CUNY Medgar Evers Threats for Toys R Us in The 2018 Canadian Market Paper This is just a guideline. Scroll to the end for the case questions. Tip 1. Conte

CUNY Medgar Evers Threats for Toys R Us in The 2018 Canadian Market Paper This is just a guideline. Scroll to the end for the case questions.

Tip 1. Contextualize the case. There is a method to my madness. Cases generally correspond to a particular set of concepts and theories. Keep this in mind as you prepare your analysis.

Tip 2. Read the case actively. The goal is not for you to grab your highlighter and speed through the case. Instead, ask yourself questions, wrestle with the core decisions, and think through multiple scenarios.

Tip 3+. William Ellet argues that there are “four types of situations” that you will often see in cases, for each here are some tips: – Problems o Define the problem in the case. This may not be obvious. o Then, be able to diagnosis the problem using the various tools you’ve acquired throughout your business training. – Decisions o Identify the decision options. o Determine the criteria by which to evaluate the decision options. o Accumulate as much evidence as possible to support your decision. – Evaluations o Again, determine the appropriate evaluative criteria. o Make the evaluation that is most consistent with the evidence provided by the case and the key criteria. o Be sure to be holistic in your evaluations – think about positive and negative aspects. – Rules (This is particularly critical for quantitative analyses) o Know the information you need to apply a rule (For example, what data is necessary for a break-even or NPV analysis) o Know how to obtain this information. o Know how to apply the rule. o Make sure your data is accurate.
Tools Ellet provides a nice model for analyzing cases. There are five key phases of the process.
1. Situation a. Figure out the big picture first; ask yourself, “What is the situation in the case? What is going on here? 2. Questions a. Develop questions about the problem, namely: i. What do you need to know about the situation? b. Think through issues related to the decision, namely: i. What are the decision options? Any seem particularly strong or weak? What is at stake here? What are the key criteria to base your decision?
c. Questions about the evaluation, in particular: i. Who or what is being evaluated? Who is responsible for the evaluation? 3. Hypothesis a. Here is where your analytical work gains momentum. Develop your perspective on the case. b. Review the aforementioned questions – now begin to develop your answers for each set of questions. 4. Proof and Action a. Ask yourself, what evidence is provided by the case that supports my hypothesis? What additional evidence do I need to collect? b. Equally important for our course, also consider how would I implement my recommendations? 5. Alternatives a. Spend some time critiquing yourself, ask the following: i. How else could this problem be defined? If defined differently, would I have the same hypothesis? ii. Where are the weak links in my analysis? iii. What is the potential downside to my recommended decision? What is the strongest counterevidence? iv. How thorough have I been in my analysis? How might a different course of action be proved?

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1.What are the strengths, weaknesses, opportunities and threats for Toys “R” Us in the 2018 Canadian market?

2.Does Toys “R” Us have a sustained competitive advantage in the Canadian market? Why or why not?

3.Can Toys “R” Us be successful by focusing only on its experiential shopping endeavors, or only on its digital experience?Why are both necessary for the company’s sustained competitive advantage?

4.Are consumers likely to value the changes Toys “R” Us is proposing for its retail space?Why or why not?

5.Does Toys “R” Us have a strong marketing mix as it moves toward the future in the Canadian toy industry? Why or why not?

