TWO LITTLE BOYS HAD TWO LITTLE TOYS

One of the most successful “Big Box” retailers in the world: Toys R Us, filed for bankruptcy in the USA in the summer of 2017. It has been in existence for over sixty-five years. This represented the nadir of this type of retailer. Similar retailers such as Blockbuster, Circuit City and Sports Authority also ran into difficulties and faced a similar exit from the retail scene.

I suppose we should not be surprised by such a development. I have always argued that the retail sector is a fickle one. In some cases the retail life cycle can be very short.  Some commentators argue that every fifty years or so retailing goes into a major shift in disruption and revolution. Perhaps the developments over the past few years in technology and changes in shopping behaviour have caught up with retailers such as Toys R Us.

“Big Box” retailers or “category killers” as they are sometimes referred to became very successful in the 1980’s.  Very large physical retail spaces allied to a focus on one category of product has worked well for category killers. Essentially they set out to be the recognised place to go for the particular category of product that they sold: in this case toys. This focused approach allowed such retailers to offer lower prices, due to being in a strong bargaining position with suppliers. They also offered a far greater selection of items in that category; thereby making it a “one stop shop” for customers making their seasonal or holiday purchases for their kids. It positioned its value proposition as being the “authoritative toy retailer.

It focused on a combination of price and quality, linked to a very comprehensive selection of items across all categories of toys. In essence: “the place to shop for toys”. Such a strategy was designed to put the small independent toy retailers out of business. In many ways this worked very well and we saw the demise of many favourite, traditional toyshops in the United Kingdom.

Category killers operated successfully for over three decades or so. However in the last ten years we have witnessed major changes in the value proposition being offered by new entrants to different retail sub-sectors. This combined with the growth in online retailing and the adoption of apps, smart phones and social media platforms, has fundamentally altered the way in which shoppers engage with retailers.

Some commentators argue that Toys R Us committed the classic mistake of well-established and successful businesses: they were too slow to adapt and the brand lost its relevance. Certainly they cannot blame economic variables such as recession for their decline. In the USA for instance holiday sales have grown by over six per cent in 2015.

It attempted to respond to these developments in 2014 when it launched what it called the TRU strategy. This was supposed to take it back to the customer in terms of relevance. It focused on clearer pricing strategies in the store, improvements in simpler promotional offers and a better and more relevant in-store experience.

Significantly it was very slow in developing its online retail business and more critically also slow to integrate both physical and virtual platforms. This has led to the criticism that it failed to recognise in time the fact that consumers have largely become hybrid shoppers. In other words they use a number of platforms to engage with a retailer throughout the purchasing process (problem recognition, search, evaluation, purchase and post-purchase).

Our old friend Amazon since its pioneering inception has conditioned and educated shoppers world-wide to engage in this hybrid shopping behaviour. Contrast Amazon’s approach with Toys R Us. In the case of the former it provides flexibility, speed in ordering and delivery of the item(s) and above all adaptability across its management of all aspects of its supply chain.

Category killers such as Toys R Us on the other hand are still frozen in the mind-set of cluttered stores and queues at check-outs.

More critically retailers such as Amazon, Target and WalMart have crossed over and across to many categories of product: including toys. As a consequence the “big box” concept has come under serious threat – perhaps a fatal one.

To be fair to Toys R Us it has plans to radically change the in-store experience. This has concentrated on focused interactive and engaged initiatives for parents and kids when they visit the store. For instance Geoffrey, the iconic Toys R Us mascot will greet shoppers as they enter the store. Shoppers can also point their smart phones at selected items on the shelves. By doing so this will activate a personalised experience. Barbie will tell her story to the shopper.

Augmented reality features are also being introduced to heighten the engagement and interaction. Live toy demonstrations will be provided by trained staff. They will also be given more freedom to take toys out of their wrapping and packaging to encourage kids to interact with them.

Critics might say that these initiatives, while welcome in terms of making the retailer more relevant and responsive to shoppers is too late. Large toy retailers such as Hamleys in the UK have been doing these things for a number of years.

Critical challenges involve slashing the levels of debt that it has sustained in recent years. It will also have to face the harsh reality of having to improve pay conditions for its staff.

Integrating its digital content into its stores is also at an early stage in its development: competitors have addressed this already.

The pessimist would say that it has “missed the boat”. For instance do we really need such a large physical space any more to sell items? Other retailers have redefined the purpose of physical space. Now such areas are used to build relationships with shoppers, provide solutions to their perceived problems and offer services to them. It does not matter whether they buy items within the store. Effective loyalty programmes allied to a solid reputation for customer service can direct shoppers to buy from their other retail channel platforms.

Arguably Toys R Us should go the way of other retailers such as IKEA.

In this case IKEA has begun to introduce smaller “showroom and display” physical spaces. Maybe Toys R Us should open up small playrooms and allow kids (and parents) to play in there.

Currently Toys R Us is undergoing a major rationalisation of its physical stores. It is closing around a dozen such outlets in the UK.

To its credit we should acknowledge that it has recognised (eventually) what the problems are and has plans to address them (as discussed in earlier paragraphs in this blog). The major concern is the levels of debt which it has incurred and the high volume of depreciating real estate which lies at the centre of its operations. It is a huge millstone that is tied around its neck and is likely to push it down and into oblivion. It faced a looming deadline of having to pay back $400 million of its overall $5 billion long-term debt.

