AA7002P SEMESTER MARCH 2018 – JULY 2018

ECO740 ECONOMICS ANALYSIS

GROUP ASSIGNMENT

BUSINESS ISSUE: TOYS “R” US INC.

PREPARED BY : AIN NADIA BINTI ZAILAN 2017884868

HAZWANI BINTI HASHIM 2017420346

PREPARED FOR : DR. ARLINAH ABD RASHID

Table of Contents
1.0 Company Background ........................................................................................................... 1
1.1 Toys industry in the global scenario.................................................................................. 3
1.2 Toys industry in the Malaysian scenario ........................................................................... 3
1.3 Toys “R” Us ...................................................................................................................... 4
2.0 Business Issue ....................................................................................................................... 4
3.0 Economic Factors .................................................................................................................. 4
4.0 Measures to Solve the Problems ........................................................................................... 5
4.1 Demand and Supply .......................................................................................................... 5
4.2 Price Leadership ................................................................................................................ 6
4.2.1 Barometric Price Leadership ...................................................................................... 7
4.2.2 Dominant Firm Price Leadership ............................................................................... 7
4.3 The Kinked Demand Curve ............................................................................................... 7
4.4 Economies of Scale ........................................................................................................... 8
4.4.1 External Economies of Scale ..................................................................................... 8
4.4.2 Internal Economies of Scale ...................................................................................... 9
4.5 SWOT Analysis ................................................................................................................. 9
5.0 Recommendations ............................................................................................................... 10
5.1 Concept Reinvention ....................................................................................................... 10
5.2 Price Reduction ............................................................................................................... 10
5.3 Benefit of the Economies of Scale .................................................................................. 11
5.4 Current Trend .................................................................................................................. 11
5.5 Strategic Location ............................................................................................................ 11
5.6 Research & Development ................................................................................................ 11
References ...................................................................................................................................... 12
1.0 Company Background
Charles Lazarus, the founder of Toys “R” Us, began selling baby furniture in 1948 in
Washington D.C. Aiming for the post World War II baby boom market, he called the store the
Children's Bargain Town. Motivated by the success of emerging self-service grocery supermarkets,
Lazarus restructured his business and opened his first store solely dedicated to toys and he named
the store, Toys “R” Us. The iconic Toys “R” Us logo was created, featuring a backwards “R”, in
order to give the impression that a child wrote it.

Through his ingenuity, Lazarus expanded his fledgling business into a toy conglomerate
that became a public company in 1978. By the early 1980s, Toys “R” Us diversified its portfolio
by branching out into children’s clothing, Kids “R” Us. In addition to expanding “R” Us stores and
brands in the United States, Toys “R” Us launched a worldwide presence when the company
opened its first international wholly-owned store in Canada and licensed operation in Singapore.
He also implemented loss-leader discount pricing, computerized inventory control, capitalized on
large volume purchasing, and utilized low-rent strip malls on major streets for new stores. By 1983
they passed the $1 billion sales milestone and, in 1986, Dun's Business Month declared Toys “R”
Us one of the nation's best managed companies. At this time they had 233 Toys “R” Us stores in
the United States, 13 international stores, 23 Kids “R” Us outlets, and four traditional department
stores.

Toys “R” Us rapidly expanded to 33 countries or jurisdictions during the early 1990's,
especially in Australia, Canada, France, Germany, Japan, Spain, and the United Kingdom. Lazarus
was inducted into the Toy Industry Association’s Hall of Fame in 1990, for his success in
revolutionizing the toy and baby products industries and building Toys “R” Us into one of the most
iconic brands in the world.

At 71 years of age, Charles stepped down as chairman and CEO in 1994. In October 1995,
Lazarus received the National Retail Federation’s Gold Medal Award, the industry’s highest honor,
presented to outstanding industry leaders who have excelled and broken new ground in the field of
retailing. Michael Goldstein became vice-chairman and Robert Nakasone became president and
COO. Their vision was to create “a one-stop kid's shop.” They began by streamlining their
merchandise lines, closing under-performing stores, consolidating distribution centers and
administrative facilities, and introducing Superstores, Babies “R” Us stores, and the Concept 2000
Megastore. In a move to bolster their new Babies “R” Us stores, Toys “R” Us acquired the 78 store
chain, Baby Superstore, Inc., in 1997. After converting the stores into their Babies “R” Us format,
they became one of the largest retailers of baby products in the United States.
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 The 1990's brought increased competition from the discount chains such as Wal-Mart and
Target, new competition from smaller specialized edutainment toy chains, and the emergence of
the online toy market. This led to another management change in 1998: Michael became chairman,
Robert became CEO, and Charles became chairman emeritus of the board. This leadership team
lasted only one year during which time major restructuring was initiated, new management policies
were adopted, their online retailing site was launched, and the 41 stores of the Imaginarium Toy
Centers were acquired. Toysrus.com was launched in March 1998 and it quickly became one of
the fastest growing sites in the toy and baby products shopping categories.

