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Amazon and Toys R Us is not an obvious retailer comparison to make, but at the turn of the millennium, both companies were viewed as leaders in their respective fields.
It was the latter days of the big box era in retail and Toys R Us was a destination location backed by a signature advertising campaign. It even had a high traffic volume website, in what were the formative years of e-commerce.
Amazon, meanwhile, was a leading pureplay business doing things that no other organisation had done – and it had just expanded to the UK and launched a sales platform for music and DVDs that would go on to seriously disrupt those markets.
These were two retailers perceived to be riding high in their sectors, and in 2000 they decided to work together. The move was positioned as mutually beneficial, following fulfilment failures at Toys R Us and overstock issues at Amazon the previous year.
It resulted in Toys R Us agreeing a $50m a year, plus percentage of sales, deal for Amazon to essentially run its website. Toysrus.com redirected to Amazon, and the e-tailer took care of warehousing products and delivering them to customers, while its new partner was tasked with buying, pricing and managing the toy inventory.
Early-days sales levels pleased both parties, but the planned 10-year relationship went sour in 2003 when Amazon sought more variety in its offering and began working with other toy retailers. Unimpressed with its lack of exclusivity, Toys R Us took the matter to court and in 2006 was able to break the partnership early and was duly compensated.
Fast forward 18 years and that settlement seems like a case of winning the battle, but not the war. The fortunes of the two companies could not be more polarised, with One Click Retail estimating that Amazon’s US business generated $4.5bn in toys sales in 2017, with its UK arm making about £500m from toys.
Toys R Us, meanwhile, is no longer in operation after collapsing into administration this spring.
Dancing with the devil
Many small to medium-sized retailers have benefited from working with Amazon, selling goods via the online titan’s marketplace, while a wide range of companies, big and small, use Amazon Web Services to support their e-commerce offerings.
But for some larger retail enterprises, collaborating with Amazon is seen as part of their undoing. As Brian Kilcourse, managing partner at analyst group RSR Research, says, “dancing with the devil will get you burned” – as Toys R Us found out.
Commenting on the 2000 partnership deal, he says: “I thought it was foolish at the get-go. Toys is one of those categories of merchandise that is easily disintermediated from the store. Toy sales are driven by other mediums, such as entertainment. They are not driven by going to the store and trying them. You can’t smell or taste them.”
Kilcourse adds: “The fact that Toys R Us worked with Amazon speaks to the company’s naivety about the threat that was presented to them.”
Bookseller Borders and department store chain Target are among the large retailers that have teamed up with Amazon – the former disappeared as an entity altogether in 2011, and the latter has spent recent years playing e-commerce catch-up after ending a deal that saw Amazon run its online retail site between 2001 and 2011.
Retail isn’t dying, boring retailers are
But blaming Amazon and the growth of e-commerce for the failure of a retail business does not tell the whole story.
Amazon’s success and its ability to rapidly eat up market share in multiple retail sectors is clearly a factor in many of the reported retail struggles in the UK and US, and, in some cases, the collapse of longstanding businesses. But there is more to it than that.
Steve Dennis, a retail consultant and former senior vice-president for strategy and multichannel marketing at Neiman Marcus, and ex-chief strategy officer at Sears, talks about the death of “boring retail” in the age of Amazon.
“It may make for intriguing headlines, but physical retail is clearly not dead,” he said recently. “Far from it, in fact. But, to be sure, boring, undifferentiated, irrelevant and unremarkable stores are most definitely dead, dying or moving perilously close to the edge of the precipice.”
This point is pertinent in the case of Toys R Us, it seems, with GlobalData senior retail analyst Fiona Paton saying in the wake of the UK arm’s company voluntary arrangement in December 2017: “The market has remained steady in toys and games, growing 16.8% over the last five years, meaning Toys R Us’s position is not one of external market conditions, but rather its own strategy.
“The retailer now has to make crucial and expensive investments in adding ‘retail theatre’ to its stores and giving consumers new reasons to visit if it is to continue operating in the UK.”