Let’s see what happens in the coming months.

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BACK TO THE FUTURE

Occasionally in these blogs I focus on what might happen in the future by way of issues that are currently trending in the social media and press. Many of the big issues have already been aired in previous blogs such as the potential demise of physical stores and the impact of drones.

I was interested in a recent article that I read which put forward the view that we could see the end of supermarkets over the next ten to fifteen years or so*. This intrigued me as a retail commentator because it would suggest that one of the longest-standing and most successful business models in retailing might be under threat.

Let us explore this further.

The article suggests that technology once again is at the forefront in this potential threat to the established supermarkets. It would not appear to be built on wild speculation as various concepts are currently being tested.

The gist of this new concept is based on new online shopping technology that could see prices to the grocery shopper fall ultimately to around one-third of what they currently pay.

Major grocery suppliers such as Unilever, Mars and Reckitt have agreed to sell some of their big brand items directly to consumers via a high street digital channel which is scheduled to be launched sometime in 2018.

This will envisage hundreds of brands such as Walls ice-cream, Durex, Dettol and Dolmio sauces being made available at bargain prices.

This website will allow the branders to decide their own prices using blockchain technology to connect shoppers directly to the products.

The potential “win” for suppliers is that if this business model takes off it will mean that they no longer have to engage and negotiate with supermarkets over price. This has always been a contentious issue and as we have discussed in the text, can lead to confrontational and combustible relationships.

Effectively this model eliminates the supermarkets. We have seen this happen in many sectors over the years, most notably in the travel and airline business and also in the insurance sector.

The model is built around an online shopping portal channel. This is supported by an outsourced network of third party operators that deal with management of the inventory in various distribution centres and delivery drivers who will provide the last mile of the supply chain strategy,

Customers will be charged the wholesale price plus additional extras to cover storage and delivery. If we factor in the absence of supermarkets in this business model, we can see how the shopper is likely to benefit from considerable savings. Typically the latter raise the price by as much as fifty per cent to cover such costs and their profit margin.

This model even allows the potential for manufacturers to charge wholesale prices than they would with supermarkets. Remember supermarkets, because of their power, leverage a large degree of pressure on them to comply with their needs and requirements. This usually revolves around squeezing them as tightly as possible to get the best possible price.

The use of blockchain technology allows for a continuously updated digital database of who and where shoppers are and what they are buying. Unlike traditional shops they do not need to be managed by a central administrator; the database automatically updates and manages itself.

Like the typical online retail channels shoppers sign up for such services.

So what are we to make of this new retail business model? Is it likely to be a game-changer?

Let us consider some of the pros and cons.

Firstly it would appear to eliminate what has become for many shoppers out there, a very boring and tedious task. In Britain this amounts to the traditional weekly visit to the supermarket: consisting of spending around an hour in the store, getting bashed by trolleys and noisy kids, loading up the car and getting in and out of the store – usually with the inevitable parking difficulties.

Secondly many of us are now acclimatised to shopping online. Some of us rely on online shopping with supermarkets via their respective online retail channels. This proposed model would appear to be a further extension of ordering groceries online.

Convenience is clearly a critical issue for many grocery shoppers: we live in a pressured environment and could be labelled “time-poor” as a consequence.

The lure of lower prices, particularly to the extent that is being speculated in the press is also attractive to many shoppers.

In terms of value we can see convenience and lower price coming together to offer a potentially attractive shopping proposition for customers.

The adoption of apps such as the one being developed by US technology firm INS create just such a convenient environment. If it can deliver prices at around one-third the current ones then what’s not to like about the model?

The model employed by supermarkets arguably has not changed over the decades: large volumes of product sold in large physical spaces. This is costly in the context of the move towards online shopping.

What are the potential difficulties associated with getting this model accepted in the market-place?

Firstly supermarkets are large and powerful players in grocery retailing. They are likely to respond with fury and employ aggressive counter-strategies to ward off this threat. Their margins, although relatively low in general terms still allow for price reductions. They can offer the largest grocery suppliers further attractive deals in order to discourage them from becoming involved in such an arrangement.

Secondly many shoppers still prefer to engage with the physicality of visiting stores, inspecting items on the shelves and interacting with them. This is unlikely to disappear anytime soon. The trends with respect to online grocery shopping suggest that this will take some time to win over everyone to this mode of grocery shopping.

Companies moving into this space where they eliminate the need for supermarkets will need “deep pockets” in order to fight off the anticipated and sustained response from the supermarkets. They will have to dangle” a number of carrots” in front of suppliers in order to encourage them to participate in this initiative.

Arguably only companies such as Google, Facebook or Amazon would have the financial capability to fight the supermarkets over a prolonged period of time.

Shoppers are changing. It is possibly that this model may gain some traction looking ahead to the next decade to fifteen years. I personally doubt that we will see the disappearance of supermarkets anytime soon.  None the less it is likely that we will see a number of initiatives in the area of grocery shopping which will increasingly be built around the challenge of reducing the dependence on supermarkets.

(* Morley, Kate (2017) “New online shopping technology could see the death of supermarkets”. Daily Telegraph, 1/11/2017).