How Toys 'R' Us Can Make a Comeback

Retailer Can Emerge from Bankruptcy a Winner

SMITH BRAIN TRUST – It's not "game over" for Toys 'R' Us. Its filing for chapter 11 bankruptcy protection this week is more of a "timeout." And Jie Zhang, professor of marketing at the University of Maryland's Robert H. Smith School of Business, says that if the iconic toy retailer plays its cards right, it could end up a winner.

Of course, none of that will be easy, says Zhang, the Harvey Sanders Fellow of Retail Management.

Toys 'R' Us has been crumbling for years. The company has been burdened by $400 million in annual interest payments, much of it related to a $6.6 billion leveraged buyout in 2005. It's been squeezed by heavy competition from Amazon.com, and from Walmart and Target, which often sell the same toys, but cheaper and more conveniently. Meanwhile, the increasing everywhereness of smartphones and tablets among older kids has meant less time for and less interest in traditional toys.

Analysts say they expect Toys 'R' Us to close some of its underperforming stores as part of its restructuring, which is among the largest in U.S. retail history. The company has 1,600 stores in 38 countries and is the only remaining national toy chain in the U.S.

For the Toys 'R' Us stores that remain open, Zhang says, it's time to rethink the model. Toys 'R' Us, long the go-to place for Lego, Lincoln Logs and Erector Sets, needs to build a new experience for shoppers.

"Toys 'R' Us needs to make the remaining stores more interactive," Zhang says, with toy demonstrations, specialized toy kiosks and play areas for kids. "They need to think of their brick-and-mortar stores as interactive showrooms, an experiential playground."

The product assortment, she says, should be revamped to focus on popular and premium toy lines, including electronics-related toys, aimed at the chain's more-affluent customers. Its website, too, needs a revamp, with faster shipping, better customer service and some technical improvements.

Toys 'R' Us, she says, "has no hope" of competing with Walmart, Target and Amazon on price. But it can win on shopping experience and expertise, she says, suggesting a shift toward cleaner, better-organized stores for both its Toys 'R' Us and Babies 'R' Us locations, with more premium merchandise, better lighting, and helpful, well-informed salespeople. "It's a way to showcase the brand's merchandise and their expertise in toys," Zhang says. "Hopefully, that entices a customer to come back. Or hopefully, it entices them to shop online for toys at ToysRUs.com, rather than Amazon.com or Walmart.com or somewhere else."

The move toward experiential stores would mark a big transformation for Toys 'R' Us, whose success was built on what's now becoming an outdated model: The expansive self-service warehouse of a single product category. In this case: toys.

But interactive stores have a way of driving new interest in merchandise and can also encourage impulse purchases, Zhang says. They offer retailers a way to differentiate themselves, which is essential in a competitive environment.

"Nike has been doing it really well with its Niketown stores," she says. 

The Niketown stores carry limited inventory, but focus on how customers interact with the brand. The stores include bright, open spaces, with treadmills, mini basketball courts and soccer pitches, and a kiosk where shoppers can design their own sneakers.

If a playground can be built around shoes, surely, they can be built around toys.

"This would have a lot of advantages for parents," says Zhang. "I think many parents would like to see how their children will play with a toy before they make a purchase. And I could see these stores becoming a new kind of destination for families."