Toys “R” Us Location Strategy Downfall

In March, Toys “R” Us announced that they are going out of business, resulting in future closures of over 700 Toys “R” Us stores across the United States. This liquidation is opening up a mass amount of real estate into the US real estate market. Because many companies are downsizing on retail and warehouse spaces to save on costs, the need for large suburban retail spaces has significantly gone down throughout the past couple years. Additionally, Most Toys “R” Us locations are standalone properties that are in the hands of publically traded real estate investment trusts, making the value of these spaces even lower in the eyes of the current real estate market. According to research by CoStar Group Inc, Toys “R” Us is having this issue because of poorly chosen locations for their retail stores, making it even harder for them to sell these soon-to-be vacant lots.

The recent bankruptcy and liquidation challenges of Toys “R” Us can be viewed as a case to exemplify the importance of choosing suitable locations for facilities that optimize performance and efficiency. Because bankruptcy is a risk that companies should consider when making business decisions, it is important to carefully consider many different factors when buying new facilities.

First, companies should consider distance between the facility and their customers and suppliers. Companies should factor in the cost of transporting goods when choosing a new facility because this choice can lead to significant savings in both time and money depending on where a facility is located in relation to customers and suppliers. Second, management should consider either leasing or buying properties based on their long-term goals and budgets. Third, management should make sure that the location has access to the specific transportation network of the company. Some companies may need easier access to airports or major highways to cut down on transportation costs. Fourth, management should have a solid understanding of the labor market situation in the area of the new facility to make sure there is a sufficient availability of adequate workers. Fifth, considering synergies with service providers, for example a refueling site for trucks, can simplify operations and cut down costs. Lastly, risk levels in each area of consideration should be heavily analyzed. For example, changes in market demands and changes to transportation infrastructure should be researched prior to a location decision.

If Toys “R” Us would have considered these qualities before purchasing millions of square feet of large retail space, would they have survived longer? Would they have an easier time liquidating their assets if they had made better decisions about the locations of their facilities? Can you think of any other negative effects poor location strategy can have on a company?

Sources:

http://blog.triskelogi.com/6-factors-to-consider-when-choosing-a-location-for-a-new-facility/

http://www.crainscleveland.com/article/20180316/news/155111/toys-r-us-shuttering-stores-and-few-will-want-fill-them

11 thoughts on “Toys “R” Us Location Strategy Downfall

  • April 19, 2018 at 7:04 am
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    Hi Fran,

    Thank you for your post. I never considered that Toys “R” Us was struggling to get these continuously more illiquid assets off of their balance sheets. I think the discussion around the change from brick and mortar to e-commerce is both interesting and just beginning. The larger retail giants are starting to feel the front-end effects of this consumer change and soon these effects will ripple through different aspects of society.
    I read a very interesting article about changing consumer culture and how we can update our strategies to adjust accordingly. I’ll mention below some of the interesting changes that Forbes suggests making:
    (1) Shopping center should no longer be composed of many shops plus a food court. Instead, the dining experience should be the height of the attraction, while accompanying the restaurants with some small shops at the location.
    I think this is a great suggestion for smaller business. With retail giants (Nordstrom, Forever21, JCrew, Macy’s) once being the attraction to the shopping centers that in turn supported these smaller stores, the small stores will begin to lose their customer base if they haven’t already. By beginning to place smaller businesses around a consumer culture that is not lessening (restaurants & dining experiences), they will still receive that much-needed foot traffic.
    (2) Completely tear down infrastructure and turn it into something more relevant.
    Whether this be a new housing complex, a new recreation center, a school, or as you mentioned a warehouse complex for e-commerce sites, we need to replace these empty lots. I think this task falls heavily on marketing and consulting teams that could analyze an area (a small market) and see what they are lacking in their economy. Sure, some locations will remain completely useless, but in many areas, there is the potential for something. The task is figuring out what that something is.
    I believe that as landowners come to terms with the fact that land is falling in value, and will continue to do so, lease contracts will be less expensive and less committal which will encourage new companies and new growth. A suggestion for Toys “R” Us could be to do some of this analysis and see what sort of a company could profit from their closed down location and try to market specifically to them.
    Source: https://www.forbes.com/sites/richardkestenbaum/2017/05/30/this-is-what-will-happen-to-all-the-empty-stores-youre-seeing/#3caeb7c24bb7

  • April 19, 2018 at 12:44 am
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    Francesca,