Robert resigned after clashing with both Michael and Charles. He was replaced in 2000
with John Eyler, who had been F.A.O. Schwartz's CEO and chairman. John continued these
changes and entered into a ten year venture with Amazon.com to combine their toy and video-game
stores. The following year the Babies “R” Us online store was added to the Amazon venture.

Toys “R” Us opened their New York City Times Square play store in 2001, featuring a 60-
foot Ferris Wheel, a two-story life size Barbie doll house, a 20-foot tall animated T-Rex dinosaur,
and a Lego New York City skyline. They also launched an advertising campaign with their mascot
Geoffrey the Giraffe in his new animatronic look. The following year, in 2002, they created
Geoffrey stores that offered customers Toys “R” Us, Kids “R” Us, and Babies “R” Us under one
roof.

In 2005, an investment group consisting of affiliates of Bain Capital Partners LLC,

Kohlberg Kravis Roberts & Co. and Vornado Realty Trust acquired Toys “R” Us, Inc. for $6.6
billion. Headquartered on One Geoffrey Way in Wayne, New Jersey. Toys “R” Us, Inc. is now a
private company. Gerald Storch was appointed as the Chairman and Chief Executive Officer of
Toys “R” Us, Inc. in 2006.

Since that time, they have expanded their line of children's electronics, introduced a Babies
“R” Us brand of baby essential products, acquired one of the largest mall-based toy retailers - KB
Toys, and obtained exclusive rights to F.A.O. Schwarz, a retailer of quality, innovative toys. With
this later acquisition in 2009, they acquired the Fifth Avenue flagship store in New York City, a
second Toys “R” Us play and shop site in Manhattan.

As a convenience to customers, Toys “R” Us opened Express “pop-up” stores in malls,

shopping centers, and within Babies “R” Us stores. They also initiated the “R” Market concept
where light snacks, candy, beverages, cleaning supplies, and health and beauty aids were offered
under the same roof as full-sized Toys “R” Us and Babies “R” Us stores.

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 Also in 2009, Toys “R” Us acquired eToys.com, babyuniverse.com, and the domain name
Toys.com to expand their offerings online. These were added to their Toysrus.com, Babiesrus.com,
KBToys.com, and FAO.com presence on the web. In 2011, Toys “R” Us, Inc. formed a joint
venture with Li & Fung Retailing for the Toys “R” Us business in Southeast Asia and Greater
China, acquiring a majority stake in its previously licensed business. With this agreement, Toys
“R” Us, Inc. assumed ownership and oversight of 90 existing Toys “R” Us stores in Brunei, China,
Hong Kong, Malaysia, Singapore, Taiwan, and Thailand. Toys “R” Us continued expansion in
China with the opening of its first stores in Beijing, while also introduced international shipping
for online orders on Toysrusd.com and Babiesrus.com to more than 60 countries.

Antonio Urcelay was appointed interim Chairman and Chief Executive Officer of Toys “R”
Us, Inc. in July 2013. Toys “R” Us, Inc. embarked on a “TRU Transformation” strategy to position
the company for sustainable long-term growth. In doing so, the company expanded global e-
commerce and mobile presence with launch of web sore, Toysrus.pl, and mobile-optimized website
in Poland.

David Brandon was appointed Chairman and Chief Executive Officer of Toys “R” Us, Inc.
in 2015. The Times Square flagship and the landmark FAO Schwarz store on Fifth Avenue closed
down due to high rents. In September 2018, Toys “R” Us filed for bankruptcy protection in the US
and Canada after running up $5bn (£3.7bn) of debts and struggling to compete online. Toys R Us’
liquidation includes plans to close all 735 of its remaining stores affecting 33,000 American jobs.

1.1 Toys industry in the global scenario

According to the NPD Group (2018), Global toy industry sales grew by 1 percent in 2017 across
the 12 countries. On par with the world’s collective performance, toy sales in the United States, the
world’s largest toy market, grew by 1 percent to $20.7 billion in 2017. While China’s total exports
dropped by 7.7 percent and imports by 5.5 percent in 2016, toy exports rose by 9.5 percent and
imports by 23 percent (Koty, 2017)

1.2 Toys industry in the Malaysian scenario

According to Statista (2018), in 2016, the sales value of manufactured games and toys in Malaysia
was approximately 330.1 million Malaysian ringgit. Revenue in the "Toys & Baby" segment
amounts to US$56m in 2018 and revenue is expected to show an annual growth rate) of 10.5%
resulting in a market volume of US$83m in 2022. The average revenue per user (ARPU) currently
amounts to US$26.21.

