Thursday, March 27, 2014

The Toys R Us "Transformation" Strategy

And no..this has nothing to do with the new Transformers movie, which is totally what I thought when I first saw you're in good company. For collectors, Toys R Us, the last survivor of the brick and mortar toy retailer wars, continues to be a constant source of frustration. Sold out items, frequent price bumps and few discounts make most trips disappointing, and certainly don't encourage one to revisit often. TRU is looking to change that...

 At presentations today for investors, industry analysts and the media, Toys"R"Us, Inc. outlined its strategy for improving the company's operational performance and positioning the business to drive profitable growth in the future. Antonio Urcelay, Chairman of the Board and Chief Executive Officer, Toys"R"Us, Inc., and Hank Mullany, President, Toys"R"Us, U.S., provided a comprehensive assessment of the company's fiscal 2013 performance and discussed the go-forward priorities and actions that will drive its "TRU Transformation" strategy.

"As we look to the future, our strategy will establish a path to sustainable business growth, building upon the company's unique strengths. Toys"R"Us is one of the most recognized brands in the world with a strong international presence and a large and loyal customer base," Mr. Urcelay said. "Our global network of stores generates strong profitability, and together with our $1.2 billion global e-commerce business, is integral to our growing omnichannel capabilities. And, as the world's leading dedicated toy and juvenile products retailer, we have well-established relationships with our manufacturing partners, and can provide them with a year-round distribution outlet that showcases the broadest selection of their products in 36 countries around the world."

Mr. Urcelay added, "Our 2013 performance was, no doubt, disappointing. While this was partly driven by macro conditions, such as the decline in birth rates since 2007 which has contributed to stagnating overall toy and baby industry sales, and the rapid growth of online shopping, we cannot blame these factors. We believe that several execution issues also impacted these results. Over the past several months, we have undertaken a comprehensive analysis and diagnosis of the business, and believe we have four main issues to resolve – improve the customer experience in-store and online, make progress on changing price perception, put disciplines back into inventory management, and right-size our cost structure on a global basis. We are encouraged that all of these foundational issues are firmly within our own control to fix, and our strategy will address these to improve the business over the short-term and put the company on track for the future."

Mr. Mullany noted, "Our 'TRU Transformation' strategy is grounded in consumer research and customer insights, and is anchored by three guiding principles – Easy, Expert, Fair. Among our highest priorities will be to deepen our focus on the customer, build meaningful relationships through loyalty and targeted marketing programs, and improve the shopping experience both in-store and online. This will include putting more emphasis on the distinct needs of our customer base of new and expectant parents and gift-givers. We are committed to delivering on our mission to bring joy into the lives of our customers by being the toy and juvenile products authority and definitive destination for kid fun, gift-giving solutions and parenting services."

For 2014, the objective of "TRU Transformation" will be to slow the company's sales decline, stabilize cash flow and improve EBITDA to effectively position the business to grow revenue and profits in 2015 and beyond. "TRU Transformation" will focus on four key priorities:

    Transform the shopping experience in-store and online. To improve the customer experience in-store and online and become a customer-centric business, the company has already begun to implement initiatives, such as cleaning up existing stores and improving in-store execution; improving out-of-stocks and the speed of checkout; solidifying customer relationships through strengthened loyalty and targeted marketing programs; improving price perception by developing a clear pricing strategy and simplifying promotional offers; and optimizing the e-commerce experience by capitalizing on the online shopping growth and omnichannel integration with stores.

    During the meeting, Mr. Mullany unveiled a new customer promise to provide the broadest selection of products to help kids and babies develop, learn, have fun and be safe; be the easiest place to research and find solutions throughout the journey of parenthood; and be the best resource for children's gift-giving occasions – all at fair prices in an environment that offers expert service and unique services with the ability to shop whenever, wherever and however they want.

    Collaborate with business partners to drive differentiation, innovation and value. As part of "TRU Transformation," Toys"R"Us will leverage business partner relationships in the U.S. and abroad to drive category leadership and effective differentiation in products, events and services, and create exciting shops and product statements in-store.