    Thank you for your post on Toys “R” Us. I appreciate the time and research you put into this post, but it was still difficult for me to read because I was and still am a big Toys “R” Us fan. I remember going on errands with my mother, and as a reward for patience or good behavior, we would stop buy Toys “R” Us on the way out of the mall. This was my mother’s way of bribing me to behave on these lengthy trips. Because of my childhood experiences at Toys “R” Us, I was upset to here they were going out of business. However, after taking a few business school classes, including this Operations Management class, I am not perplexed by the eventual failure of their business model. Toys “R” Us refused to transition to the online shopping market and stubbornly held on to their retail locations for far too long. In today’s increasingly online economy, the retail-based Toys “R” Us business model was a relic of the past, and once management realized they needed to fundamentally change in order to save the business, it was too late.

    As your post highlighted, the various retail locations in remote suburban locations are now undesirable and very difficult to sell for even a fraction of the original value in the real estate market. Unfortunately, having so many locations in poorly chosen spots negatively affected both their sales and their inventory/transportation costs. This faulty business model was a major contributor to the inevitable demise of Toys “r” Us. The article linked below goes into further detail about how the structure of Toys “R” Us’ business operations was the main reason for its failure, and not the reluctance to shift to digital. I encourage you all to give it a read!

    https://diginomica.com/2018/03/14/toys-r-us-failure-points-to-structural-business-model-failure-not-just-digital/

  • April 18, 2018 at 9:27 pm
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    Fran,

    Thank you for your insight into the downfall of a past retail giant. I liked the way that you analyzed things based on the supply chain challenges that they posed to retail locations. It just goes to show how important supply chain management is to a company’s survival. It can mean the difference between a Walmart-type success story and a Toys R Us failure. I am wondering what impacts Blockchain could have had on Toys R Us’ survival. As we discussed in class, Blockchain is a significant investment that can have immediate returns on a company’s ability to manage their supply chain and reduce overall company cost. In our class example, a baby food company was struggling to meet demand due to a lack of communication in their supply chain. Their supplier was being supplied by a handful of apple orchards that, when production stalled, impacted the entire supply chain. I think that Toys R Us could have implemented some block chain ideas to streamline their supply chain and increase communication so as to reduce the amount of inventory they needed to hold up front in their stores. Additionally, moving to a more online-based retail company (per the E-commerce trend) like Walmart has been in the process of doing could have spared them the crippling expenses associated with the outdated inventory model that they were using. I am interested to see what other companies that are using outdated supply chains do after seeing how it drove Toys R Us out of business.

  • April 18, 2018 at 6:16 pm
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    The move to ecommerce my toy manufacturers and retailers has be the catalyst to the failure of Toys R Us. I remember walking the aisles of that store as a child and being overwhelmed with everything on the shelves and essentially being in heaven. However, companies like Amazon have drawn customers away from these huge brick and mortar retail stores with their essentially limitless inventory and convenience for consumers. Additionally, the inventory costs for a company like Amazon would be significantly less than that of a company like Toys R Us. Maintaining a retail space, staffing, and everything else that is associated with the Toys R US retail store would be significant wastes to Amazon putting them at the cutting edge of expansion and corning the toy market.

  • April 18, 2018 at 4:00 pm
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    Francesca,

    Thank you for the information and thoughts on Toy’s “R” Us. I think you did a great job of outlining a number of important factors that companies must think about when considering the locations of their retail stores based on things such as location to customers, location to suppliers, and other cost efficiencies. However, after considering your thoughts that Toy’s “R” Us failed in their location choices, I looked more into their situation and I do not fully agree.

    I understand that Toy’s “R” Us is having a difficult time selling their current real estate holdings, but this does not necessarily reflect their level at which the locations were able to serve their particular purpose. There is a growing trend of retail locations of all types becoming devalued due to the rise of e-commerce amongst other things. An article I read attached below outlines other faulty characteristics that lead to their demise other than their supply chain efficiency and strategy. They were no longer able to compete with online competitors because they could not provide as large of a variety or low-cost as online competitors. Their business strategy simply was out dated. In response they tried to cut staff and locations for more profit, but this only exacerbated the issues.

    SOURCES: https://seekingalpha.com/article/2179943-toys-r-us-has-major-problems

  • April 18, 2018 at 3:32 pm
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    Fran,

    Thanks so much for your insight into Toys “R” Us’s recent struggles. It’s so sad to see a store with which many of us have great memories to be doing so poorly. A Businessweek article put it really well, I think, by saying “what if the problem isn’t that a particular store is out of fashion, but that consumers are just shopping less at brick-and-mortar retailers in general?” So, the problem that Toys “R” Us is facing has a lot to do with competition from Amazon, Walmart and other firms with large e-commerce footholds.

