Toys “R

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Toys “R” Us, Inc.

461 From Road
Paramus, New Jersey 07652
U.S.A.
(201) 262-7800
Fax: (201) 262-8919

Public Company
Incorporated: 197’8
Employees: 40,000
Sales: $5.51 billion
Stock Exchange: New York

With sales of more than $5 billion, Toys “R” Us operates the world’s largest toy store chain, with 497 stores in the United States and 126 in Canada, France, Hong Kong, Malaysia, Singapore, Taiwan, the United Kingdom, Germany, Spain, and Japan. The company also operates the 189-store Kids “R” Us children’s apparel chain. Industry analysts laud Toys “R” Us for its streamlined operations, ability to respond quickly to its customers’ ever-changing demands, and its success in making the toy retail business less seasonal. The company has long been a leader in using sophisticated computer systems to track what is selling in each store, to predict the items that will be popular in coming weeks, and to cut check-out time. All major administrative and buying decisions are made at company headquarters, and as Chairman and Chief Executive Officer Charles Lazarus often puts it, only the selling is done in the stores.

Identical in design, each supermarket-style Toys “R” Us store is 46,000 square feet and stocks a minimum of 18,000 items on shelves that reach to the ceiling. The stores offer large selections of toys and baby furnishings at discount prices and feature a “no questions asked” return policy. Items such as diapers are sold at little or no profit, serving as a means to entice new parents into the store. The fast-growing Kids “R” Us chain uses many of the same operating principles as its parent company. Also set up as a supermarket, each 20,000-square-foot store offers children’s clothing, shoes, and accessories. Although not completely insulated from downturns in the economy, Toys “R” Us consistently succeeds in improving same-store sales and in boosting its market share.

Toys “R” Us founder Charles Lazarus was born above the shop in Washington, D.C., where his father repaired and sold used bicycles. After a stint in the army, Lazarus opened the National Baby Shop, a children’s furniture store, in 1948, just two years after the beginning of the baby boom.

Lazarus noted that customers often asked if he sold toys, so just a year after he opened shop, he began adding rattles and stuffed animals to his stock. In 1952 he opened Baby Furniture and Toy Supermarket in Washington, D.C. Five years later, he opened a discount toy supermarket in Rockville, Maryland, a Washington suburb. It was the first to bear the Toys “R” Us name. The store’s original name was too long to fit on its sign, so Lazarus changed it to the descriptive Toys “R” Us. By 1965 he was operating four such outlets in the Washington, D.C, area. In 1966 Lazarus sold his four profitable toy supermarkets to Interstate Stores Inc., but continued to serve as president of the company he had founded.

Interstate was founded in 1916 and became publicly owned in 1927. In 1957 the company had 46 small department stores in its fold, but it sales growth had dwindled to almost nothing, and its profit margins were shrinking. The company sought relief for its financial woes in the burgeoning discount store arena. It experimented with a discount store in Allentown, Pennsylvania, and by 1960 had acquired two discount chains: the White Front Stores in southern California and the Topps chain, located mainly in New England.

Interstate undertook an aggressive but ill-fated expansion of its discount stores. The company overextended itself in the discount business, and the 1973-1974 recession aggravated its problems. In 1974 Interstate declared bankruptcy, its debt at the time the largest accumulation of liabilities in retail history. By that year Interstate had 51 Toys “R” Us stores, and it continued to open new ones during its court-ordered reorganization.

Before 1974 Toys “R” Us was still ordering and counting stock manually, but that year the company streamlined its ordering and inventory system by installing its first computer mainframe. In years to come the company would upgrade its computer system many times to keep pace with its evergrowing sales volume and inventory level.

In 1978 Interstate emerged from its reorganization a vastly different company. It had closed or sold all its discount store operations; only the 63-store toy chain and 10 traditional department stores remained. To reflect its principal business, the company had changed its name to Toys “R” Us, with Lazarus serving as its president and chief executive officer.

Beginning in 1978 Milton Pétrie, owner of Pétrie Stores, a women’s clothing chain, began to acquire Toys “R” Us stock, owning approximately 25% by 1984. That year Lazarus told Toys “R” Us shareholders that he had received Petrie’s assurance that he would not attempt to acquire the company. By the late 1980s, Petrie reduced the amount of stock he owned in the company to 14%.

