If the death of traditional retail shopping were to have a martyr, Toys R Us might be the perfect contender for such a role. Once the go to place for toys, games, and children’s electronics, the brick-and-mortar retailer finds itself saddled with $5 billion of debt and depleted cash flows as Amazon, Walmart, and Target sap up market share like taking candy from a baby. The general public finds itself asking, “How could this happen?”, but I think we all know the answer: When was the last time Toys R Us was at the forefront of anything? When were we talking about Toys R Us like we were Amazon or Walmart or Target? The answer was decades ago, and it is not hard to see why.
Death by Innovation
The last time I walked into a Toys R Us, the lonely building sat by itself on a hill surrounded by a sea of empty parking spaces. The year was sometime around 2006-2007, right after Bain Capital took the toy giant private in an effort to make some quick profit in a 3-5 year turnaround (more about that later). The store, right outside of Lancaster City in Pennsylvania, is pretty big, but has a strange effect on shoppers: the colorful toys and games are dimly lit, and the slight twang of a pop song follows you around the store. Here and there you hear a child scream, hopefully in delight, but the store is devoid of customers and maybe even salespeople. If I happened to find something in the store, I could not recall for you today what it was, just another example of the sorrowful show Toys R Us had on display. I could describe for you the terrible experience, but not the actual toy I bought.
What I am getting at is that the last thing a consumer wants from a retailer selling something as exciting as toys is the experience I had as a child above. Just like the products themselves, stores should mirror the type of experiences one has when using the product at home. Toys R Us wanted to do this after first filing for Chapter 11 bankruptcy protection last year. The retailer had started to put Toy and Baby “labs” in some 200 of its stores, which would allow consumers to test and experiment with new products in creative games and showcases. These types of experiences create positive memories for consumers to associate with a retailer’s offerings, bolstering their chances of buying the product or service and elevating the image of the brand. However, debt servicing syphoned off much needed capital that Toys R Us would have used to modernize the brand and continue to innovate the consumer experience, so the retailer was handicapped from the start in competing with innovative giants like Amazon and Walmart.
The Worst is Yet to Come
When Joseph Pine and James Gilmore wrote their defining article for the Harvard Business Review in 1998 entitled “Welcome to the Experience Economy”, it is as if they were predicting the fall of retail right then and there. Pine and Gilmore’s primary argument was that there has been a progression in economic value, from raw materials, to goods, to services, and now experiences as the highest source of economic value.
They go on to explain the implications: those organizations who do not enhance their economic offerings (for example, turning traditional retail shopping into retail experiences like those of Barnes & Noble’s partnership with Starbucks or Apple’s “town square” feel) are doomed to fail in this new economy.
Toys R Us is one, but not the only brand, to fall under Pine and Gilmore’s prediction. In the past we have seen the likes of Circuit City, Radio Shack, and others close due to this “experience” problem, and others including Sears/Kmart, Macy’s, Rue21, American Apparel, Bon Ton, and more are filing for bankruptcy and closing stores with the same set of problems: declining sales and poor brand images.
Moreover, even brands built on experiences are struggling, as the recent bankruptcy of Claire’s demonstrates. The teen accessory outlet specialized in combining products (earrings, head-ware and the like) with service offerings like ear-piercings. But even Claire’s unique offerings are not enough to truly warrant the higher economic value in this day and age, and although they have reduced their debt by $2 billion in the past few years, it was not enough to save them.
The story is similar to Toys R Us, which was saddled with $5 billion in debt from the Bain Capital buyout from early. Payments on this debt amounted to $250 million a year and so what little cash Toys R Us did have coming in wasn’t enough to both pay down the debt and reinvest in new toy experiences. Bain and others who invested in the company for their part weren’t able to turn the company around, a strategy which settled on growing the international portion of the business, cutting costs, and reconfiguring what stores they could . It just wasn’t enough and the innovation and experiences weren’t there to lure new customers into the store.
So what does the future hold for retailers and service providers that do not shape up and adapt to the experience economy? First and foremost, we will surely see more retailers file for bankruptcy and close, with the potential for huge consolidations in a variety of industries. I am predicting grocery is ripe for disruptions and experience innovation, as evidenced by Amazon’s foray into grocery with their Whole Foods purchase and the aggressive expansion of Walmart’s “Neighborhood Market” grocery concept, both staging grounds for fantastic customer experiences. However, it’s not just grocery; market players in brick-and-mortar retail in general need to put more emphasis on consumers experiencing their store and their products over simply getting in and getting out. I think we will see some retailers do this really well (Best Buy is a great example of both a business turnaround and an improvement to the consumer experience, with faster delivery and a better online interface) while others will try and fail or won’t try at all.
As consumers, we have come to expect more from our stores. If brands do not give us the experiences we deserve, then they’ve doomed themselves already.