    In the case of Toys “R” Us, it seems as though the problem may have less to do about the location of their stores and more to do with the fact that so much of their business was done in those stores in the first place. To answer your second question, I think it’s entirely possible that some of their locations are just in retail spaces that are big enough to house their operations, and that location was a secondary concern when they purchased the lots. Had they purchased lots in better locations they probably would have had to pay more of a premium (and of course they didn’t purchase the lots with the intention of having to liquidate in the case of bankruptcy), but that decision would be paying off now.

    Location plays a huge role in the success of a brick-and-mortar operation. Unfortunately for even the firms that choose strategic locations, the push toward e-commerce and away from physical retail spaces has caused there to be problems with even the best spaces.

    https://www.bloomberg.com/news/articles/2018-04-17/as-toys-r-us-fails-the-retail-real-estate-glut-is-getting-worse

  • April 18, 2018 at 1:25 pm
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    Fran,

    Thank you for sharing your thoughts on Toys “R” Us. Your post brought up a lot of interesting points about the logistical decisions of Toys “R” Us and how other retail brands can learn from their mistakes. First, I believe that Toys “R” Us is an extremely outdated concept that has been destined to go bankrupt after the emergence of e-commerce and “megaretailers.” Also, smaller, neighborhood toy stores have been huge competitors of Toys “R” Us because they are convenient and easier to get around than the huge Toys “R” Us retail boxes.

    Also, traditional Toys “R” Us stores have strayed away from going into large malls, in order to save costs, however this makes the store harder to get to, which you referenced in your post. When Toys “R” Us was expanding, I believe they made the costly mistake to think that its brand name and business alone would drive traffic to the store. However, in the dying years of the business, it never had the traffic it once did. To me, this is a huge logistical error that was justified in the early times of the business because of how many people they brought through the doors.

    Finally, I believe the retail properties will take some creative brokers to get them sold or leased. Due to the ineffectiveness of Toys “R” Us, it will be very difficult to attractive “big box” retailers that are willing to take over a dead location. However, this is where the creativity of the broker would come in handy because these locations could be useful for other purposes. In your post, you labeled these spots as “poorly chosen locations for their retail stores,” and I completely agree. They could be perfect locations for a small satellite warehouse for e-commerce companies or retailers that want their products closer to the consumer. As a retail space, most Toys “R” Us stores are just off main retailer corridors, so it takes some effort to get back to see them, but they are still very close to plenty of consumers. Other businesses that are not looking to necessarily use these vacant spaces as a retail showroom could cut down on transportation costs and times because they would be even closer to the consumer. All in all, Toys “R” Us has a long round ahead to liquidate all of its real estate assets, however they are plenty of opportunity for other businesses to come in and use the space effectively.

  • April 18, 2018 at 7:40 am
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    Fran,

    When purchasing or leasing land whether it is for a retail store, warehouse, or more commonly a home, everyone considers location. In the real estate world, it is known that location can make or break a property. Location can also have a positive or negative influence on the price of a piece of property. There is the common saying “location, location, location.” When determining if a piece of land fits the company’s needs, the company should consider: the proximity of the location to its suppliers and customers, the affects that the facility will have on the surrounding community, the labor climate, government regulations and laws, and environmental factors.

    Land is a valuable asset to any company or individual that can be used when a company or individual needs a loan. This is the case when a particular store does not fit in with consumer trends. When this occurs a vacant store can be replaced with a new store fitting the recent trends in consumerism. However, the problem with the value of land arises when the reason consumers are not shopping at a particular storefront. This is the trend as consumers are switching to ecommerce rather than brick and mortar retail. This leaves empty storefronts and increases retailer debt. One may think that empty retail locations create problems for landlords. However, empty storefronts can affect the business of other businesses in the area. People may choose not to shop at a particular mall or area because of surrounding stores having “for lease signs” or the stores being vacant.

