How Retailers Can Avoid Becoming the Next Toys R Us

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Wharton's Barbara Kahn and Columbia's Mark Cohen discuss the latest round of retail bankruptcies.

There is dire news coming out of the American retail industry these days. Malls that once teemed with eager shoppers are slowly dying, big-box stores are losing ground to e-commerce, and many legacy chains are shrinking their numbers in a too-little-too-late strategy to save themselves. Experts say it all points to a revolution that has been sparked by a sea change in consumer behavior, thanks to the ease of online shopping.

The latest casualties are Toys R Us, which filed for bankruptcy in September and recently announced it will shutter all stores, and mall accessories chain Claire’s, which has also filed for bankruptcy. Wharton marketing professor Barbara Kahn and Mark Cohen, a former retail executive who is director of retail studies at Columbia University’s Graduate School of Business, joined the Knowledge@Wharton show on SiriusXM channel 111 to talk about lessons from the downfall of Toys R Us and where the retail industry is headed.

The following are key points from the conversation. (Listen to the full podcast using the player at the top of this page.)

The Struggle Is Real

Hockey legend Wayne Gretzky famously said that his father told him to “skate to where the puck is going, not to where it has been.” It’s a quote repeated often in the business world and sound advice that the retail industry should heed, Cohen said.

Change is now absolutely upon us, and retailers who want to remain viable have to respond to those changes,” he said. “A very large retailer has to be thinking about where their business has to be positioned in the future, and they have to be taking action to accomplish that.”

He said Toys R Us and Claire’s have been paralyzed by inaction, pinned under the weight of debt and poor leadership. The debt “gave them very little financial capacity, even if they had intellectual capacity, with which to make changes. I’m not sure either one of them did, by the way.”

“Any retailer that doesn’t understand the changing shopping behavior is going to be at a loss.”–Barbara Kahn

Cohen doesn’t mince words when it comes to management’s role in the demise of Toys R Us. He said company leaders became complacent after years of sitting at the top of the toy-store game, and they did nothing to improve stores, adapt to technology or tackle competition head-on.

“They outsourced their e-commerce business to Amazon early on in an extraordinarily foolish deal that gave Amazon tremendous insight into customers and customer behavior, and it gave [Toys R Us] basically nothing,” he said. “They never reorganized their stores to become more attractive, appealing and experiential. And they decided they didn’t have to be price-competitive, which was the last straw, if you will. That they’re in bankruptcy and facing liquidation is certainly no surprise.”

By contrast, Claire’s is a mall-dependent chain that found itself falling deeper into debt at the same time mall traffic began declining. Cohen thinks the company has few options beyond closing a significant number of stores and restructuring debt.

“The legacy retail business is struggling, whether it’s mall or off-mall,” he said.

Kahn, who is author of the upcoming book The Shopping Revolution: How Successful Retailers Win Customers in an Era of Endless Disruption, noted a few more trends she said are hastening the closure of brick-and-mortar stores.

“As we all know, shopping is going to omni-channel shopping, this seamless shopping, so you really need to have an integrated presence across phone, online and offline,” she said. “Stores that don’t are in trouble, especially Claire’s, which is targeting the digitally native Gen Z. Those people are used to shopping through their phones; they’re used to being able to look at a website before they go into a physical store. Any retailer that doesn’t understand the changing shopping behavior is going to be at a loss.”

She also pointed out that the U.S. has been “over-stored” for a long time. Malls and big-box chains flourished during the 1980s and 1990s, opening an abundance of stores, including many large-footprint spaces like Toys R Us. With the current increase in online shopping and small-footprint stores, Kahn said, it’s only natural to see some of those stores close.

Technology has also empowered startup brands to market directly to their target audiences through the web. For example, a jewelry brand that wants to steal Claire’s tween market can find those customers through Instagram and other social media platforms rather than depend on kids hanging out at the mall. “That’s an interesting change in the competitive scene of retailing,” Kahn said.

The Revolution Is Just Getting Started

The fast-changing retail environment has Kahn pondering what the sector will look like in 10 years, when voice-activated technology, the connected home and augmented reality will make it far simpler for people to shop from home. “When it’s very easy to order something from home, what does that require for retail in the future?” she asked. “What will get people out of the house and into a physical store?”

That’s why stores have started experimenting with different models, such as showrooms that hold a limited inventory or pop-ups that exist for a limited time. Perhaps pop-up stores could work for the toy industry, which makes most of its sales during the fourth quarter, Kahn noted.

“There is an advantage to this pop-up idea [for toys], but that’s very hard to set up,” she said. She pointed out that it takes about a year to set up the temporary costume shops that pop up in empty storefronts every Halloween. “They have to find the locations, staff them with sales associates, deal with the inventory. But that’s a model that’s been in place for a while, and they know how to do it,” Kahn said. “I could see things like that changing. If retail is so seasonal, why don’t you adapt the physical space to the seasonality? I agree it’s not an easy thing to do, but it’s doable.”

