Investment Thesis - Making Toys R' Us fun again

Toys R' Us was founded in 1948 and went on to become the biggest toy retailer in the US. But by the mid-2000's, Walmart, Target, Amazon, Big Lots, and Dollar Stores had jumped into the game and all cut prices on toys forcing many toy stores out of business. Facing declining sales Toys R Us was taken private in 2005 by KKR, Bain Capital and Vornado Realty Trustin a $6.6 billion deal.

Under private ownership, Toys R' Us tried to remain a relevant player in the toy industry by increasing private label and exclusive toys at the retailer. The company also bought KB Toys, eToys, and F.A.O. Schwarz. The company also converted ~25% of its locations into combined Toys R' Us and Babies R' Us stores. These moves were an effort to protect itself from competition and drive traffic into the stores.

However, these points of difference have not proven sufficient to fully stop the bleeding. The competitive pressures facing Toys R' Us continues to intensify and as its Private Equity owners consider an IPO, its time for consider options for future growth of its toy business. More specifically, given Toys R' Us is being cannibalized by both low cost vendors as well as more convenient vendors and the shift to a more exclusive assortment mix and co-locating doesn't appear to be sufficient, the company needs to find an additional factor that will draw customers into the store.

A solution is to dramatically change the in-store customer experience in order to build a stronger point of difference from competitors, to help limit price competition. One potential game changing move would be to turn the center of the store into a large play area taking the best of the playground and combining it with the best of Chuck E. Cheese, while merchandising toys around it. This play center could even potentially be turned into a revenue generator via ticket purchases. Not only would the play area would operate as a traffic driver, but also a testing ground by taking the toys out of the box and let the kids (and adults) play. For anybody who can remember walking into the original New York City F.A.O. Schwarz as a child, it would also help bring back the magic toy store once seemed to have.


The concept of "shoppertainment" has been proven out on plenty of smaller scales.  For example, Jordan's Furniture, a Boston based furniture founded in 1918 and now owned by Warren Buffett, applied this principle in one of their stores by building a Motion Odyssey Movie (MOM) theater/ride in one of there stores in 1992 and then later added an Imax theater in a different store in 2002. These moves not only created an instant traffic driver, but also a clear point of difference that couldn't easily be duplicated by its competitors.

Toys R' Us growth can come from expanding their mission from selling toys to entertaining children in and out of the store.