At least 3 pages. Not including references. For the exclusive use of S. RAMLOCHAN, 2019.
W18684
TOYS “R” US CANADA: IS PLAYTIME OVER?1
Steven Campbell and Kelly Whitehead wrote this case solely to provide material for class discussion. The authors do not intend to
illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.
Copyright © 2018, Ivey Business School Foundation
Version: 2018-11-06
In June 2018, Toys “R” Us, Inc. officially closed its doors and left the US retail landscape, marking the demise
of the former “category killer.”2 Melanie Teed-Murch, president of Toys “R” Us (Canada) Ltd. (Toys “R”
Us), found herself fighting two concurrent battles: firstly, clearing up the confusion regarding the lack of
inclusion of Toys “R” Us in the closure of the 735 US locations, and secondly, addressing the desperate need
to rebrand the company in a changing retail landscape that continually placed more value on digital operations
and sleek, experiential store designs.3 How should Teed-Murch position the company to address the growing
online threat and prevent Toys “R” Us from following in the footsteps of its American counterpart?
TOYS “R” US CANADA
Founded in 1984 as part of its American parent company’s international expansion, Toys “R” Us was the
second-largest toy chain in Canada with 25 per cent of the market.4 Toys “R” Us sold products in categories
that ranged from baby and toys to entertainment and learning, and operated stores under both the Toys “R”
Us and Babies “R” Us brands.5 With CA$1 billion6 in revenue and over $100 million in earnings before
interest, taxes, depreciation, and amortization (EBITDA), Toys “R” Us had experienced markedly different
results from its US counterpart south of the border: the Canadian side of operations, although it had faced
digital pressures in recent years, had continued to thrive amid the American parent company’s demise.
Although the Canadian company’s beginnings had been humble, stemming from the American parent
company’s tentative steps toward international expansion, they ultimately marked the start of a Canadian
chain that had separated from and came to outlive its American counterpart.7
NORTH AMERICAN PLAY: A BRIEF HISTORY
In 1948, Toys “R” Us, Inc. began when 25-year-old Charles Lazarus realized his lifelong dream of opening
a children-oriented store. At first, the store focused on children’s furniture, but it slowly began to
incorporate toys. By 1957, motivated by the success of the superstore format and customer demand, Lazarus
opened his first store dedicated solely to toys with the now iconic Toys “R” Us logo. It was not until 1965
that the company introduced its famous mascot, Geoffrey the Giraffe, but it took only a few years for the
mascot’s popularity to skyrocket. By 1973, Geoffrey was a bona fide celebrity, starring in television
commercials alongside hundreds of children.8 In 1978, the company took the next step and became a public
company with its first public offering.9
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By the early 1980s, Toys “R” Us, Inc. was actively looking to diversify its portfolio. It branched out into
children’s clothing and opened its first Kids “R” Us stores. By 1996, Babies “R” Us had also joined the
company’s brand portfolio. In 1988, the rise of the Internet was impossible to deny, leading the company
to launch Toysrus.com, which grew rapidly and became one of the most visited sites in the toy and baby
product categories. Toys “R” Us, Inc. continued its diversification plans in 1999 with the acquisition of the
company’s first competitor, Imaginarium, an educational toy business, which allowed Toys “R” Us, Inc. to
strengthen its position in the growing sector.10
In 2001, the company opened its international flagship store in New York City’s Times Square, where it
remained a top family destination in the city until the store’s closure in 2015. The 2000s saw Toys “R” Us,
Inc. face many difficulties, including closure of its Kids “R” Us locations and overall company distress,
leading to it being taken private in 2006.11 In the following years, several executives tried to revive the
ailing toy store chain with numerous strategies, including the acquisition of FAO Schwarz in 2009 with the
hopes of growing its share in the specialized toy market.12 In the end, these plans failed, and the company
continued to struggle in the rapidly changing retail landscape. By 2018, Toys “R” Us was the only
remaining division of the once global brand. After managing to extricate itself from the liquidation
proceedings of its parent company, the now wholly Canadian 82-store chain prepared to chart a new course
into an uncertain future alone.13
THE GROWING ONLINE THREAT
The arrival of ecommerce giants such as Amazon.com, Inc. (Amazon) and eBay Inc. (eBay) disrupted the
toy market in the early 2000s, and became a leading cause cited for the bankruptcy of Toys “R” Us, Inc.
The technological advancement in toys led to price increases and forced many consumers to become more
discount savvy. This call was answered not only by large, “big-box” retailers such as Walmart Inc.
(Walmart) and Target Corporation (Target) but also by large online marketplaces such as Amazon. These
marketplaces allowed for a more distributed cost base and convenient shopping that enabled easy price
comparisons. A host of innovations such as digital wallets and one-click shopping, coupled with
increasingly cost-effective delivery exacerbated the shift to online shopping, eroding customer preference
for more expensive retailers such as Toys “R” Us, Inc.14
Amazon certainly stood out among online retailers due to its historically close ties to the Toys “R” Us, Inc.
story. Unfortunately for the toy company, its relationship with Amazon had shifted over the years from one
of co-operation to one of strident opposition. In 2000, Toys “R” Us, Inc. entered a 10-year agreement with
Amazon to create a co-branded online store.15 This agreement involved Toys “R” Us, Inc. giving up its
website and selling online exclusively through Amazon. However, in 2006, years before the timeline that
had been stipulated in the agreement, the partnership collapsed when Amazon was found in breach of the