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But time ran out for Toys R Us and the business collapsed into administration just weeks later. GlobalData released research in the same week showing that Toys R Us’s market share in the UK dropped from 14% in 2008 to 8% in 2017, and at the same time, competitor Smyths grew its share from less than 1% to more than 9%.
Smyths has actually bought some of the Toys R Us stores in Europe to provide a catalyst for further growth outside the UK and Ireland.
Patrick O’Brien, retail research director at GlobalData, says: “The internet did take away Toys R Us’s main USP, which was having such a wide range – ‘everything under one roof’, as the famous advert said. But its failure to react in terms of the shopping experience, pricing and its own website is in stark contrast to the more imaginative reaction of Smyths and, to a lesser extent, The Entertainer.”
And there are other ways of selling toys. Consumer products retailer JML, which operates its own transactional website, TV shopping channel, and promotes goods using digital screen demonstrations inside third-party retailers, achieves steady revenue from toys.
JML CEO Ken Daly says: “We have had some very successful toy products and we just use our core model of video demonstrations, and actually the big volumes for us in toys are in the supermarkets.
“We are agnostic when it comes to what channels we sell our products through – we just want to get to the consumer. Supermarkets are a place to get in front of lots of shoppers, and video works brilliantly.
“If it’s a new, innovative toy, video is a perfect way to demonstrate that. We’ve all seen live demos in the likes of Hamleys, so if you can bring that to a screen in a supermarket, it’s a great way of selling toys.”
It’s hard to argue that more digital screens and product videos would have saved Toys R Us, but JML’s model provides yet another example of the competition it was up against.
Constructing its own coffin
Although images of seemingly decades-old tills and point-of-sale equipment in UK Toys R Us stores – some photographed by retail consultant Steve Dresser – circulated on social media and gave the impression of a lack of capital expenditure on technology, the retailer did make a latter-day effort to invest in modern store equipment.
As Computer Weekly reported in 2017, Toys R Us introduced two tablet devices per store to give UK staff access to inventory levels and information about product availability to help serve shoppers better.
One way the retailer’s staff utilised the tech was to help parents select a suitable child car seat by using an iPad app that could filter products based on the vehicle, the child’s age and the customer’s budget.
It was, arguably, a case of too little, too late. And in any case, crippling debt levels – revealed to be about $5bn at the time the business filed for bankruptcy in the US last autumn – would have prevented the necessary investment in equipment.
Tech did not seem a primary concern for the company, with its first-ever chief technology officer, Lance Wills, appointed as recently as the summer of 2016.
Wills was working closely with new CIO Phil Newmoyer to bring the Toys R Us e-commerce business in house, but with hindsight, these changes implemented in the twilight months of the company’s existence appear like last throws of the dice to turn around the retailer’s fortunes.
Brian Kilcourse, RSR Research
A combination of factors led to the collapse of Toys R Us – excess debt, which constrained investment in the business, and an over-reliance on high-ticket items, which Amazon could, and typically would, undercut.
In the UK, for example, the retailer was locked into long leases in arguably the wrong locations at the wrong level of rent, and the store experience paled in comparison with its closest market rivals. The growth of Smyths and The Entertainer, both of which have developed compelling store spaces, emphasises the last point.
As RSR’s Kilcourse says, the company has arguably been in decline for decades. But the collapse of the original deal with Amazon, and the decision to work so closely with that company in the first place, cannot have helped.
The collaboration led to a reliance on a third party’s e-commerce infrastructure while also helping that third party to learn how to sell toys, so that when diverged from Amazon, Toys R Us was always playing catch-up.
“It is tempting to blame Amazon for Toys R Us’s demise, but the business has carefully been constructing its own coffin for a long, long time,” says Kilcourse.
“It failed to see the trends that consumers were clearly indicating in terms of how they were buying whole categories of products. It failed to see these fundamental changes in consumer buying behaviours.
“Amazon didn’t build the coffin and put Toys R Us in it – Amazon’s success in recent years was just the final nail.”
But looking back at 2000, there is certainly an argument that Amazon also hammered in the first nail when it turned around its own toy business by working so closely with Toys R Us. Other brands looking to work with the online titan might consider this tale, and tread with caution.