Opinion: What startups can learn from the decline of Toys R Us

CEO and Co-Founder of Intelligence Node, a big data firm with largest global retail product index that tracks real-time price and catalog movements for major retailers. You can create a community post just like Sanjeev here.

Photo credit: Mike Mozart.

Mere weeks before the holiday season began, American toy retailer Toys R Us filed for Chapter 11 bankruptcy protection amid crippling debts, declining sales, and relentless competition from retail powerhouses.

This incident can be a rich source of lessons for startups who wish to avoid a similar fate. To stay relevant and profitable, startups can consider the following pieces of advice.

1. Lead with your greatest strength

Last year, the baby products category accounted for 36 percent of the total US revenue of Toys R Us, representing the company’s biggest share of domestic product sales. This suggests that baby products — and not toys — are the brand’s strength and core differentiator.

As competitors Amazon and Walmart grow their market share in the toy category, Toys R Us has announced its plans to focus on baby products.

Tough competition in toys: Powerful rivals have eroded Toys R Us’ competitive edge in toys and baby products.

Toy sales have fallen in recent years as more consumers shop online. With its vast product offerings, Amazon is the largest seller of toys and baby products online in the US, with US$2.16 billion in sales in 2016. While its toy sales rose in 2016, Toys R Us’ revenues fell, and the company hasn’t reported a profit since 2013. Meanwhile, Walmart is aggressive with prices, and the expansion of its baby products led to nearly US$1.3 billion sales last year.

Takeaway

  • What unique qualities make your company stand out and sell?
  • Is there a niche where your company outperforms your rivals?

2. Remove the blinders

While internal performance deserves strategic attention, it’s also vital to watch your rivals to protect your competitive position.

Amazon and Walmart dominate ecommerce sales due to lower costs, a robust online presence, and fast home delivery. Online retail gained share points last year to account for more than 20 percent of baby product sales, and Toys R Us’ competitors — Walmart, Target, and Amazon — all earned ecommerce share.

This means that Toys R Us needs to focus more on its online business to avoid losing any more market share to its online rivals. Offering an efficient online shopping experience must be a priority, including fast web page loading, sufficient product data to help shoppers make a purchase decision, and a seamless mobile payment system.

Amazon excels at effective cross-merchandising, which boosts the average value per transaction by driving add-on sales. Its limited flash sales also entice with huge bargains for online shoppers who complete their purchase immediately. Walmart’s price-matching policy offers everyday low prices both in their stores and online.

Distracted by a US$1 billion debt, Toys R Us missed the ecommerce game. The company was focused on paying interests to stay afloat rather than catching up to online shoppers’ rising expectations on ecommerce service. They invested in ecommerce far too late.

Toys R Us has announced that they will redo their website to make it impactful and consumer-centric. For instance, the streamlined checkout process will shrink from five steps to two, product images will be larger, and online baby registry visitors will receive notifications about sale items.

Additionally, the company’s decline is partly due to their neglect of the older children market. In 1999, Toys R Us was the Top 2 retailer for video games in the US. But now, the company has only less than 1 percent market share, as Amazon and Walmart’s prices have remained too attractive for shoppers to ignore.

Takeaway

What are your competitors doing differently (and better)?

3. Use empathy as strategy

Knowing your customers and adapting your business to surprise and delight them is the key to business success in any sector. Companies must deeply understand their customers’ motives, behaviors, and purchase drivers.

For instance, Toys R Us is reinventing its online presence to keep up with shoppers’ desire to research products, compare prices, and shop online. Consumers may shop online for toys and baby products because they don’t want to take their children to the store, wait in line amid rows of candies at children’s eye level, and carry big, bulky boxes of diapers to their car. Such insights into the customer journey signal the need to prioritize an ecommerce strategy for a compassionate and convenient customer experience.

Surprisingly, having children in the home does not improve consumers’ odds of purchasing baby products, as 58 percent of buyers were households without children. Knowing these shopper insights is good news, as Toys R Us can expand its marketing campaigns to target doting grandparents, relatives, and friends of families with children, especially leading up to the holidays.

What does your data reveal? Data proves that a surprising number of baby product consumers live in child-free households, including grandparents, siblings, and friends, according to TABS Analytics.

Toys R Us’ “Be Prepared-ish” campaign recognized that new parents often feel overwhelmed and anxious, so it positioned Babies R Us as a wise, trusted friend who reassure new parents they would be fine. This campaign made the baby brand stand out with a relatable and trustworthy personality (qualities millennials appreciate). It also offered hope that new parents can relax and savor the special period of their lives. Toys R Us needs more of this strategic empathy as they move forward.

Takeaway

  • What consumer behaviors are common in your target market?
  • How can you adapt to their behavior to show them that your company cares?

4. Balance emotion with data-driven logic

Right now, Toys R Us executives are prioritizing inventory building to maximize their sales for the holiday season, which accounts for 40 percent of annual revenue. The company’s turnaround strategy will also involve investing US$277 million from 2018 through 2021 to convert existing locations into side-by-side storefronts dedicated to toys and the Babies R Us brand. Profits suffered in locations where Toys R Us and Babies R Us operate separately.

In recent years, Toys R Us has spent hundreds of millions of dollars on interest, which left them with few resources to fund their ecommerce website. The retailer will also overhaul its web presence, digital customer loyalty program, ship-from-store capabilities, and delivery time to compete with Amazon, Walmart, and Target.

Takeaway

  • Data-driven decisions are paramount to business success, and tech startups have a massive advantage here.
  • Beyond your financial statements, what data can help you understand your customers and rivals better to gain an edge?

5. Invest more where you’re in demand

Toys R Us has invested in more physical stores in China and ecommerce operations, as the country’s market conditions look favorable. For instance, China’s elimination of its one-child policy has led to a mini baby boom, boosting sales for Toys R Us. The country also has nearly 500 million middle-class consumers who are increasingly affluent, tech-savvy, and willing to buy safe, quality products made overseas. This group of shoppers is an ideal target for the retailer’s omnichannel operations.

Toys R Us has also achieved growth in Asia-Pacific markets, according to the company’s June 2017 financial report. Beyond mainland China, the retailer operates in Brunei, Hong Kong, Malaysia, Singapore, Taiwan, and Thailand — markets that can fuel growth as the company adjusts its US strategy.

Across Asia, consumers’ disposable incomes are rising, and shoppers are buying more premium toys, which has fueled faster growth in Asia’s toy market compared to Western countries. Toys R Us dominates the US$20.7 billion Asia Pacific market for toys with a 20 percent share. Its closest competitor has a 1.4 percent share.

Since the bankruptcy in North America, Toys R Us has explored options to boost its growth in Asia, including a potential initial public offering with Chinese joint venture partner Fung Group. This spring, the retailer also combined its Japanese business with a joint venture operating stores in China and Southeast Asia, which amount to a total of more than 400 stores.

Takeaway

Along with a business strategy that reflects your startup’s unique strengths, competitive vigilance, empathy, and data-driven decisions, your pursuit of markets can lead you to great opportunities for success.

Originally published at www.techinasia.com.

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