The Toys “R” Us bankruptcy is another reminder that retail is in a constant state of disruption, which is why only those retailers that relentlessly adapt and innovate have a chance of survival. TRU, like many former dominant retailers, clung too closely to their original concept without making the necessary adjustments to modern retail realities. It’s also a cautionary tale about getting into bed with Amazon.
But first, let’s take a step back and look at a brief history of TRU. As I wrote in my 2005 book Category Killers: The Retail Revolution and Its Impact on Consumer Culture (Harvard Business School Press), if the history of category killers was written as a biblical story, Charles Lazarus, founder of TRU would have been Abraham. Lazarus not only changed the nature of the toy business, he was the progenitor of the era of low-priced, big box stores, in the days when physical size mattered.
Parlaying a $5,000 investment in his father’s bicycle shop in Washington, D.C., Lazarus created what would eventually become TRU by offering a huge selection of name-brand toys at below-list price. His timing was impeccable, thanks to the confluence of plastics, and the Baby Boom. The new medium of television with “Mad Men” era product advertising promoted the toy story beginning in 1952 with Mr. Potato Head, and later Barbie and Chatty Cathy (the world’s first talking doll), made by Mattel. The 1955 marriage of Mattel and Walt Disney’s “Mickey Mouse Club” television show revolutionized the way toys were marketed to that era’s children (of which I was one). Parents wanted to buy branded toys they had seen advertised on TV because those were what their kids were asking for.
Lazarus revolutionized the way that toys were sold, with 90,000 square-foot, bare-bones warehouse type stores. These arenas were jam-packed with thousands and thousands of different toys at low prices because TRU shaved costs at every stop along the supply chain. Customers were more than willing to paw through inventories that were wider and deeper than they would ever find anywhere else, pull the merchandise from the shelves, pack them in their own bags and boxes, and place them in oversized shopping carts.
In addition to the pricing structure, TRU changed the consumer shopping cycle of the retail toy business in the United States from primarily the six-week period before the holidays, where the vast majority was sold by department stores, to year-round. Having a showplace for their wares and a medium to advertise them, toy manufacturers aggressively added more and more new products. Some manufacturers even designed and sized their packaging in order to fit in stacks on TRU store shelves. Because of its enormous buying clout, the retailer essentially held veto power over what products would be manufactured.
The visionary Lazarus created the template for big-box category killers: centralized buying and computerized inventory management, self-service, big selection, low prices, and lots of parking. He started the movement that led to the dismantling, piece by piece of the eclectic categories that once made a department store a store with lots of departments. By deeply discounting his merchandise, Lazarus began the trend of reducing once expensive products to the status of affordable commodity goods—this was the democratization of the consumer culture.
The Lazarus Legacy
The kids whose parents were buying those toys in the 1950s and 1960s eventually grew up to buy at other big box retailers including books at Barnes & Noble, printers at Staples, power saws at Home Depot and pet food at Petco, and the affordable commoditization shopping experience felt perfectly natural. Although the product categories were different, the approach was very much the same. In fact, Sam Walton thought so highly of Lazarus that he named him to Walmart’s board of directors, on which Lazarus served from 1984 to 1989.
In 2000, at the height of the internet stock bubble, Amazon and TRU signed a 10-year strategic partnership that made Amazon the exclusive online retail outlet for TRU toys, games and baby products. Amazon helped with site design and development for TRU web sites, as well as warehousing, order fulfillment and customer service. Some observers considered the deal as the prototype partnership between legacy brick-and-mortar and online retailers. At that time, most big pure-play brick-and-mortar retailers didn’t consider internet retail their strong suit. At toysrus.com, customers actually placed their orders into an Amazon.com shopping cart. The arrangement worked well for both sides for the first several years, improving the ability of TRU to compete with eToys and Walmart.com while eliminating toy inventory problems that had been plaguing Amazon.
Behind the Curtain at The Amazon
But after a few years, the relationship with Amazon went south. TRU believed that it would be the exclusive provider of such products on Amazon. That point of view was not shared by Amazon, which signed agreements with rival retailers including Target as well as independent sellers known as zShops. In 2006, TRU Inc. prevailed in a bitter two-year lawsuit against Amazon when a judge ordered the two companies to sever their partnership, clearing the way for the toy retailer to establish an independent internet store. The judge said Amazon had breached its agreement, although she did not award any monetary damages. By that time, Amazon was firmly entrenched in the toy business, while Toys “R” Us continued to scramble to become an omnichannel retailer.
Now, 11 years later, Toys “R” Us has declared bankruptcy. A lethal combination of a misjudged deal with Amazon and an abject inability to plan for the future, the once innovative retailer has become a relic, and a sentimental memory for the Boomers that got their training wheels on the Lazarus dream.
By the way, there’s more to the insidious reach of Amazon. In the late 1990s, Amazon also managed the internet businesses for Borders, OfficeMax and Circuit City. None of them is still around. Do you see a pattern here? Just asking.