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What Went Wrong With Toys R Us

By Daniel B. Kline – Updated Mar 9, 2018 at 12:03PM

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The chain had lost its way long before it filed for bankruptcy.

In the 1980s and even the 1990s, Toys R Us was a place children begged their parents to take them.

The chain had a selection of toys that dwarfed what was sold at now-defunct department store chains like Ames, Caldor, and Bradlees. Even its Sunday newspaper inserts were an event, and its holiday season "toy book" was much perused by children in order to pick out what gifts they planned to ask for.

Toys R Us' slow path to bankruptcy, which it filed on Sept. 18, did not begin with (AMZN 1.18%). It started with chains like Wal-Mart (WMT -0.47%) and Target (TGT -0.17%) creating toy departments that not only pushed prices (and margins) lower, but also made it so a visit to Toys R Us was no longer unique. Wal-Mart and Target made Toys R Us less of a destination and gave parents a way to placate their kids while also doing their own shopping.

A mother and two children browse in a toy store.

Toys R Us has filed for bankruptcy. Image source: Getty Images.

How Toys R Us went wrong

For two years, I ran the largest toy and hobby store in New England. We had a Toys R Us, a Target, and a Wal-Mart within a couple of miles of us. We were also in a relatively remote location while our toy-selling rivals were closer to the highway and near a major mall. Despite those deficits and the fact that we were generally more expensive than the chains we competed with, we thrived.

The mistake Toys R Us has made is that it has done very little to differentiate itself from its department store rivals. My former toy store, which is doing well to this day, did much more than sell toys, hobby items, model trains, and more. It actively gave customers a reason to visit.

We hosted gaming events, tournaments, and learn-to-play classes for everything from the easiest children's games to the most complicated collectible offerings. We also had multiple huge model train sets that were shown off for free twice a month, and every Sunday during the holiday season. Those trains were maintained and built by clubs that met in the store.

During weekdays, we had story time for children, and on holidays, we barbecued, made cotton candy, or handed out special treats to our customers. Even when nothing was happening, we had play areas for little kids, model-building areas for all ages, and a near-endless supply of curios we picked up in theory to sell, but just as much to give customers something to look at.

We also had a customer-first attitude where we welcomed everyone warmly, treated regulars like family, and accepted that sometimes we were going to teach a customer about a product only for them to buy it cheaper on Amazon. Our store also had merchandise that wouldn't be found at a Toys R Us or a department store, as well as staff that was passionate about what they sold.

What's next for Toys R Us

Toys R Us had the tools and the space to be all of those things, but either arrogance or complacency stopped it from evolving. Once simply having toys stopped making it a destination for kids and toy lovers, the chain needed to do more. CEO David Brandon acknowledged that in the bankruptcy filing, explaining how the company would change its stores.

"Once these initiatives are implemented, Toys R Us stores will be interactive spaces with rooms to use for parties, live product demonstrations put on by trained employees, and the freedom for employees to remove product from boxes to let kids play with the latest toys," he said.

That's the model that would have worked all along. It's a game Target and Wal-Mart are unlikely to play, and one that Amazon, for obvious reasons, can't.

Bankruptcy may clear some debt and let the company shed some leases, but it needs to change in order to avoid slowly falling right back into the same hole. Toys R Us has to go from being a place that sells toys and games to one that's full of activities, experiences, and discoveries for kids and adults alike. The chain needs to transform from store to destination -- if it does that, then sales will follow.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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