Part C as e s

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Case 2-1
Toys “R Us Goes to Japan
TOYS “R“ U5, the giant “category killer“ in toys. repre- founded in the late 19405 by an American. Charles
sentsa very special kind offirm.The categorykillers are Lazarus. as the first “toy supermarket,” and was ac-
specialty retailers that operate on a much larger scale quired in I966 by department store chain operator Inter-
than the typical boutique specialty retailer. Examples in- state. Inc. Interstate went bankrupt in I974 after
clude Home Depot in hardware and Best Buy in home becoming overextended through buying a number of
appliances and consumer electronics. Wal-Mart. other discount chains. but continued to build more Toys “R”
superstores. and discount outlets threaten these specialty Us stores through a court-ordered reorganization. After
retailers. Toys “R” Us was bought out by an American the reorganization was finished in I977, Interstate di-
consortium in 2005, but has continued to operate with vested all its other assets and became Toys “R” Us. Inc.;
fewer stores. The Japan operation has continued, man- Lazarus became chairman and CEO. Toys “R” Us grew
aged as a separately incorporated subsidiary in Tokyo. At fast through the late- I 9705 and 19805 via an aggressive
the time of its Japanese entry, the question was mainly expansion campaign that undercut existing retailers.
whetherits retailing formula could succeedin suchadif- The first Kids “R” Us stores, a clothing extension,
ferent market environment. were opened in I982; and the first international stores
The Toys “R” Us case shows how high barriers to were opened in I984. Since going public in I978. sales
entry can be overcome, at a cost, and how protected busi- rose every year, although earnings showed only nomi-
nesses easily become uncompetitive. The case also demon- nal gains between I989 and l99l.
strates howa new service format requires promotion that At the beginning of the 20005, encountering in-
educates customers about its advantages. creased competition from Wal-Mart, sales and profits
Toys “R” U5, Inc., a children’s specialty retailer con- of Toy’s “R” Us had stagnated in the United States.
centrating on toys and children’s clothing was headquar- Still, the company operated about 700 stores in the
tered in Paramus, New Jersey. In the early 19905, after United States, and was growing steadily overseas (see
successful penetration of the North American market Exhibit I). Sales for 2003 were $1 1.6 billion. The coin-
and selected European markets, company executives pany was not quite this big in the beginning of the
were formulating their expansion plans for the Japanese 19905 when the Japanese entry took place. In IQQ3 the
market. company operated 1,032 stores. with 58l Toys “R“ Us
stores and 2 l 7 Kids “R” Us stores in the United States.