Leg Zero: Pressure from Substitutes: Porter´s Industry Analysis Model. Part IV.
Good Morning to all.
Hope you are thriving in every possible way. As I promised last week, I will continue with Porter´s Threat of Substitutes Force. I hope to finish this force by the end of September. As you can read it from later posts, today it is the opportunity to the Substitutes Relative Price-Performance key determinant factor. The relative price performance from substitutes is defined as the ability of substitutes to perform the same characteristics or quality features at a lower price. These alternative products may also offer better benefits. “Substitute products or services which offer more benefits, such as savings in price, without impacting the quality of the products/services are more likely to be viewed favorably for adoption”, diminishing the possibilities for sales for our own products. “Substitution risk is greatest if a substitute product is cheaper and equal or superior in quality“.
Let´s talk about the “Toys R Us” Retailer company. I would like to illustrate the concept of Price-Performance Characteristics of Substitutes using this example. Do you believe the reasons why did “Toys R Us” file for Chapter 11 Bankruptcy last week are: (1) its incapacity to keep consumers from abandoning its stores for the lower prices and (2) the convenience of online shopping?. We will see. I will respond to this question during the week. First of all, in my own opinion, we have to understand “Toys R Us” origins, return back to the Founder´s mentality or original vision (Mr. Charles Lazarus) and go through “Toys R Us” business history. Second we have to check financial numbers during the last decade, and third, we have to figure out if there is a misfit between the clients expectations and the “Toys R Us” value proposition.
Charles Lazarus founded “Toys R Us” in 1948. He started his business in Washington DC with a first store “Children´s Bargain Town”, as a baby furniture retailer. Given his clients demand toys, he changed the focus of his first store, and 9 years later, his business evolved to become the first “Toys R Us”. Some years later, a diversified retailer group, Interstate Super Stores, acquired his retail chain. And “Toys R Us” concept emerged as a specialty retailer: the Children’s discount supermarket of toys. In the 1970s, Interstate filed for bankruptcy, and “Toys R Us” became the only post-bankruptcy profitable core business rescued from Interstate. Mr. Lazarus took over the company and renamed it to “Toys R Us Corporation”. Since then the company continued an expansion of stores in the USA and kept a steady American organic growth. “Toys R Us” specialized its value proposition to one category: Toys offered in a supermarket format to fulfill the needs of children’s objects to play with.
Mr. Lazarus, “Toys R Us” founder was an avid technology adopter. Since the beginning of technology disruption, “Toys R Us” was keen to use technology. By 1982, Lazarus inventory control and information systems were at the top score in the retailer’s industry. Lazarus embraced change with technology. Lazarus also opened an electronic video games area in the stores since that decade. The company also initiated an international expansion in Europe, Canada, even in Asia. With the emergence of huge merchant retailers such as Walmart, Target, and Amazon, “Toys R Us” started to lose its share of the toy market and for the first time in 1998, fell behind Walmart in toy sales. Lazarus modus operandi was to embrace technology as a new sales channel. Toysrus.com started since the year 1998. In addition, “Toys R Us” signed a 10-year contract to be the exclusive vendor of toys on Amazon in 2000. Do you think “Toys R Us” missed the opportunity to develop its own e-commerce presence with its Amazon strategic alliance?
Lazarus retired in 1994 but was kept as Chairman Emeritus and member of the Board of Directors for several years afterward. He watched his company trying to regroup, refocus, realign and rebuild themselves through expansion plans internationally, new acquisitions, new channels and new corporate leaders and then he saw the division of his business into two parts. The company relaunched its retailer chain separating baby businesses from toys. Babies R Us was introduced in 2009.
For several years the company did not reach its expected financial expectations and operating profits. On 2005, a consortium of Bain Capital Partners LLC, Kohlberg Kravis Roberts (KKR) and Vornado Realty Trust invested $1,300 Million to complete a $6,600 million leveraged buyout.
Three private equity firms continued the corporate growth of “Toys R Us” in several dimensions (omnichannel strategy): New segment stores (Toys R Us Express); new distribution channels (ToysRus.com placed at #29 in the “Internet Retailer Top 500 Guide” for 2012); new acquisitions (FAO Schwartz, Toys.com, and eToys.com and others), and new geographic expansion to other countries, including China. Since the year 2010, the company started with several innovative projects such as the implementation of high safety standards, energy efficiency projects, strong expansion in China, improving customer experience, TRU Transformation, and Christmas Seasonal Initiatives. But what happened with the renewal of the value proposition format inside its stores? With the arrival of David Brandon as CEO in June 2015, he started with his plans of renewing the customer experience in the stores. In consequence, what happened in reality? Was this a “too late” move? Let´s talk about “Toys R Us” substitutes, what was happening with them during the last 30 years? Which are Toys R Us substitutes? What happened to “Toys R Us” business model?
I would like to share with you an interview about Dave Brandon strategy, “Toys R Us” CEO:
To this day, the company owns or licenses 866 “Toys R Us” and “Babies R Us” stores in the United States and Puerto Rico, more than 750 international stores and more than 245 international licensed stores in 37 countries and jurisdictions. We will continue tomorrow with the analysis of price-performance characteristics of “Toys R Us” Retailer´s substitutes.
Before finishing my post from today, let me share with you a video about “The Founder´s Mentality”, from Bain and Company.
“Listening to the customer is probably the best thing in the world. Almost all that we have here and now, and how we expanded the business came from the customer saying ‘I need.’ or ‘I want.”-Charles Lazarus.
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