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5 lessons learned: How suppliers tried to save Toys ‘R’ Us

I know what you’re thinking – another tired post about a brick-and-mortar retailer replaced by ecommerce. But this story goes much deeper, exposing more fundamental shifts in how we handle risk management and how we will do business in the future.

It’s true that Toys ‘R’ Us became the latest casualty in a retail sector that is overbuilt and struggling for relevance. Industry leaders such as J.Crew and Sam’s Club are contracting, and the United States will shutter nearly 200 million square feet of retail stores over a two-year stretch.

In Toys ‘R’ Us’ case, private equity paid $7.5 billion in 2005, in part to acquire the chain’s real estate. Many Toys ‘R’ Us locations were in strip malls where they were anchors. As category killers are replaced by Amazon, Zulily, Zappos, Wayfair and others, malls are creating more entertainment centers featuring upscale movie theaters, bowling alleys and even fitness boutiques.

Lesson #1: Choose your acquisitions carefully; even the savviest buyers get burned when they overpay for assets.

Perhaps the most interesting part of the Toys ‘R’ Us saga was the response of the company’s vendors after it announced its exit from the toy business. MGA Entertainment, a modestly sized toy manufacturer led by Isaac Larian, attempted to raise enough capital through crowdsourcing to save one of its largest customers. Armed with an employee-made viral video, the company raised over $800 million. Yet Larian seemingly fell short as a viable buyer.

Lesson #2: Funding sources are transforming overnight.

Banks are under attack from untraditional competitors and will be disrupted by blockchain and other technologies. In the future companies will have untraditional alliances with investors, funders and crowds.

This effort was remarkable for several reasons. The lines have blurred among customers, vendors and competitors. On the heels of the announced CVS-Aetna merger and others, we are in a period of rapid vertical integration. Retail and wholesale as channels are under attack.

When testifying before Congress last month, Mark Zuckerberg couldn’t name a primary competitor. Facebook actively competes with a couple dozen competitors in the different sectors it serves. We are at a point where manufacturers, wholesalers and retailers need to rethink their value propositions and go-to-market strategies.

Lesson #3: Long-standing rules of competition no longer apply.

The number of competitors across channels could be infinite. Companies may not survive representing a single step in the value chain.

Larian proposed a strategy of providing “curated” products in a new format designed to combat the thrift provided by ecommerce (which is projected to grow another 20 percent this year). Curated offers are the rage online with suppliers such as Loot Crate (a geek subscription box service) and Stitch Fix, which provides hand-selected fashion conveniently paid for in advance.

Lesson #4: To remain relevant in a sea of sameness, providers must be hyper-focused on serving specific niches and overwhelming customers with value.

This may require a business to completely rethink its model and do something radical, such as an entirely different monetization method.

There is a trend toward more end-to-end solutions where companies deliver value in multiple ways and utilize data to better serve customers. Artificial intelligence will only amplify providers’ ability to curate customized offers. In the future, your service level and pricing will match finite needs. It may even change from one customer to the next, based on their age, sex, geography or buying history.

The shift to omnichannel was sudden and dramatic. Companies cannot win playing in a single sandbox and reaching customers through one or two channels. Read more about staying relevant in a hyper-competitive world

Lesson #5: Omnichannel strategies that blend the physical and digital worlds are an important factor in migrating from legacy business models.

Toys ‘R’ Us made a cardinal mistake. It tried to compete with Walmart, Target and others on price instead of refocusing on uniqueness. While all companies are hungry to grow, focusing on the right economies of scope is more important than ever before. That means participating only in the product categories or markets where you can win and spreading costs across those businesses. While the market you address may be limited, your offer needs to be complete.

If you are a small or midsize company fighting for survival, learn from the failure of Toys ‘R’ Us. Your future may depend on it. Read more about building an omnichannel strategy

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