Seizing the Day

Toys “R” Us is going against the grain. At a time when many retailers are pulling back, the chain is moving boldly ahead, buying up weaker rivals, rolling out new services, improving its store infrastructure and expanding its reach, adding some 1 million sq. ft. of temporary holiday selling space.

“We see this economy as an opportunity to be aggressive and grow our category authority,” said Gerald L. Storch, chairman and CEO, Toys “R” Us, at a media briefing in New York City. The company operates more than 1,550 stores in the United States, and more than 700 international locations.

As to Toys “R” Us’ ability to compete in a difficult marketplace, Storch is confident.

“Toys have held up the best in this environment,” he said. “We’re pleased with how we are doing in difficult times. I’m thankful every day that toys are in our name.”

Storch joined the company in 2006. Under his leadership Toys “R” Us has focused on driving sales, taking steps to protect margin and rigorously controlling expenses.

“We’ve had three consecutive years of solid financial performance,” Storch said. “Our same-store sales for December 2008 (up 1.9%) were among the best of any retailer.”

With discounters the only ones left standing as its main competition, Toys “R” Us has found success by shoring up its niche positioning, with a strategy based on its differentiation as a specialty retailer.

“Discounters compete on a cost-based strategy and are agnostic as to what they carry, Storch explained. “We compete on a very focused strategy as the experts—the authority—in babies and toys. We’re in this business 365 days a year in 34 countries.”

Its specialty positioning allows Toys “R” Us to offer a breadth of products that extends far beyond the edited selections of mass merchants.

“The No. 1 reason people shop specialty stores is because of the broader offering of product,” Storch said.

In a further effort to differentiate itself, Toys “R” Us is increasing the number of exclusive products, both branded and Toys-proprietary, in its mix.

“We are seeing more opportunities to get product exclusives from brands, and we’re also growing our own labels,” Storch said.

In addition to breadth of assortment, the chain competes on quality.

“Customers are looking for value for their money, and value isn’t just low prices,” Storch said. “Lego is one of the best-selling products we carry, and it’s not cheap. At the same time, we are always price competitive. We carry more toys under $10 than most of our competitors carry total toys.”

Service and safety are other important cornerstones for Toys “R” Us.

“Ultimately, we compete very differently from the discounters,” Storch said. “It’s a strategy that has worked and will continue to work. Our brand is strong.”

Industry experts say that Toys “R” Us has ample liquidity and is well positioned to meet its future obligations—evidenced by the reaction of capital markets.

“We’ve found the capital markets to be very friendly and open to us,” Storch said, “and we feel very good about our access to them.”

During the past nine months, the chain has made a series of opportunistic moves to increase its brand penetration and market share. It expanded its Web-based portfolio of brands with the purchase of eToys.com , babyuniverse.com and ePregnancy.com . It also acquired Toys.com , a commonly used URL when shoppers search for toys.

In May, Toys “R” Us bought legendary toy retailer FAO Schwarz. In August, it acquired the brand name of the bankrupt KB Toys.

“We believe we can increase sales at FAO’s Fifth Avenue store significantly and make it more special and exciting than it already is, turning it into even more of a showcase for the industry,” Storch said.

Holiday initiative: Toys “R” Us’ ambitious holiday program includes more than 80 pop-up stores (averaging 4,000 sq. ft. each) in malls and shopping centers. Taking advantage of storefronts left vacant in the wake of the recession, the chain was able to secure prime retail space.

In addition, it has opened approximately 260 Holiday Express boutiques in its Babies “R” Us stores. The average shop will provide about 2,500 sq. ft. of toys, or nearly triple the space typically given to toys in the Babies “R” Us stores.

Along with helping Toys “R” Us shore up its all-important holiday business by increasing the convenience factor for shoppers, the temporary shops are designed to solidify the chain’s category-authority position.

“The Holiday Express shops offer us an unparalleled opportunity to capture more toy-buying dollars and grow our market share,” Storch said. “They are a very capital-efficient investment, with a very high ROI.”

Equally important, the shops give Toys “R” Us an anchor, albeit temporary, in what has become (particularly since the bankruptcy of KB Toys) a largely underserved market for toys: the nation’s shopping malls.

“Who is going to take KB’s mall business? Toys “R” Us,” Storch said.

The holiday program also illustrates the chain’s ongoing drive to combine the best of its two brands to provide what it sees as a more convenient shopping experience. Continuing to invest in improving its infrastructure, the retailer has opened 26 “R” superstores, which combine full-size Toys “R” Us and Babies “R” Us stores under one roof, and more than 60 “side-by-side” locations, which involve renovating existing Toys “R” Us stores to include a small “Babies “R” Us store within the existing location.

“One of our core strategies is bringing the two brands back together again, using Babies as the feeder for Toys,” Storch explained. “We’ve seen significant sales increases in the side-by-side locations, which involve a total remodel of the box.”

To date, more than 25% of the chain’s stores have been refashioned to one of the two configurations, which feature more contemporary and kid-focused interiors. The chain ultimately expects to convert nearly all its locations to one of the two formats.

In another initiative designed to make its stores more convenient, the chain has introduced “R” market, a dedicated, upfront shop featuring an expanded assortment of family-related consumables and commodities to more than 260 Toys “R” Us stores, with more to come.

“It’s doing very well for us,” Storch said.

As to holiday 2009, Toys “R” Us is managing its inventory carefully and actively analyzing market data to ensure it is in an “unbeatable” stock position on hot toys. Storch is optimistic.

“Parents may cut back on luxuries for themselves, but the last thing they will cut back on is gifts for their kids,” he said.