By the end of 1980 Toys “R” Us was a 101-store chain. The Christmas season that year was a troubled one for many toy retailers, but thanks to its computerized inventory system, Toys “R” Us noted a glut of slow-moving electronics items on its shelves and cut prices on those toys long before the Christmas buying season. This cost-cutting allowed the retailer to make room on its shelves for other, more desired items that were not discounted, while other toy retailers were selling their slow-moving toys at lower prices that holiday season.

Lazarus’s approach to pricing was vastly different than that of his competitors. He sold the items shoppers wanted most at little or no profit. Customers would then automatically assume that all of the items in the store were equally well priced and do the rest of their toy shopping there. The company’s market share climbed steadily each year, rising from 5% in 1978 to 9% in 1981.

By 1980 Toys “R” Us had earned a solid reputation as a retailer of great efficiency. Since its reorganization three years earlier, Toys “R” Us’s sales had more than doubled to nearly 750 million dollars in fiscal 1981. With its 120 stores, there seemed to be no serious threats to the company’s growing dominance of the retail toy market, and company executives were often quoted as saying they sought not so much to boost sales as to increase market share. In 1982 Lionel Corporation’s Lionel Leisure, a chain of 98 toy stores, filed for bankruptcy.

In a 1982 article in Advertising Age, Toys “R” Us Vice President of Real Estate Michael Miller explained that his company was seeking markets of at least 250,000 people, of which 25% must be children. To assure that advertising and distribution dollars are spent cost effectively, Miller explained, each market had to be big enough to support four of the toy stores.

Toys “R” Us announced in 1982 the formation of a new division to sell name-brand children’s apparel at discount prices. The company had first-hand experience with the baby-boom generation’s willingness to spend money on their children. Social changes such as increasing numbers of divorces, single working mothers, and more two-paycheck families meant more sales for purveyors of children’s toys, apparel, and accessories. Divorced parents often spend more money on their children than do married parents. Two-paycheck families, who have often put off having children while they developed careers, were also known to be willing and able to spend more on their children than previous generations.

The company opened two pilot Kids “R” Us stores in the New York metropolitan area during the summer of 1983. The 15,000-square-foot, exuberantly decorated stores featured electronic games and clearly marked departments. From the day the first pilot store opened its doors, the new chain was recognized by owners of department and specialty stores as a major threat to their survival.

All was not easy for Kids “R” Us, however. In the 1980s traditional department stores and small children’s shops complained that makers of name-brand apparel were selling their goods to discounters. The new competition from Kids “R” Us further raised the stakes. Just a few months after Kids “R” Us opened its first two stores, Toys “R” Us filed suit in September 1983 against Federated Department Stores Inc. and General Mills Inc., charging the companies with price-fixing. The following month, the company brought a similar suit against Absorba, which had agreed to supply the new stores, but later allegedly refused to fill the order. Toys “R” Us dropped the suits in January 1984, noting only that circumstances had made it prudent to terminate the litigation.

The Kids “R” Us concept successfully implemented many of the policies Toys “R” Us had, such as discount pricing, tight inventory control, purchasing in large volume, and opening stores in low-rent strip malls along major thoroughfares. In 1983 the company surpassed the $1 billion milestone, with sales of $1.3 billion. Two more Kids “R” Us stores opened in New Jersey in the summer of 1984. The new stores added more than 5,000 additional square feet to the prototype’s original 15,000. The roomier layout included a “race track” design that wended its way through the store. By spring 1985 there were 10 Kids “R” Us units in New York and New Jersey, with an additional 15 to be opened by year’s end.

The company opened its first toy stores outside the United States in 1984, with four in Canada and one in Singapore. It opened five stores in the United Kingdom the following year.

An article in Dun ’s Business Month in December 1985 cited Toys “R” Us as one of the nation’s best-managed companies and credited Lazarus with developing an extraordinary management team. With few exceptions the company promoted from within, the article noted. In 1984 Toys “R” Us stockholders approved a generous stock option plan open to all full-time employees. Lazarus told Dun’s that salaries alone were no longer enough to make people feel they have a stake in a company’s success.

Between 1980 and 1985, the toy retailing industry grew 37%, while Toys “R” Us’s sales increased 185%. The company estimated in 1985 that it had 14% of all U.S. retail toy sales, an increase of 9% from the share it had in 1978, the year the company emerged from its reorganization.

