Last summer, Toys ‘R’ Us shuttered the toy retailer’s famed FAO Schwarz store. Less than half a year later, it closed the iconic Toys ‘R’ Us flagship location in Times Square. There’s a simple reason: They were money losers.
“If the definition of a flagship store is you are going to lose a lot of money, I’m not big on flagship stores,” said Toys ‘R’ Us Chief Executive David Brandon during this year’s Fortune Brainstorm TECH conference. He explained that traditional flagship stores—massive behemoth locations with several floors full of inventory—can’t always afford to be profitable these days. At least not in the toy industry, where average orders are too small and margins are too thin to make money.
There’s a reason why Toys ‘R’ Us needs to be purposeful about how it invests these days. It operates in the very competitive $19.4 billion U.S. toy market where Walmart (WMT), Target (TGT) duke it out in the brick-and-mortar side of the business. Add Amazon.com (AMZN) into the mix, and you’ve got an even more competitive e-commerce rivalry. Brandon says Toys ‘R’ Us generates about $1.4 billion in annual revenue from the website today, but he admits that business should be “double or triple” that size.
That explains why Brandon finds himself at a tech conference. Toys ‘R’ Us is a specialty retailer that generates billions by selling dolls, toy cars, action figures and bikes. But it needs to think more digitally than ever before it if wants to stay competitive, especially as a specialty retailer with such a narrow focus.
Back to the example of the toy market in New York City, where the company operates just a single store now—a Babies ‘R’ Us store in Union Square. Brandon hinted the main Toys ‘R’ Us brand could return to the island of Manhattan, though he admits it won’t look like it did in the past. He says locations will likely be smaller, perhaps between 8,000 to 12,000 square feet, an “urban model” that is similar to what Toys ‘R’ Us operates in China. Those potential city locations would have a leaner inventory, but also would be commercially feasible.
Why would Toys ‘R’ Us want to think about building urban stores when consumers are spending more and more money online? Brandon explained that there’s a synergy between the two. “They work together,” he said, adding online sales are stronger when there is a physical store in the neighborhood. They also are a distribution center, as Toys ‘R’ Us can ship from those retail locations.
Another point of differentiation, Brandon hopes, is the fact that Toys ‘R’ Us is the only national chain left that just focuses on selling toys. “We are a specialty retailer and we need to really compete on that,” he argues.
That has been a challenge of late. While toy industry sales have increased of late, bolstered by hot properties based on hit films like Star Wars and Frozen, Toys ‘R’ Us hasn’t always capitalized on the bullish market. Last year, the industry’s sales jumped 6.7%, but Toys ‘R’ Us’ fiscal-year sales slipped 0.6% at existing locations. Results improved at the beginning of this year, with same-store sales up a slim 0.1% in domestic locations for the first quarter of the year.