Cohen isn’t so sure pop-up stores are the answer for toy sellers. The industry faces tremendous logistical challenges because most of the products are manufactured overseas and far in advance, he noted. Kids today also favor digital toys over physical toys, so marketers are hard-pressed to create crazy demand like they did in the past with Tickle Me Elmo or Cabbage Patch dolls. Besides, those hot items were almost always discounted.

“When it’s very easy to order something from home, what does that require for retail in the future?”–Barbara Kahn

“You’ve got something customers are clamoring for, and you’re busily racing to the bottom by reducing your margins to get their attention,” he said. “The only winners are the players who don’t rely just on the toy business, like Walmart, Target and Amazon, who have tremendous scale and buying power and who are not tethered to a physical network of stores, especially stores that are not at all appealing, not at all interesting.”

He echoed Kahn’s belief that retailers who are successful in the future will have to provide customers with a seamless omni-channel experience.

“Twenty years ago, customers had very little choice. They had to shop locally. Today, customers can shop anywhere in the world, effortlessly,” Cohen said.” These legacy formats who just don’t get it — and there’s quite a few more than just Toys and Claire’s — are in for terrible trouble as we look toward the future.”

Retailers Need to Lead, Not Follow

If retailers want to gain firm footing in the shifting sands of the marketplace, they need to think outside the (big) box.

“I think that retail has to think really revolutionary,” Kahn said. “Toys R Us and all those big box stores — Borders, Circuit City — were offering large assortments at cheap prices. Online just completely dominates that, so that model doesn’t make any sense. If you’re thinking about what’s the role of the physical store, it’s got to be something about experience, whatever that means.”

That’s why retailers with physical stores need to think about touch, feel, sight and sound.

“When you look at some of these legacy stores, what were they thinking?” Kahn said. “They were really boring, awful places to go. It’s about time people realized they should make it fun to go to the store.”

Cohen circled back to leadership, saying managers need to envision the possibilities and take action.

“Many of these legacy businesses have had bogus leadership, leadership that rested on its laurels, that believed their success would be forever and always guaranteed. They took no action to consider the future,” he said. “Now, many of them are completely behind the eight-ball. They’ve either run out of gas, like Toys R Us and Claire’s, and they’re in restructuring, or they’re frantically trying to avoid that outcome and reacting. For much of what we’re reading about, in my view, it’s far too little and far too late.”

Amazon vs. Walmart

Kahn recently when to the Shoptalk retail conference in Las Vegas, where many conversations centered on whether Amazon is friend or foe. She contends Amazon is good for business because it pushes competitors to think bigger. Walmart, for example, is now buying up more brands and improving their online experience.

“They’re moving in several directions,” she said. “They’re trying to leverage their stores, which is a big advantage, and their sales associates, which is another big advantage, to be more efficient in omni-channel shopping so that they can compete with Amazon. But Walmart is doing more than that, and what I think is particularly interesting is their notion that they do believe in brands, whereas Jeff Bezos has said, ‘Your margin is my opportunity.’ He really is convening more on convenience, low price, etc., although he’s hedging his bets. I do think there are some very big differences in Walmart’s and Amazon’s strategy, although they are going to go head-to-head in a lot of arenas.”

“Twenty years ago, customers had very little choice. They had to shop locally. Today, customers can shop anywhere in the world, effortlessly.”–Mark Cohen

But Cohen said that Walmart’s chasing Amazon is “a fool’s errand” because while Amazon has created a marketplace, “Walmart is trying to create a more attractive store.” The chain has done a good job of improving its stores, Cohen said, but it’s “nowhere near” offering a brand assortment that would expand its customer base.

“The small brands that they’ve acquired may be interesting, but they need literally hundreds and hundreds more to form some critical mass that enables them to present themselves in a more attractive and interesting way,” he said. “They’re trying to go up-market into Amazon country, and I don’t think it’s going to happen. They also don’t have the advantage that Amazon has in that they don’t have a profit-making machine called the Amazon website.”

The experts say there are so many contingencies that it’s anybody guess where the retail industry will go, but there certainly will be more significant changes.

“The rumor of the moment was that Kroger was going to merge with Target. This has been denied,” Cohen said. “Kroger is one of the largest grocery store enterprises on the planet, struggling to avoid being relegated to some legacy version of themselves, and Target went all in on food years ago and has never made sense of it. Maybe something like that happens and turns that segment completely on its head.”

Kahn is keeping a close eye on foreign markets where Amazon competes with Chinese e-commerce giant Alibaba.

“Those are two titans, and they have very different models, and it would be interesting to see which one wins in that debate,” she said. “That might also change the future of retailing as they eke out their different ways of doing business.”

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