Toys 'Were' Us?
Undercut by Big Discounters, Toys 'R' Us Is Indicating It May Get Out of the Business By JOSEPH PEREIRA, ROB TOMSHO and ANN ZIMMERMAN Staff Reporters of THE WALL STREET JOURNAL August 12, 2004; Page B1
It could be curtains for a onetime category killer.
After years of battling cut-throat pricing from Wal-Mart Stores Inc. and other discount chains, Toys "R" Us Inc. indicated it may be ready to get out of the toy business altogether.
In a surprise move, the once-dominant toy retailer said it is exploring a sale of its core 1,200-store toy chain. At the very least, the company said it plans to separate the toy unit from its smaller but faster-growing baby-products business -- in a possible spinoff -- and to significantly cut spending on the toy operation.
The retreat by Toys "R" Us is the most dramatic sign yet of Wal-Mart's growing supremacy over chains once thought to be category killers themselves. Toys "R" Us during the 1980s and early 1990s drove dozens of smaller toy operators out of business with lower prices and pile-'em-high selection.
But Wal-Mart, slashing prices even further and using toys as loss leaders, slowly eroded Toys "R" Us's grip on the market. The toy chain has seen its share of the U.S. retail toy market slip from 25% in the late 1980s to just 15% today, industry analysts estimate. Wal-Mart passed Toys "R" Us as the industry leader in 1998, and now commands about 25% of the U.S. market.
Aiding Wal-Mart's rise to the top has been a transformation of the toy industry from that of a fashion business in which consumers thronged stores in search of the hottest new crazes, to that of a commodity market of staples and evergreen products in which shoppers browse for bargains.
"This just might be a sign that Toys 'R' Us is throwing in the towel," says Bill Simms, an analyst for Citigroup Inc.'s Smith Barney division. "Given the competitive threat of Wal-Mart today, Toys 'R' Us will not be able to continue as a going concern in the long term without drastic structural changes."
The irony is that Toys "R" Us declared victory as the dominant toy retailer 10 years ago, when it forced Child World and Kiddie City into back-to-back bankruptcies and liquidation, says Burt Flickinger, managing director, Strategic Marketing Group in New York. "It's a sad day in retailing when Toys 'R' Us declares victory, runs all the competition off the cliff and then Wal-Mart kills off the only surviving toy retailer."
Toys "R" Us isn't the first category-killer to be bloodied by Wal-Mart and likely won't be the last. As the Bentonville, Ark., retailing giant has attempted to dominate more merchandise categories, the companies that once dominated them have become increasingly threatened. Today, Wal-Mart is the single biggest seller of consumer electronics, pressing players like Circuit City Stores Inc. Viacom Inc.'s Blockbuster, the largest video rental chain in the country, has been struggling for the last several years -- in large part because Wal-Mart prices DVDs so low that it's almost as cheap to buy them as rent them. Wal-Mart's sales of health and beauty products are squeezing the giant drugstore chains. And its more than 1,500 combined grocery and discount stores are putting pressure on giant supermarket chains and have contributed to bankruptcy filings by 25 regional grocers, many of which drove scores of neighborhood grocers out of business earlier.
"Wal-Mart is putting pressure on everyone, indirectly and directly," says Jeff Lenard, spokesman for the National Association of Convenience Stores in Alexandria, Va.
In the toy business, Toys "R" Us has held out longer than other major chains. KB Toys Inc., a big mall-based chain, filed for bankruptcy last year, and FAO Inc., parent of FAO Schwarz Stores, slipped into bankruptcy for the second time last holiday season. Parts of the chain have since been bought by a private equity firm....