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Change Is Happening

Saddened by the potential loss of another piece of his childhood, the editor tries to put the pieces together when he realizes there’s a good lesson to be learned in a toy retailer’s likely demise.

April 5, 2018

I just returned from NADA 2018 with this thought: How can you not believe change is upon us?

I count myself fortunate to have grown up in a town that had one of the last Woolworth stores before the 118-year-old chain closed in the mid-’90s. One of my fondest memories as a youngster was walking my sister to the retailer’s lunch counter for a grilled cheese sandwich and a chocolate shake. I always felt lucky to have experienced that, as it allowed me to imagine the chain’s heyday and the stories my grandparents and great-aunts used to tell me of their childhoods.

“Things were different back then,” they’d tell me. “Life was simpler.”

It also sounded like a lot of fun. My great-aunts told me about how they used to travel by horse-drawn wagon into the Montebello Hills, east of Los Angeles, to camp, fish, and do all sorts of exciting things. I so wanted to go back to that time, and sipping on that Woolworth shake allowed me to do that for just a few minutes.

The consolidation we’re seeing at the dealer level, among tech providers, in the F&I product provider space, and even in the agent arena also tells me that change is happening.

But I never fully grasped what my grandparents and great-aunts felt when they talked about how much things had changed — that’s until Toys “R” Us announced last month it is shuttering its U.S. operations. Yeah, I was a Toys “R” Us kid. And, yes, I dreamed of winning those shopping-spree sweepstakes the retailer promoted back in the 1980s. In fact, I knew exactly which aisles I’d target first to make sure I got everything I wanted in three minutes.

No, the Toys “R” Us story isn’t strictly about a retailer that refused to innovate. Its problem was debt — debt related to its 2005 purchase by a group of private equity firms in a leveraged buyout. Basically, those companies used borrowed funds to buy my beloved Toys “R” Us, leaving it with $5.3 billion in debt. And according to media reports, Toys “R” Us was paying nearly double its annual net profit in annual interest payments on that debt alone.

In the retailer’s Sept. 19, 2017, bankruptcy filing with the Securities Exchange Commission, CEO David Brandon said his company’s debt prevented it from reinvesting in its business to compete with online retailers like Amazon, which “are not concerned with making a profit at this juncture,” as well as Walmart and Target, which have “supplemental departments and revenue streams from which to make up for the lost margin on selling.”

“But Toys did not engage in this race to the bottom,” Brandon writes in the filing.
The filing then reveals Toy “R” Us’ post-bankruptcy plans. They include an online subscription shipping service for its Babies “R” Us brand, which would deliver items like diapers and formula to compete against retailers like Buy Buy Baby; a relaunch of an updated loyalty program that integrates with its customer relationship management tools; raising starting wages and positioning trained employees in high-value areas in the store to conduct product demonstrations, host instore events, and improve the instore customer experience; and an upgraded webstore and instore “gamification,” including augmented reality tools and increased instore digital content.

Yes, innovation through technology is a hot topic in every retail industry. And, yes, digital retailing was the hot topic at NADA 2018. But that’s not why I’m talking about the death of a toy retailer. Truth is, there are so many ecommerce platforms to choose from, it’s difficult to know who or what will win out.

In fact, when I asked an F&I product exec how his company approaches all these digital retailing solutions, he compared it to buying one of those international power plug adapters: You just have to make sure you can plug into all of them.

What I honed in on were two phrases used in Toys “R” Us’ post-bankruptcy plans: “streamline the company’s operations” and “efficiency enhancements.” Why? Because if exhibitors weren’t talking about digital retailing, they were talking about the need for dealers to do both of those things.

Look, until the future becomes clearer, we need to operate on what we know now. And what we know is we’re not going to sell above 17 million units this year or next. We also know that margins are compressed, and no one I talked to believes that situation will improve.

Yeah, I know that sounds like I drank a little too much of the Kool-Aid exhibitors were serving up, but reading Toys “R” Us’ bankruptcy filing tells me differently. The consolidation we’re seeing at the dealer level, among tech providers, in the F&I product provider space, and even in the agent arena also tells me that change is happening.

As that F&I product provider I talked to also pointed out, sometimes we don’t realize we’re in the middle of change. I’ll have more on this topic next month.

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