agreement, after other toy retailers such as Target appeared on the website. The ensuing lawsuit was not
settled until 2009, when Amazon paid out US$51 million to Toys “R” Us, Inc.16
Despite the settlement, the bleeding of Toys “R” Us, Inc.’s market share to online retail did not stop. The
bungled agreement signalled the start of a long game of catch-up that saw the company struggling to keep
pace with the competition.17 After 2006, Toys “R” Us, Inc. acquired eToys.com, ePregnancy.com, and
BabyUniverse.com, aiming to consolidate its bricks-and-mortar and online businesses to chart a path
separate from Amazon.18 This strategy had mixed success, as by 2018 Toys “R” Us, Inc. was still
completing only 14 per cent of its sales online.19 Attempting to compete online was insufficient to remain
competitive, and it became abundantly clear to all involved that the company would need to dispense with
the outdated “stack ’em high and sell ’em cheap” merchandising style of the past, in favour of a more
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For the exclusive use of S. RAMLOCHAN, 2019.
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involved customer experience that made it worthwhile for customers to visit physical locations.20 When
asked how Toys “R” Us intended to fight more effectively online, Teed-Murch responded:
Digital content—creating that tether between the bricks-and-mortar experience and the online
experience. We know from our research that customers who shop both channels with us are more
loyal and spend more money throughout the year. We really need to eventize parents and
grandparents bringing those children in, shopping for convenience when they want to online and
picking it up curbside.21
In addition, the company expected to distinguish itself by continuing to differentiate its offerings. About 30
per cent of its offerings were exclusive to Toys “R” Us, and historically, when it had been the first to launch
a product, its market share often topped 40 per cent on those items.22 It remained uncertain whether these
efforts would succeed at keeping at bay a behemoth such as Amazon.
2018: DEMISE OF THE AMERICAN COUNTERPART
While a lagging online presence certainly impeded the company’s attempts to stay afloat, all of its woes could
not be laid at the feet of competitors such as Amazon and eBay. A glance at the company’s balance sheet told
another story: Toys “R” Us, Inc. was saddled with a significant amount of debt. The debt was crippling, and
merely servicing it—at an annual cost of US$400 million—rendered the company unable to make the
necessary investments in its bricks-and-mortar locations. At the end of its life, Toys “R” Us, Inc. still had
US$7 billion in revenues and a 14 per cent market share, but even in the best of times the astronomical sum
demanded by its debt was nearly half of its operating profit.23 David Brandon, the chief executive officer of
Toys “R” Us, Inc., admitted that, prior to its bankruptcy, the company had fallen behind its competitors “on
various fronts, including with regard to general upkeep and the condition of our stores.”24
In 2005, several years before its liquidation, Toys “R” Us, Inc. stock was downgraded to junk bond status.25
Its Toys “R” Us stores were struggling and its Babies “R” Us brand stores had become one of the only
lifelines buoying profitability. Several business missteps, including the ill-conceived deal to give up its
website in favour of selling exclusively on Amazon, ensured that it was only a matter of time before the
company was taken private.26 The next year, Kohlberg Kravis Roberts & Co. L.P., Bain Capital LP, and
Vornado Realty Trust did just that, privatizing the company in a US$6.6 billion transaction. Perhaps most
telling was the staggering US$5.3 billion in debt taken on as part of the deal, an amount that would prove
to be a constant spectre haunting the company until its liquidation over a decade later.27 All of this occurred
at a time predating Amazon’s market dominance, calling into question deeper aspects of the company’s
structure and business strategy.
Around this time, big-box retailers such as Walmart and Target had begun to encroach on the market share
of Toys “R” Us, Inc. This trend continued, and by the time the company filed for bankruptcy, toy sales at
Target had caught up to those of Toys “R” Us, Inc.—while Walmart’s sales dwarfed them both. In fact, in
2017, leading toy makers Mattel, Inc. and Hasbro, Inc. alone sold approximately US$2 billion worth of toys
collectively at Walmart, twice the amount sold at Toys “R” Us stores.28
In 2010, there seemed to be some hope of debt reduction through an equity offering. However, these
ambitions were shattered after the company realized there was no market interest to support a US$800
million offering, and any plans for an initial public offering were shelved indefinitely. In 2012, when
holiday sales experienced a massive slump and profits took a 75 per cent nosedive, the company approached
lenders for an additional US$250 million to pay off bonds that were maturing. The debt troubles would not
end there, as more debt would be maturing in the years to come. In 2017, the company bargained with
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For the exclusive use of S. RAMLOCHAN, 2019.
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lenders in the hopes of putting off US$400 million that was coming due in the spring of the following year.
When lenders could not come to an agreement, it was the last straw (i.e., the latest setback after a series of
disappointing news), and signalled the beginning of the end for the American company. As the company
prepared to file for Chapter 11 bankruptcy, vendors refused to ship products without upfront payments, and
some required that outstanding obligations be settled. In a last-ditch effort for solvency, the company
secured debtor-in-possession financing of approximately US$3.1 billion as an operating loan to meet
supplier demands and weather the 2017 holiday season.29
Unfortunately, the holiday season provided no reprieve, with sales 15 per cent lower than the same period in
2016. The holiday sales would be insufficient to sustain operations for another year. Toys “R” Us, Inc. tabled