Charles Lazarus told Dun’s Business Month in 1985 that market share was his company’s number one priority. To keep increasing market share, he explained, the company was willing to cut prices, even if earnings suffered. Lazarus called Toys “R” Us’s highly computerized merchandising system the ultimate market research tool. He explained that it helps the company project sales for each item it sells and to know not only when to order particular toys but also when to drop them.

Toys “R” Us has always been willing to try new tools to increase its market share. During the 1985 Christmas season, the company launched Toys “R” Us Magazine, which was sold in its stores for 79C. Aimed at slightly older children, the well-received magazine contained feature stories on animals, celebrities, adventure, and travel and included ads for television shows, clothes, and toys. A second issue was offered during the summer of 1986, but the magazine was eventually phased out.

By January 1986 Toys “R” Us had 233 toy stores in the United States, 13 international toy stores, 23 Kids “R” Us outlets, and 4 traditional department stores. A little more than a year later, the company opened 37 additional Toys “R” Us stores in the United States, 11 new overseas stores, and 14 new Kids “R” Us stores. The company’s market share stood at 15% of the $12 billion toy industry.

During the summer of 1986 Toys “R” Us and Montgomery Ward announced that they would open a store jointly that fall in Gaithersburg, Maryland. Each store would operate independently, but would share an entrance and exterior sign. The arrangement was a boon to Ward, which had restructured its business and had surplus floor space in many of its locations. Toys “R” Us found the arrangement beneficial since many of the Ward stores were in excellent locations, and rental rates were often quite reasonable. Five years later, the companies were sharing six locations and were considering additional sites.

As it grew into a national chain, Toys “R” Us aggressively fought other companies that used the “R” that is such a distinctive part of its name. Tots “R” Us, Lamps “R” Us, and Films “R” Us were among the companies sued by Toys “R” Us for name infringement. Michael Goldstein, the company’s executive vice president, told The Wall Street Journal in January 1986 that the company had never lost a name-infringement suit.

Even when toy sales were sluggish, Toys “R” Us managed to perform well. During the 1986 Christmas season, the company’s sales far exceeded many analysts’ grim forecasts. Its success was attributed to its ability to offer the toys that shoppers were interested in buying.

In a bid to further increase its market share, the company surprised the retailing industry in 1987 by announcing that it would pass on to customers the savings it expected to receive from lower tax rates. Two additional retailers, Wal-Mart and Target quickly followed Toys “R” Us’s lead.

During 1987, the year in which the Toys “R” Us international division moved into the black, the company opened four stores in as many German cities. The company had planned to open even more stores during the year, but found it difficult to secure the required permits from local bodies for a retail outlet larger than 18,000 square feet. Competing German retailers had good reason for concern. In the United Kingdom Toys “R” Us had captured 9% of the $1.8 billion toy market in just three years.

The products of two prestigious German toy manufacturers, Steiff and Maerklin, were not sold in the new German Toys “R” Us stores. Steiff, maker of high-quality stuffed animals and dolls, chose not to do business with the toy giant out of loyalty to smaller-scale German retailers. Maerklin’s electric trains, sold without packaging, could not be offered in a toy supermarket setting.

From the very start, the Toys “R” Us overseas stores had been strikingly similar to those in the United States. Most were freestanding buildings, and all were bulging with many of the 18,000 items for which Toys “R” Us is famous. Approximately 80% of the items offered were the same as those found in U.S. stores, with the remaining 20% chosen to reflect local interests.

Sales for the 1987 fiscal year, the first in which Kids “R” Us earned a profit, surpassed the $3 billion mark. The company attributed part of its success during the 1987 holiday season to its upgraded universal product code (UPC) scanning system, which had been installed in all the Toys “R” Us stores shortly before Thanksgiving. The benefits of product scanning include having up-to-the-minute data about every product the company sells, shorter transaction time, fewer cashier errors, and a reduction in marking costs in those stores that use only shelf tagging.

During the 1987 Christmas season, a Florida newspaper published a cartoon showing a couple burdened with many gifts leaving a Toys “R” Us store. The caption beneath read, “Broke ’R’ Us.” Company executives thought it was so funny that copies were posted around their offices.

By January 1988 the company had 313 U.S. toy stores, 74 Kids “R” Us outlets and 37 international toy stores. Plans to open stores in Italy and France were also in the offing.

Charles Lazarus told The Wall Street Journal in August 1988 that his goal was to sell half of all toys sold in the United States. While that might have sounded overly ambitious, signs abounded that Lazarus was well on the way to meeting his goal. Even though toy sales in 1986 and 1987 grew an average of 2%, sales at Toys “R” Us grew 27% during each of those years.