    As a result of the recent news that Toys “R” Us is going out of business, hundreds of Toys “R” Us storefronts will be vacant. The company will be looking to sell these properties. Toys “R” Us could face difficulty when trying to sell this retail space as it appears retail restate is going to reach its demise in the United States according to a Bloomberg article (https://www.bloomberg.com/news/articles/2018-04-17/as-toys-r-us-fails-the-retail-real-estate-glut-is-getting-worse). Many other companies besides Toys “R” Us have closed retail locations such as J. Crew and Sam’s Club. When Toys “R” Us purchased these retail spaces, they could have been the best choice for what the company was looking for. However, as economic and the social climate rapidly change, the location of the storefront may not be in the best interests of the company. It will be interesting to see what happens with the vacant Toy “R” Us storefronts. Will companies like Amazon, Warby Parker, Apple, Whole Foods purchase these retail locations for warehouses or retail locations as these companies have been expanding their retail locations while the majority of retailers have been closing their storefronts.

  • April 18, 2018 at 12:59 am
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    Francesca,

    Thank you for your post and this insight on Toy “R” Us and its struggle with location strategy. This is obviously a big problem that the company ran into and is hurting it in this state of bankruptcy. Something you mentioned briefly that I think is a very important piece of information is that most of the locations are big standalone properties. Sometimes keeping up with these properties can end up being costly for the company to maintain over a period of time. One option that you mentioned is potentially leasing the space, but the problem there is that most standalone places aren’t exactly standalone locations, and if they do exist, its probably because another store moved its business out of the space, and probably with good reason. While Toys “R” Us is at an advantage with its variety, what they are selling (toys mostly for children) can just as easily be bought online. Online purchases aren’t necessarily the worst thing for the company, but one issue here is how much inventory the stores hold. Since the stores hold so much inventory, it would probably be nice to keep that inventory flowing in and out of the store.

    I’m not exactly sure if considering any of these qualities would have helped Toys “R” Us survive much longer. But now looking back, I do think that it might have been somewhat beneficial invest in smaller locations, and maybe less standalone locations to attract more customers. In the end, poor location strategy could make or break a business’s potential. With a good location, the company is probably getting a lot of value out of the space they have invested in. There is also probably a good customer base in the area with reasonable incomes to be able to afford the products. Without these few factors, a poor location could be selected and could in turn have the business heading on a downhill trend.

  • April 17, 2018 at 2:19 pm
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    Thanks for your post!

    While it is unfortunate that the company is closing their doors, it isn’t surprising, especially after all the poor decisions that their management made. The most prominent being that Toys R Us signed a 10-year contract to be the exclusive vendor of toys on Amazon, instead of investing in its own e-commerce site.

    After the announcement of the company closure, Amazon has been especially quiet on the subject. According to several industry updates, Amazon is considering buying the Toys R Us for the retail space. Amazon has already bought Whole Foods and is utilizing the spaces to get products to us in a faster, and more convenient way and this acquisition could be another way that the company to get closer to the public. With the sheer amount of location that Toys R Us had, Amazon would be able to pick and choose the locations that fit best with the company’s needs. Amazon would get a competitive edge over Walmart who has been investing in their same-day delivery program. Additionally, this could be used to expand and perfect their move towards bookstore and convenience store concepts as well as showcase their product line of Echo devices.

    While this is an unfortunate turn of events for Toys R Us, Amazon is taking full advantage of this opportunity to expand their supply chain and create a more comprehensive chain across the country.

    https://www.inc.com/robbie-abed/amazon-is-thinking-about-buying-toys-r-us-heres-why-thats-a-genius-move.html

  • April 17, 2018 at 11:01 am
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    Francesca,

    Thank you for your post. I definitely remember going to Toys “R” Us as a kid and going up and down the aisles looking at all of the toys that they had to offer. I was always amazed. However, I am not surprised that they are going out of business.

    Toys “R” Us was profitable before the e-commerce realm because people would come into the stores with their children, be overwhelmed by the toys and options that they had, and then buy way too many beanie babies than they probably should have. However, because of this shift to e-commerce, Toys “R” Us has lost their ability to encourage sales in this way. This type of effect is almost impossible to create with online shopping. Additionally, they really never adjusted to effectively keep up with the times. Many businesses have evolved and changed to implement the recommendations that you have laid out in your third paragraph. However, Toys “R” Us has not, forcing them to go out of business. One example is the non-strategic locations of their stores. Nowadays, it is very important to have strategic store locations and warehouses so that businesses can efficiently ship products as well as receive a steady customer stream. Because of the rise of e-commerce and Toys “R” Us’ non-strategic locations, demand for their products have greatly decreased—forcing them to go out of business. Therefore, it is very important for companies to implement the recommendations that you have made into their operations. It is also important for them to be on the lookout for future changes. If they do not, they could end up like Toys “R” Us.

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