several ideas, including the closure of 180 stores, and even looked to secure a buyout. However, no offers
were forthcoming, and any ideas fell on deaf ears. On March 9, 2018, the company announced that it would
close and liquidate its US operations. All 735 remaining stores closed their doors, and 30,000 employees were
laid off amid a mass sale of company assets.30 Ultimately, the amalgam of miseries plaguing Toys “R” Us,
Inc. had become an inescapable force that grounded and shuttered the iconic American toy company.
TOYS “R” US CANADA RESPONSE: “HERE TO PLAY AND HERE TO STAY”31
After its American counterpart filed for bankruptcy, Toys “R” Us was forced into a Companies’ Creditors
Arrangement Act filing in September 2017 because it shared a debt facility with the US parent company. It
was an uncertain time for the Canadian division, leading to customer confusion and skepticism from
suppliers as a result.32 For a time, the future of the company was called into question as it struggled to
extricate itself from the proceedings that had sunk Toys “R” Us, Inc. It was a great relief when Torontobased Fairfax Financial Holdings Limited offered $300 million to acquire the 82 Canadian stores.33 The
acquisition was completed on June 1, 2018, making it an independent and 100 per cent Canadian-owned
business with over 4,000 employees.34
The recent ups and downs had left the company and its president Teed-Murch with the task of spreading
the word that Toys “R” Us was here to stay. For a long time, Toys “R” Us had been the highlight of the
parent company’s portfolio.35 With over $1 billion in annual sales and a stable EBITDA of more than $100
million for the preceding nine years, Toys “R” Us had a consistent track record of financial stability that
was expected to endure. Teed-Murch commented, “It’s our No. 1 priority to get our message out that there
is a business here.” To this end, she was embarking on a two-month, coast-to-coast tour to broadcast the
company’s plans under its new ownership.36
A major impediment to the Canadian chain’s business in the past had been its continued subsidization of its
US parent, with surplus cash sent south of the border in the form of unsecured inter-company loans. This
drag on resources had severely limited the company’s ability to reinvest in its operations. With this burden
lifted, Teed-Murch indicated that many upgrades were slated for stores across the country. The company had
already committed over $10 million to renovate its stores by the end of 2018. These changes involved updates
to the dated store format, including lowered shelving and a new layout that included interactive play areas
and seating for parents. Stores were also expected to introduce mobile pay options that would be coupled
with an optimized checkout area to improve the efficiency of payment processing and online pickups.37
From a more long-term perspective, Teed-Murch had ideas for the future, including a food service partner and
various in-store events such as birthday parties and a series of workshops: “There are lots of opportunities to
put in food and beverage and other partnerships where we can bring children and families together in our
locations.” She hoped to test out these strategies through pilot programs to determine whether there would be
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For the exclusive use of S. RAMLOCHAN, 2019.
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traction with the consumer base. This same model of “experiential retail” had seen success when implemented
by Indigo Books and Music Inc., and it certainly showed promise for Toys “R” Us. Opening smaller, 5,000square-foot stores in towns previously unable to support the large-format (more than 35,000-square-foot)
stores could also provide access to communities the company was currently not serving.38
It appeared that Canada had not given up on the retailer, which was already seeing some success with a new
loyalty program it had instituted, with half a million customers signed up in the 2017 holiday season. There
were certainly many paths forward for the eager Canadian company, and Teed-Murch was optimistic,
saying, “As a smaller company now, I liken (the difference) to that of a speed boat and a yacht. We are able
to make swift decisions about important factors that impact our business, and really cater to a rapidly
changing retail marketplace.”39
THE CANADIAN TOY MARKET
The Canadian market had experienced relatively strong growth in comparison with the US market in the
years leading up to 2018, suppressing the level of rivalry in the toy market. In 2017, the Canadian market
grew by 3.6 per cent to $2.068 billion, whereas the US market remained stagnant with 0.6 per cent growth.
By 2022, the market was forecasted to grow at a slightly slower but still comparable pace of 3.3 per cent,
to $2.438 billion, 17.9 per cent above 2017 levels.40
Demand for lower-end value products and high-end toys were both increasing as mid-ticket items gave up
market share year over year. Licensed toys, such as those under the Star Wars brand, were a constant driver
of the popularity of toys in Canada. Despite strong online competition, the most lucrative channels for
generating sales remained hypermarkets, supermarkets, and hard discounters, which generated total revenues
of $223.3 million in 2017. Toy stores such as Toys “R” Us and Mastermind Educational Technologies Inc.
(Mastermind Toys) were holding on to their position as the main distributors of Canadian toys, largely through
retailers’ efforts to couple ordinary shopping trips with meaningful experiences for children and families.41
While the market was fragmented, some major players remained, such as Toys “R” Us, Walmart, and
Mastermind Toys. The competitive pressures were significantly higher for specialized stores that did not have
other offerings to fall back on when faced with lagging profitability. Companies such as Walmart were much
less exposed to the industry rivalry, as they had a distributed cost base and could weather challenges in any
one product segment. This ability allowed these stores to reduce their…
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