Leg Zero: Substitutes of “Toys R Us” as a retailer of toys.

eleonoraescalantestrategy 2 Oct 2017 Leave a Comment

Dear and beautiful audience:

Someone posted a question, asking why did I consider the rest of retailers as substitutes of “Toys R Us”, instead of naming the substitutes of “Toys R Us” products (toys and baby products).

Here is my reason:

This company filed for bankruptcy some days ago. I was reading several articles about this and I wanted to understand how a company which has had three famous private equity owners: KKR, Vornado Realty Trust, and Bain Capital, could n´t help this company to thrive, despite its competition.

I decided to imagine, I have been hired as a strategic corporate advisor for Dave Brandon, and think for a minute this way. I was supposed to work for some hours as an external advisor for “Toys R Us” board of directors team. They invite me to participate in one of their monthly meetings and asked me the same question posted by a reader in my blog yesterday. Well, this is the answer: I will start my analysis from the basic bottom line: the definition of the company. “Toys R Us” Inc. is a “specialty retailer of toys and baby products. The Company sells products in the baby, core toy, entertainment, learning and seasonal categories through its retail locations and the Internet, offering a differentiated shopping experience through its family of brands”. I took this definition from Reuters.com. In addition, I will show “Toys R Us” position in the toys value chain.

toys value chain1.jpg

If you wish to download the Toy Industry Value Chain in PDF version, click here: Toys Industry Value Chain by ECSIP Consortium

Given “Toys R Us” position in the toys industry value chain, I decided to do my analysis, not from the point of view of “what are the products of this company”, but from the perspective of the “what is this company doing?”. To my understanding, “Toys R Us” do not produce toys. It is a retailer of toys. It is a toys merchant. It is a company defined as a “distribution channel” of toys which are produced by others. “Toys R Us” sell toys from other companies or toymakers.

toys r us main suppliers

If you wish to download this slide in PDF format, click here: toys r us main suppliers

Then I asked myself, let´s see: if this company wishes to succeed from its core business, this company has to be “the best merchant retailer of toys”. And when we ask ourselves about the substitutes of toy retailers, it conveys to respond: the rest of the retailers. My focus when doing the “pressure from substitutes analysis” was under the latter premise. Of course, we can do an analysis from the product perspective (toys), but I found the distribution channel dominance as “Toys R Us” key source of market power and competitiveness. Each company can acquire a leadership position or a follower position. And “Toys R Us” purpose was conceived to be a distribution channel, a retailer for toys manufacturers. In consequence, leadership position or market power should have come from a Channel Dominance perspective.

This week we will continue with the third and fourth forces of Porter´s Industry Analysis Framework: The Bargaining Power of Suppliers and the Bargaining power of Buyers.

porter´s flower suppliers and buyers

Suppliers can exert “bargaining power on participants in an industry by raising prices or reducing the quality of purchased goods and services. Powerful suppliers can thereby squeeze profitability out of an industry unable to recover cost increases in its own prices”.

Customers or Buyers likewise “can force down prices, demand a higher quality of more service and play competitors off against each other – all at the expense of the industry profits”.

We will understand the key determinant factors for each of these two Bargaining Powers (Suppliers and Buyers) in parallel. This week will be a busy week for all of us. Thank you. Blessings.

Determinants Supplier-Buyers Power.jpg