The toy chain consistently proved itself capable of turning away all pretenders to the throne of top toy retailer. Its two nearest rivals, Child World Inc., with 152 stores and Lionel, with 78, offered similarly large toy selections in equally cavernous structures, but neither had been able to equal the success of the originator of the toy supermarket concept.

The company’s success can be attributed to many factors, including its buying clout, great selection, deep inventories, and ability to identify the latest hot items and get them on the sales floor fast. When some companies’ stores were finding it difficult to get sufficient quantities of Nintendo games in early 1988, for instance, Toys “R” Us was able to get the number of Nintendo games it wanted.

The Wall Street Journal noted in 1988 that Toys “R” Us sold $330.80 worth of merchandise per square foot annually, with Child World selling only $221.70, and Lionel just $193.10. Average sales for a Toys “R” Us store were $8.4 million; for Child World, $4.9 million; and for Lionel, $4.4 million.

In fall 1988 Toys “R” Us shed the last reminder of its connection to Interstate Stores when it sold its remaining department stores in Albany and Schenectady, New York, and Flint, Michigan, to that division’s management. Between 1987 and 1989, Toys “R” Us opened 133 new U.S. toy stores, 50 international toy stores, and 94 children’s clothing stores. Company sales hit the $4 billion mark in fiscal year 1988, and the following year, total sales were more than $4.8 billion, with a 25% market share of the $13 billion U.S. retail toy market.

In fall 1989 Toys “R” Us joined McDonald’s Company (Japan) Ltd. in announcing a joint venture to open several toy stores in Japan. Toys “R” Us would have an 80% interest in the venture and McDonald’s a 20% interest with an option to open restaurants at the store sites. Although difficulties in finding store sites and in circumventing the large-scale retail law still loomed before them, the joint-venture company planned to eventually open 100 stores in Japan.

For many other U.S. retailers interested in opening outlets in Japan, Toys “R” Us was to become a test case in how to overcome local Japanese retailers’ resistance to their entry into a particular market. Japanese retailers had already felt the pinch of a birth rate that had been in decline since 1973 and did not relish a further erosion of their market share. U.S. officials, however, persuaded Japanese governmental bodies to speed up their approval process on applications for large retail stores, and the first Toys “R” Us in Japan opened late in 1991 in Ami Town, on the outskirts of Tokyo.

Toys “R” Us launched Geoffrey’s Fun Club during the 1989 holiday season. The company said the club was to be low-key and noncommercial, offering club members quarterly mailings featuring items such as an activity booklet with the child’s name or a storybook that presented the child as the main character, with his or her name repeated throughout the book. The club, designed to boost Toys “R” Us’s profile in the homes of members, more than doubled the company’s membership projections.

Toys “R” Us had some difficulties with importing toys deemed dangerous by the Consumer Product Safety Commission. In spring 1990 it had to recall 38,000 “Press N Roll” Toy boats with small parts that, if broken off, could choke a child. That summer Toys “R” Us was one of seven distributors sued by the Justice Department on charges of selling hazardous toys, such as a xylophone painted with lead-based paint, and toys with unsafe, small parts on which children could choke. Toys “R” Us successfully defended itself on the grounds that its safety record was excellent, and a federal judge dismissed the charges.

Toys “R” Us is likely to remain the leading toy retailer for many years to come. It consistently makes innovative, long-term investments that ensure its continued toy retailing preeminence by offering, in Lazarus’s words, “selection, stock and price.” As Lazarus told Forbes magazine in 1988 when describing his company’s entry into the U.K. market, “Some very bright people said: ‘Your prices could be 20% higher and you’d still undersell everybody in the marketplace.’ No. That’s not Toys “R” Us. The idea is to be preemptive, to sell at such low prices that no one will even try to compete.” There is always room in this tightly controlled company for innovations to further decrease operating costs. For instance, in 1989 Toys “R” Us completed installation of gravity-feed-flow racks in most of its U.S. toy stores to reduce the costs involved in restocking fast-moving diapers and formula. In mid-1990 the company opened a $40 million distribution center in Rialto, California, that holds 45% more merchandise than the company’s other warehouses, but takes up one-third less land. As an industry analyst told The Wall Street Transcript in 1989, “I can look at a slowing economy and still feel comfortable that Toys “R” Us is going to grow.”