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1.3 Toys “R” Us
According to Schultze (2017), there are 1,690 Toys “R” Us stores worldwide and they operated a
network of over 400 brick-and-mortar stores and 8 web-stores that span across Brunei, China, Hong
Kong, Japan, Macau, Malaysia, Philippines, Singapore, Taiwan and Thailand, and there are 40
stores in Malaysia. In the third quarter 2017, Toys “R” Us Inc recorded a net loss of $ -622.00
millions.

2.0 Business Issue

In September 2017, Toys “R” Us filed for Chapter 11 Bankruptcy Protection, $5 billion
debt according to Capetta (2018). The proceedings will not include the company’s European,
Asian, or Australian operations, and stores in the US and Canada will remain open. Toys “R” Us
was burdened with a hefty $5 billion of debt, which became difficult to pay down as online
competitors drew in more customers. Same-store sales in its latest quarter fell 4.1% year-over-year
(YoY), and resulted in $164 million in losses (Pandolph, 2017).

Toys “R” Us are closing 735 stores in US, leaving 33,000 people without jobs and wrap up
a 70-year business (Verdon & Jones, 2018). Furthermore, Toys “R” Us are closing 100 stores in
UK, leaving 3,000 people without jobs (Goldman, 2018). The Star (2018) mentioned that Asia and
Central Europe stores will undergo reorganization and sale process.

Toys “R” Us blamed Walmart, Target, and Amazon because they slashed prices on toys so
steeply in during holiday season at low-margins or as loss-leaders that Toys “R” Us could not
compete. Toys “R” Us relies exclusively on toys for profit, whereas Amazon, Walmart, and Target
are selling a broad array of merchandise to make up for profit losses on toys. The company said it
also couldn’t compete with its rivals’ online pricing and shipping offers.

3.0 Economic Factors

Increase in China Economy - Toys “R” Us outsourced Chinese factories to manufacture their
product due to the combination of cheap labour & undervalued currency. However, the labor costs
in China have risen rapidly as the average hourly wages hit $3.60 in 2016, spiking 64 percent from
2011 (Yan, 2017).

Translation of Currency - Toys “R” Us has translated its business to 37 countries, therefore, any
changes in the economic condition and currency will directly impact their revenues. According to
Toys “R” Us third quarter 2017 report, they experienced a $6 million negative impact from foreign
currency translation (Toys “R” Us, 2018).

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Economic Growth - U.S. economic growth slowed in the first three months of the year to a 2.3
percent annual rate, down from 2.9 percent at the end of last year (Ydstie, 2018). Children toys and
amusement that Toys “R” Us are selling are sometimes viewed as additional costs to a family, and
therefore many people cut on their cost during economic depression times.

Demand and Supply - During holiday seasons, demand for toys spiked up. One third of the annual
sales for toy makers are made in the holiday season. The global market itself amounts to $90bn and
is led by the US who produces $21bn of this total revenue (Leech, 2016). During the 2015 holiday
season, Toys “R” Us ran out of stock due to the company's policy of considering stores being in-
stock if they had three units of a particular SKU, which in turn leads to shelves looking half empty
(Tradegecko, 2017). During off season, oversupply of the toy products from Walmart, Target, and
Amazon drive down product demand for Toys R Us. In response to the oversupply, Walmart,
Target, and Amazon reduces their product price to balance the supply and the demand for the
product to ultimately reach an equilibrium price which add more to Toys R Us downfall.

4.0 Measures to Solve the Problems

Toys “R” Us can solve the problems that they are facing by using managerial economic concepts
and theories such as demand and supply, price leadership, Kinked Demand Curve, economies of
scale, and swot analysis.

4.1 Demand and Supply

The logic of the model of demand and supply is simple. The demand curve shows the
quantities of a particular good or service that buyers will be willing and able to purchase at each
price during a specified period. The supply curve shows the quantities that sellers will offer for sale
at each price during that same period. By putting the two curves together, we should be able to find
a price at which the quantity buyers are willing and able to purchase equals the quantity sellers will
offer for sale.

A change in one of the variables (shifters) held constant in any model of demand and supply
will create a change in demand or supply. A shift in a demand or supply curve changes the
equilibrium price and equilibrium quantity for a good or service.

