There's a kid in Alex Gonzales' seventh-grade class--we won't mention any names--who still plays with X-Men plastic action figures. "He's kind of weird," says Alex, 11, of Fontana, Calif. "None of us play with X-Men anymore. We like PlayStation better." Toy-industry experts call this "age compression"--boys shunning G.I. Joe and girls dissing Barbie at ever younger ages in favor of computer games and sporting goods. And it is just one of the obstacles confronting Toys "R" Us as the nation's No. 1 retailer of playthings tries to get itself back on track.
Toys "R" Us faces quickening competition from such all-purpose discount stores as Wal-Mart and Target. Its bloated inventory system costs hundreds of millions of dollars each year. It must somehow cut costs while remodeling stores and bolstering employee training and service. And Toys "R" Us managers can only pray, as they do each fall but even more so this year, that among the new toys they have bought by the trainload are a few hits--the Tickle Me Elmos and Power Rangers--that will fill parking lots with minivans.
Attacking its problems, Toys "R" Us recently declared that it was closing 59 stores, laying off as many as 3,000 workers and taking a $495 million charge against earnings to slash inventory, a move that jolted its two biggest suppliers, Hasbro and Mattel, into announcing that they expect lower earnings. Toys "R" Us has undertaken a redesign of its stores and a new strategy of broadening its merchandise to include children's clothing and electronics. But it will also have to pull off a more difficult transformation. Says Sean McGowan, an industry analyst with Gerard Klauer Mattison in New York City: "Toys 'R' Us has a lot of stuff my 14-year-old daughter would like, but there is no way she and her friends will go there." Toys "R" Us, he added, has to change the way it is perceived.
This marks a sad pass for a brand name that, while dreaded by many parents, spelled excitement to a generation of kids, many of whom have kids of their own. Founded by Charles Lazarus in 1957, Toys "R" Us was the original "category killer"--industry jargon for a chain of large stores that offered low prices on almost every product and brand in its category and killed competing local retailers. (Think Home Depot or Petco.) Lazarus transformed an industry once dominated by mom-and-pop toy stores, eventually launching 1,462 Toys "R" Us outlets and gaining a 25% market share by 1990, the company's peak year.
Erik Gustafson, manager of the Steinroe Young Investor Fund, says the toy retailer and other category killers such as Circuit City and CompUSA have become victims of their own success, encouraging shoppers to expect everything to be on sale all the time. "The category killers are going to have to live with lower profit margins going forward," says Gustafson. That is good news for the consumer, but not for shareholders who have watched Toys "R" Us' stock price get cut in half over the past 12 months, to a little more than $16 a share.