Toys R Us – Bad Execution or Poor Strategy?

Toys R Us has been beaten at its own game (reg. required). Was it just poor execution?

Last October, two months before the heart of the holiday rush, Wal-Mart Stores Inc. (WMT ) surprised all of its competition by dropping Elmo's price from $25 to $19.50, a full $4.50 below what many retailers had paid for it. Within days, Toys 'R' Us dropped its price to $19.99. The price war dominoed all the way down the toy aisle. "Our choice was short-term profit vs. long-term market share; we chose to protect market share," says CEO John H. Eyler Jr., who thinks all stores could have sold out of the popular doll at $29.99.

That's profit Toys 'R' Us couldn't afford to lose. And by Jan. 8, Eyler and his board were hiring an investment bank to explore strategic alternatives. It's a move that could lead to a dramatically different company — and almost certainly will seek to lessen the retailer's dependence on its traditional toy stores.

While Toys 'R' Us is in nowhere near the dire straits of KB Toys Inc. and FAO Schwarz Inc., both of which have declared Chapter 11 in recent months, 2003 was the third disappointing holiday season in a row. It was also the worst since Eyler was hired in 2000 to stanch market-share losses to Wal-Mart. The giant discounter surpassed Toys 'R' Us as the No. 1 toy seller in the late '90s and is now estimated to have at least 22% of the market.

Blame it on Wal-Mart. Toys R Us should have seen it coming. Maybe they did, maybe they didn't, but rule number two for leaders is embrace the inevitable. Competing on price is, in my opinion, not that great of a strategy. Toys R Us needs to give people a reason to come to the stores other than just cheap toys. People can go to WalMart for that.