Demand shifters that could cause an increase in demand include a shift in preferences that
leads to greater coffee consumption; a lower price for a complement to coffee, such as doughnuts;
a higher price for a substitute for coffee, such as tea; an increase in income; and an increase in
population. A change in buyer expectations, perhaps due to predictions of bad weather lowering

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expected yields on coffee plants and increasing future coffee prices, could also increase current
demand.

Substitute goods are those goods which can be used in place of one another for satisfaction
of a particular want, like tea and coffee. Demand for a given commodity varies directly with the
price of a substitute good. For example, if price of a substitute good (say, coffee) increases, then
demand for given commodity (say, tea) will rise as tea will become relatively cheaper in
comparison to coffee.

Looking at Figure 1, with decrease in price of substitute goods, demand for the given commodity
also decreases from OQ to OQ1 at the same price of OP. It shifts the demand curve of the given
commodity towards left from DD to D1D1.

During off season, oversupply of the toy products from Walmart, Target, and Amazon drive down
product demand for Toys R Us. In response to the oversupply, Walmart, Target, and Amazon
reduces their product price to balance the supply and the demand for the product to ultimately reach
an equilibrium price which add more to Toys R Us downfall.

4.2 Price Leadership

Figure 1

In this form of coordinated behaviour of oligopolists one firm sets the price and the others follow
it because it is advantageous to them or because they prefer to avoid uncertainty about their
competitors’ reactions even if this implies departure of the followers from their profit-maximizing
position.

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4.2.1 Barometric Price Leadership - Barometric price leadership refers to situations in which a
price leader acts as a barometer of prevailing market conditions for other firms in the
industry. The characteristic of the traditional price leader is that he sets his price on
marginalistic rules, that is, at the level defined by the intersection of his MC and MR curves.
For the leader the behavioural rule is MC = MR. The other firms are price-takers who will
not normally maximise their profit by adopting the price of the leader. If they do, it will be
by accident rather than by their own in-dependent decision.
4.2.2 Dominant Firm Price Leadership - In some oligopolistic markets, one large firm has a
major share of total sales, and a group of smaller firms supplier the remainder of the market.
The large firm has power to set a price that maximizes its own profits. A dominant firm
exists because it has lower marginal cost than the other fringe firms.

4.3 The Kinked Demand Curve

Figure 2

The Kinked Demand Curve model assumes that a business might face a dual demand curve
for its product based on the likely reactions of other firms to a change in its price or another variable.

The assumption is that firms in an oligopoly are looking to protect and maintain their market
share and that rival firms are unlikely to match another's price increase but may match a price fall.
I.e. rival firms within an oligopoly react asymmetrically to a change in the price of another firm. If
a business raises price and others leave their prices constant, then we can expect quite a large
substitution effect making demand relatively price elastic. The business would then lose market
share and expect to see a fall in its total revenue. If a business reduces its price but other firms
follow suit, the relative price change is smaller and demand would be inelastic. Cutting prices when
demand is inelastic leads to a fall in revenue with little or no effect on market share.
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 To understand it better, if a firm increases price, others won’t go along, so demand is very
elastic for price increases. If a firm lowers price, other firms match the decrease, so demand is
inelastic for price decreases. When there is a kink in the demand curve, there has to be a gap in the
marginal revenue curve. To survive, Toys “R” Us must decrease its price in order to match the
pricing of Walmart, Target, and Amazon in order to protect and maintain its market share.

4.4 Economies of Scale

Figure 3

Economies of Scale is defined as a fall in the long run average costs because of an increased scale
of production. This basically means the cost of production per unit reduces as you produce more
units. Reducing the cost per unit of production is the most significant advantage of achieving
economies of scale. Economies of scale are critical because this means that as firms grow in size,
they can become more efficient. In some industries, without economies of scale, firms cannot be
efficient or profitable.

4.4.1 External Economies of Scale

Technology - A larger firm may be able to adopt technologies of production that a smaller firm
cannot.

Buying Power - A large firm can purchase its factor inputs in bulk at discounted prices if it has
greater buying power. They can buy more from suppliers at a lower price.

Financial - Larger firms tend to be more creditworthy and have access to credit with favorable
rates of borrowing.

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4.4.2 Internal Economies of Scale
Transportation - Better transportation and communication may develop because of the presence of
larger firms.

Skiller-labor - Concentrated areas of skilled labor force may appear as they get better trained and
educated to serve these firms.

Research and Development - Able to afford large R&D because of the ability to reduce average
costs per unit by creating effective and efficient tactics of productions, which will result in overall
revenue rise.

