After Toys R Us: How to Survive When Your Big Sales Channel Dies

The age of the iconic toy store is over. Toys R Us — the same company that absorbed former competitors like KB Toys, eToys.com, and F.A.O. Schwarz in 2009 after those brands faltered — announced last week it was shutting down after 70 years in business.

Toys R Us threw in the towel just six months after filing for bankruptcy and unveiling an ambitious strategy to introduce cutting-edge options like augmented reality into the shopping experience.

The Ripple Effect: 1 Down, More Could Follow

In court papers last fall, CEO David Brandon spelled out his vision. He wanted to transform Toys R Us stores from warehouses to "interactive spaces" where employees would "remove products from boxes to let kids play with the latest toys."

Americans spent $20.7 billion on toys last year — and Toys R Us accounts for an estimated 15 to 20 percent of that.

But Toys R Us waited too long to embrace these potential inspiring experiences as it struggled under the weight of about $5 billion in debt.

Now more than 31,000 people are losing their jobs. What's worse, many more job losses could follow unless toy suppliers find new outlets for the products they formerly sold to Toys R Us.

As Brandon noted in a speech to employees last week, "We have vendors and suppliers out there who are also going to experience disruption and in some cases the same risks of insolvency based on the level of penetration they have with our company."

Toys R Us Numbers

At the time of its bankruptcy filing, Toys R Us owed $7.5 billion to toymakers, including Mattel (owed $136 million), Hasbro ($59 million), Spin Master ($33 million), Lego ($32 million), Radio Flyer ($12 million), and Crayola ($2.6 million).

The debt could be even higher now. According to documents filed this week, Toys R Us "continued to order goods as late as mid-March while failing to inform vendors that they could not pay for those goods."

'Crushing Blow'

How will suppliers weather the loss of a significant portion of income — much less what could arguably be their most important distribution channel?

Industry analysts estimate Toys R Us accounts for about 11 percent of Mattel's annual sales and about 9 percent of Hasbro's annual volume. At both companies, share prices have stumbled since the closings were announced last week.

But small companies could feel even deeper pain.

As Jim Silver, editor-in-chief of toy review site TTPM.com, noted, Toys R Us "was known as an incubator." It could generate 40 percent of a smaller company's overall business, Silver told the Associated Press.

Gary Atkinson, CEO of The Singing Machine Company, already said he expects to lose worldwide distribution for his karaoke products and potentially most of his international operations.

Toys R Us played a critical role for toy makers, which relied on the big box store for visibility and sales.

Linda Parry Murphy, CEO of Product Launchers, a supplier that connects smaller toy makers with retailers, called the Toys R Us closings "a crushing blow to start-ups."

When Sales Channels Die

It's easy to get complacent when business is good.

In the enthusiasm of today's strong performance, even otherwise strategic leaders can fail to see what lies ahead. Others underestimate the probability of disruption — like the newspaper publisher who told a roomful of reporters in 1990 that he viewed the internet as a passing fad.

But none of us can afford to be like Alfred E. Neuman, the cover boy of Mad magazine. We have to worry.

Perhaps more accurately, we have to plan.

Today every company needs to hedge their bets through the effective use of multiple channels. Retailers today need to understand the relationships between all of their digital and physical channels and create a memorable brand experience.

"Brands must shift to a cross-channel approach where AI is used to learn, understand, and engage with consumers at the individual level with hyper-personalized, relevant, and timely communications, making them feel compelled to engage back," said Brian Solis is principal analyst and futurist at Altimeter, the digital analyst group at Prophet.

5 Ways to Future-Proof Your Company

Maintaining stable business in the disruptive digital era takes effort. My suggestions:

1. Make ecommerce a priority rather than an afterthought. By offering customers a direct way to purchase your products and services, you can help maintain loyalty regardless of what happens to your brick-and-mortar sales outlets.
2. Create relationships with your customers, regardless of the channel from which they purchased. Reach out after the sale with a personal thank you, educational information, tips for getting the most out of their purchase, and other relevant content.
3. Select the best digital tools for your goals. Strategically important technology advances your ability to reach your customers and other stakeholders. A strategic approach enables you to more effectively leverage your technology investments and create more compelling and frictionless brand experiences.
4. Optimize insights from your data and analytics. To chart the most accurate path, It's all about aligning your expectation, determine the correct indicators to measures, and analyze metrics proactively — rather than looking at data after the fact.
5. Keep your focus on the big picture. Stop looking at your company in isolation. Instead, look at it in the context of both its industry and its sector. What trends are affecting you and your competitors? More broadly, evaluate everything from new technologies to demographics, the economy, and lifestyle factors.

Toys R Us said it failed to adapt to a "continued and significant decline" in the birthrate. Generally speaking, fewer kids mean fewer toy sales. In retrospect, that seems like a pretty obvious red flag to miss.

It's too late for Toys R Us. But it's not too late for you.

Feel free to contact me if I can help.

About Arke

Atlanta-based Arke develops strategies and implements digital technologies for better brand experience for your customers.