Executives at Toys 'R' Us Inc. should be as jolly as Santa Claus this Christmas. After all, the chain's largest toy-store rival, Child World Inc., closed its doors for good last summer. And another big competitor, Lionel Corp., is hobbling along under Chapter 11 bankruptcy protection and has shuttered 31 of its 100 stores.
But Toys 'R' Us is hardly kicking back with a mug of well-spiked eggnog, thanks to a clatter of fresh rivals: discount merchants such as Wal-Mart, Kmart, and Target Stores. Led by Wal-Mart Stores Inc., the discounters lately have been beefing up their toy departments while adding scores of new outlets. And they're using toys as traffic builders during Christmas, advertising superlow prices on hot items to lure shoppers. That has forced Toys 'R' Us to slash its own prices--one reason analysts figure the company's U.S. operating margin has been squeezed from 13% in 1989 to about 11.6% this year.
Indeed, the discounters have emerged as a real threat to Toys 'R' Us's dominant 20% share of the $15 billion U.S. toy market. Wal-Mart, by far the most potent rival, has more than doubled its share since 1985, to 12%, and is pushing into the Northeast and California. Kmart, meanwhile, expects its toy sales to grow 25% this year. "If Wal-Mart and the other discounters weren't around, Toys 'R' Us would have the toy market virtually to itself," says Greg Simpson of A.G. Edwards & Sons Inc.
DISCOUNT COUPONS. To counter the new threat, Toys 'R' Us is making big changes in its marketing strategy. The Paramus (N.J.) company grew at a 25% annual rate during the 1980s by sticking to its everyday-low-price philosophy, stealing business from higher-priced merchants. But with its competitors advertising even lower prices on some items, Toys 'R' Us has switched to a new policy: Bring in a rival's ad, and it will match the lower price.
That has only accelerated the price war. A comparison of a half-dozen best-selling items in the Port Huron (Mich.) area, for instance, reveals just how hot the competition has become. Wal-Mart and Kmart Corp. are a few cents cheaper than Toys 'R' Us on nearly every product. Another sign of the shift away from everyday low pricing: Last Christmas, Toys 'R' Us for the first time gave away three million catalogs with $175 worth of money-off coupons. This year, it will hand out twice as many and has increased the savings to $315.
Even if they can match the discounters most of the time, Toys 'R' Us executives, who have a policy of declining interviews during the holiday season, have told analysts that they're looking for other ways to stand out. Toys 'R' Us Vice-Chairman Michael Goldstein told a toy industry conference in late October that the chain's advertising now will put more emphasis on its broad selection: Toys 'R' Us stocks some 16,000 items in a typical store, vs. a few thousand at the discounters. The company also is spending heavily to refurbish older stores.
Toys 'R' Us is trying to improve service, too. To shave costs, the chain had styled itself as self-service. "If we have an Achilles' heel, it's service," Goldstein said at the fall conference. But Toys 'R' Us this year decided to put hundreds of extra staffers in its stores. "This is a major change for Toys 'R' Us," said Goldstein. "But we think the extra payroll costs this year will be worth it."
GLOBAL REACH. To help compete with the discounters who draw customers with their wide array of merchandise, Toys 'R' Us is trying to broaden its appeal. One new concept: Books 'R' Us. At 30 test outlets, portions of the store have been equipped with carpeting, comfortable chairs, and an expanded children's book selection. Then, there's Parties 'R' Us, a concept that groups all party-related goods together. "Toys 'R' Us is finally doing something to make their shopping environment more consumer-friendly," says John H. Williams, general manager of Ray Larsen Associates Inc., a Manhattan-based sales agent for toymakers. "For years, they were so popular they didn't have to do much to draw in the customer."
Toys 'R' Us does have some advantages over rivals. Its U.S. expense-to-sales ratio of 17%, for instance, rivals Wal-Mart's 15%. And although comparable-store sales in the U.S. were up only 3.6% in the first nine months of 1992, analysts predict the chain's Christmas business will benefit from the demise of Child World. Earnings per share, which had barely inched ahead in 1990 and 1991, are expected to rise 25% in 1992.
Even so, much of Toys 'R' Us's sales and profit growth is coming from its fast-expanding international operations. The chain opened 41 new stores in Europe and Asia during 1992, up from 29 the prior year. International sales contributed an estimated 18% of sales in 1992, vs. 9% in 1988. There's still room for more growth. And best of all from Toys 'R' Us's viewpoint--there's no Wal-Mart overseas. Not yet, anyway.