    Develop high-performing, highly engaged, diverse talent. Internally, priorities will include reviewing the organizational structure, creating an infrastructure that promotes talent development, maintaining a culture of productivity and accountability, driving training in the areas that matter most for customers, cultivating a culture of engagement, and enhancing the ability to hire and retain great talent.

    Become fit for growth. The company will focus on improving operational and financial performance, while positioning the business to capitalize on future growth opportunities through the implementation of a right-sized cost structure, a strong focus on disciplined inventory management, and the deployment of capital to key growth initiatives.

        Right-size the cost structure. Overall, the company is in the midst of a renewed assessment of its operations and business structure to determine where greater efficiencies can be created and where additional resources can be allocated to help best serve customers. As part of this evaluation, in a comprehensive review of functional areas throughout the organization, a number of opportunities were identified to streamline functions and reduce headcount. In total, throughout its U.S. and International operations, Toys"R"Us, Inc. has now eliminated more than 500 positions across all functions. The company has been actively helping with the transition of those impacted by offering all eligible employees severance benefits and outplacement services. In addition, there are some areas of the business where the optimal go-forward structure is still being evaluated based on strategic reviews currently underway.

      Like all retailers, the company regularly looks at the performance of its physical locations to ensure they are meeting the needs of the business. While it may close some stores during the year primarily due to lease expirations, at this time the company has no plans to close a significant number of stores. After a thorough evaluation of its current fulfillment capabilities in the U.S., the company has made the decision to close the McCarran Distribution Center in Storey County, Nevada effective June 1, 2014. Over the past few years, the company has expanded its omnichannel capabilities and the ability to ship online orders from stores and distribution centers that serve stores, resulting in the ability to flex inventory more efficiently, leverage underutilized space and ship from points closer to customers. The company will continue to open stores and expand fulfillment capabilities in markets where it makes the most sense, including in China where growth has accelerated.

        No near-term debt, strong balance sheet, ample liquidity. The company ended the year with a strong liquidity position of approximately $1.8 billion and reduced its total long-term debt by $322 million to $5 billion. In addition, it successfully refinanced its $1.85 billion senior secured revolving credit facility in last week, a key component of the company's capital structure. The execution of this transaction ensures the company's ability to appropriately fund the working capital needs of its operations at rates that are significantly lower than the prior revolving credit facility. The company has no material outstanding debt repayments due until 2016, providing a large window to grow and develop new strategic initiatives.

To add a bit more to an already lengthy article, here are some things I think Toys R Us can do to keep us running back...

- Competitive Pricing: We realize that Walmart is destroying the world with their low prices and Amazon isn't much better, but when TRU comes up as the most expensive option for shopping 9 times out of 10, it's a problem.There were just signs outside of several TRU stores touting a big clearance sale and at my nearest location, that isle was a sad, vacant area with things that have been at the same not-so-clearance price for over a year now. At the flagship Times Square store, I found no isle, and no signs pointing to an isle, but I did find this tiny bin full of items in packaging that looked like it had been chewed on. That's just embarrassing. Does it really hurt TRU to deep discount an item that has been sitting for a long time? Worse, does it cost less for TRU to destroy these items? I would think loyalty building from a happy customer who found something at clearance would go further toward a return purchase than if that item just disappeared one day. Clearance out that old stock and let Rewards Club members get the first shot at it.

- More Coupons: The TRU Rewards card used to spit out 5 dollar off coupons all the time. Now I rarely get any notice from it. This card should be used to track buying habits, pre-emptively order deals on upcoming items the buyer has been known to take an interest in and encourage return trips resulting in multiple purchases by building up those Rewards points with no expiration date, offering reward member only sales and always giving a discount on multi item purchases.