4.5 SWOT Analysis

SWOT analysis is most commonly used by business entities to assess initiatives, products
or projects. The framework is credited to Albert Humphrey, who tested the approach in the 1960s
and 1970s at the Stanford Research Institute. Developed for business and based on data from
Fortune 500 companies, the SWOT analysis has been adopted by organizations of all types as an
aid to making decisions.

A SWOT analysis is often used at the start of or as part of a strategic planning exercise. The
framework is considered a powerful support for decision-making because it enables an entity to
uncover opportunities for success that were previously unarticulated or to highlight threats before
they become overly burdensome. As its name states, a SWOT analysis examines four elements:

1. Strengths: Internal attributes and resources that support a successful outcome.

2. Weaknesses: Internal attributes and resources that work against a successful outcome.
3. Opportunities: External factors that the entity can capitalize on or use to its advantage.
4. Threats: External factors that could jeopardize the entity's success.

A SWOT analysis should be used to help an entity -- whether it is an organization or an

individual -- to gain insight into its current and future position in the marketplace or against a stated
goal. The idea is that because entities can see competitive advantages and positive prospects, as
well as existing and potential problems, they can develop plans to capitalize on positives, address
deficits or do both. In other words, once the SWOT factors are identified, decision-makers should
be better able to ascertain if an initiative, project or product is worth pursuing and what is required
to make it successful. As such, the analysis aims to help an organization match its resources to the
competitive environment in which it operates. Below are the SWOT Analysis of Toys “R” Us :

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 Figure 4

5.0 Recommendations
There are several recommendations for Toys “R” Us to remain competitive and sustainable in the
future such as concept reinvention, price reduction, benefit of the economies of scale, strategic
location, current trend, and research & development.

5.1 Concept Reinvention

Reinvention involves the changes that are made to innovation ideas, objects, and practices (Rice et
al., 1980). According to Nunes and Breene (2011), all businesses, even the most successful, run
out of room to grow. Faced with this unpleasant reality, they are compelled to reinvent themselves
periodically. Toys “R” Us have to understand their current business model well enough to know if
it would suit a new opportunity or hinder it and know how to build a new model when they need it
because they are kind of caught as one of those, a little bit anachronistic retailers that was big box
in format, and basically just selling a lot of stuff basically toys at low price (Nassar, 2018).

5.2 Price Reduction

According to the Kinked Demand Curve, if a firm lowers price, other firms match the decrease, so
demand is inelastic for price decreases. When Toys “R” Us competitors especially Walmart,
Target, and Amazon lower their price, Toys “R” Us should also reduce its price to avoid losing
their customers to the competitors who offer their products at a lower price compared to Toys “R”
Us.

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5.3 Benefit of the Economies of Scale
Economies of scale are critical as company grow in size as they can become more efficient. Toys
“R” Us have the ability to buy in bulk that can lower the cost per unit of their products. The saving
obtain from the lower cost can be used to increase their profits or pass the savings to consumers
and compete on price.

5.4 Current Trend

In 2017, retail e-commerce sales worldwide amounted to 2.3 trillion US dollars and e-retail
revenues are projected to grow to 4.88 trillion US dollars in 2021 (Statisca, 2018). The number
already speaks how important is the e-commerce in nowadays sales. Thus, Toys “R” Us should
revamp their website with a clear, crisp easy to navigate design, with superb usability and
functionality to cater to the new trends and lure the online customers. Another important factor that
Toys “R” Us have to improve is to enhanced the shipping options such as free shipping service
with the idea of same day delivery or in store deliveries which customers can order products online
and have it shipped to their closest store, where they can collect their purchases at their
convenience.

5.5 Strategic Location

Bricks and mortar is not going to die because consumers still want to go to the store to touch and
feel the products. Millennials don’t shop like the older generations but they still treasure that
experience and even the e-commerce players are now setting up physical flagships and pop-up
stores to gain trust (Parpart, 2017). This means many consumers still prefer the experience of
physical stores, which are developing new attractions to keep customers coming back. According
to Euromonitor International projection, 83% of goods purchased globally in 2022 will still be
bought in store. Toys “R” Us have to reduce and be more selective on their stores location. They
should focus on opening their stores at a very strategic location that can attract a huge amount of
customers.

5.6 Research & Development

Research and development (R&D) refers to the part of a company's operations that seeks
knowledge to develop, design and enhance that company's products, services, technologies or
processes (Ross, 2018). Toys “R” Us will gain a competitive advantage by producing their own
product design in which their competitor are unable to replicate and sell due to the copyright issue.
Thus, Toys “R” Us should innovates by investing in research and development to create a more
appealing product to differentiate themselves with their competitors and later may attract more
customers to purchase products in their stores.
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