- Better Stock: I don't know about you, but my nearest TRU hasn't had more than 2 Marvel Legends figures hanging on the pegs for months now, the Star Wars section is a wasteland with Chewbacca shaped tumbleweed blowing through and the same 5 Teenage Mutant Ninja Turtles in large numbers. To combat the overflow of peg warmers, TRU needs to be faster at identifying them and offer a discount on those items when they start to build up, to Rewards members first, then as part of sales events. To meet our needs, TRU can implement a reserve list, allowing customers to request an item via a TRU help station activated by the Rewards card. If the item is available in stock nearby, the system will give you the phone number to check in and hold it. If it is not, the system will allow you to request it. If enough of an item is requested, the store is restocked. Since the Rewards card was used to activate the terminal, the TRU system will know if the customer has bought the item in another TRU location and will email the customer asking if they still want the item request active and if they needed anything else. If they want to get really fancy, TRU could implement a pre-order system for out of stock items they know are still available via the manufacturer and ship to store, assuring the customer not only saves money on shipping, but is saved the hassle of hunting and is encouraged to buy more in the store with a coupon. There is absolutely a way to make that work.

- Technology: Let's face it...TRU is super low tech. Their computers are ancient and buggy and their system looks like something out of Tron. Toys R Us needs to be pro-active but not pushy if they want to become a force again. I outlined some of the tech TRU could implement above, but there is one more thing that would be essential for someone constantly on the hunt for new action figures. An Ap. A TRU All Stars Ap could crunch all the data entered into it to work with the customer to help them grow their collection and aid a mother in finding a toy she can't even pronounce. This ap should..
          - Know what store you have entered and help you locate what you are looking for with a store map.
          - Allow you to keep a checklist of toys you are looking for and alert you when they are in stock, providing a phone number so you can hold the item for a period of time.
          - Help a customer identify a toy via images and video if available, then show them where it is in the store, if it's in stock, with a click.
          - Allow a customer to check things off their list and identify where they bought it, if not at a TRU location, allowing TRU to see where you are primarily getting your toys and allowing them the opportunity to lure you back with discounts and further help.
          - Allow you to make a wishlist from items found in the store via your phone's camera and the item barcode. After scanning the barcode, the Ap will have the data on the item, an image and the current price. It will then synch up with "buddies" who will be able to access your list and know when something you've requested is on sale, which would be invaluable for a parent on a budget shopping for a child.

- Store Professionals: When was the last time you went to your local TRU and the person you asked knew the toy you were looking for by name alone? Never you say? Me neither. Sure, I've had helpful employees wander the store with me for 10 minutes trying to find that magical doll with the glitter shedding hair, but that doesn't mean they had any idea what it was when I walked in and we both wasted a lot of time hunting for a store they are in far more often than I am. There are 2 ways to combat this...
        1. Hire some store professionals- If there was at least one person who knew the boy's brands and one who knew the girl's brands, on hand for at least the busier times of the day, you wouldn't see so many angry parents in the isles during the holidays. I wind up helping customers so often, I should be an honorary staff member.
         2. Tablets- With a tablet in hand, an employee could have the store system at their finger tips, help a customer identify what they are looking for, find a picture, then locate the item.

...And here's where we can be pro-active. Sound off in the comments with your experiences at local TRU stores. Be as detailed as possible and if you've got ideas on how to improve things, let's hear them!


  1. I agree with you about having in store professionals. I've helped out so many customers while shopping. I've even asked the employees questions about certain toys, they couldn't help me because they didn't know what I was talking about. On one occasion, I asked the person behind the counter to follow me after I was told they didn't have a certain doll for my daughter. They had a lower shelf full of them. She was clueless.

    Anyway, great article!

  2. All good points. But since TRU is a private company and does not need to answer to share holders there is very little hope on any radical change or anything that looks like a major turn around. It probably will continue to die a slow death until the toy side of TRU is gone and only Babies R us is left (The only thing making them money)

    TRU Problems have been around for a long time. When I consulted for them in the late 90's they seem to have more of a clue and got it a lot better. Unfortunately there biggest problem is the shear lack of competition for them has drawn them into mediocrity. They tend to attempt to be keeping up with the other box stores when instead they should be doing the exact opposite. If Walmart has a wall of turtles TRU tends to think it needs 2 walls of them to compete, instead of have a wall of something else that Walmart don't have. TRU needs to start using a lot of the KB mentality (Hell they own the brand open up a KB and run it like it use to be and see how sales go) They need to discount a lot quicker or move it on to there discount feeder stores Ross/Marshell.