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Blockbuster’s 20-Year Odyssey Arnold, Thomas K Home Media Retailing; Jun 26-Jul 2, 2005; 27, 26; US Newsstream pg. 1 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Tiny Redbox’s DVD Kiosks Grow Pruitt, Angela . Wall Street Journal , Eastern edition; New York, N.Y. [New York, N.Y]27 June 2007: B.5D. ProQuest document link ABSTRACT (ABSTRACT) Redbox also has kiosks located in some 2,600 grocery stores, including Supervalu Inc.’s Albertsons and Royal Ahold NV’s Giant and Stop &Shop chains. Wal-Mart Stores Inc. is testing the Redbox kiosks in at least 10 cities and Puerto Rico. In Denver, Redbox has seen its market share rise to about 20%, second only to Blockbuster, in just three years. A unit of McDonald’s started the concept of Redbox in 2001 amid a push to drive traffic into the restaurants. It also included “convenience store” kiosks that didn’t take hold. The fast-food chain later partnered with Coinstar Inc., which owns a 47.3% stake of Redbox. The company’s focus remains on DVD rentals, but [Redbox] said it will continue to explore other categories. “Most of the consumers in Blockbuster want to rent about 100 new release titles. Most of Blockbuster’s square footage is wasted on older titles, which often sit unrented,” Mr. [Gregg Kaplan] said. Redbox also offers the option of ordering rentals online. The kiosk holds 500 of the latest movie titles. They have to return the DVDs to any Redbox location in a day or incur another $1-a-day charge on their credit card. FULL TEXT As Blockbuster Inc. and Netflix Inc. duke it out for dominance in the video-rental industry, a tiny company called Redbox wants to jump into the ring. With about 4,000 automated DVD kiosks scattered across the country, Redbox has emerged as the nation’s fourthlargest renter of DVDs since it starting testing in the market in 2002. Right now, Redbox is still a relatively small threat. But its growth comes as Blockbuster is fighting to remain competitive. The dominant player in the market is closing unprofitable stores, propping up its online business and undercutting the prices of Netflix, its chief rival. Besides, Redbox has a formidable partner that knows something about growth by spreading out: McDonald’s Corp. has a 47% stake in the closely held company. And the fast-food chain has a multiyear revenue- sharing pact that puts the kiosks in its restaurants, about 1,400 currently. Redbox also has kiosks located in some 2,600 grocery stores, including Supervalu Inc.’s Albertsons and Royal Ahold NV’s Giant and Stop &Shop chains. Wal-Mart Stores Inc. is testing the Redbox kiosks in at least 10 cities and Puerto Rico. In Denver, Redbox has seen its market share rise to about 20%, second only to Blockbuster, in just three years. The battle for customers is “really going to be location driven,” said Michael Pachter, an analyst at Wedbush Morgan Securities, of Redbox’s growth. Redbox might gain marginal market share at Blockbuster’s expense in PDF GENERATED BY SEARCH.PROQUEST.COM Page 1 of 4 select locations, he said. The $1-a-day price point benefits consumers who pass a kiosk and make the impulse decision to rent a movie, he added. And they become repeat customers. Doug Adcock, owner and operator of eight McDonald’s restaurants in Houston, said the kiosks have helped increase traffic. “When customers are making another visit to return a movie, they make food purchases,” he said. A unit of McDonald’s started the concept of Redbox in 2001 amid a push to drive traffic into the restaurants. It also included “convenience store” kiosks that didn’t take hold. The fast-food chain later partnered with Coinstar Inc., which owns a 47.3% stake of Redbox. The company’s focus remains on DVD rentals, but Redbox said it will continue to explore other categories. Convenience aside, analysts say that both Blockbuster and Netflix offer a better deal if the consumer is able to keep the rental for a week without late fees. Redbox, of Oak Brook Terrace, Ill., projects that it will beat Blockbuster, which has more than 5,000 stores in the U.S., on number of locations in coming months. Redbox already has almost three times as many locations as automated DVD-rental companies The New Release and DVDPlay. Redbox Chief Executive Gregg Kaplan said the company has been “growing under the radar” at a rate of 300% every year during the past few years. Mr. Kaplan, a former investment banker, said Redbox retooled Blockbuster’s model by cutting the price, focusing on just the top new releases, and replacing a 6,000-square-foot physical store with a 15- square-foot automated kiosk. “Most of the consumers in Blockbuster want to rent about 100 new release titles. Most of Blockbuster’s square footage is wasted on older titles, which often sit unrented,” Mr. Kaplan said. Redbox also offers the option of ordering rentals online. The kiosk holds 500 of the latest movie titles. They have to return the DVDs to any Redbox location in a day or incur another $1-a-day charge on their credit card. Redbox’s operational costs include the DVDs, payment-processing costs, distribution to the kiosks, customerservice expenses and revenue-sharing costs with the host retailer. After five to six months, the DVDs are sold back to the distributors. Sean Bersell, vice president of public affairs at the Entertainment Merchants Association, said kiosks make sense where space is at a premium. Mr. Bersell added that he anticipated Redbox will expand its kiosks to markets where Netflix has made heavy inroads such as the East and West coasts and among upscale suburban and urban consumers. Mr. Kaplan says the company will continue to examine its strategy in the next seven to 10 years. One big challenge ahead: the expected growth of movie downloads and video-on-demand on cable. The emergence of the new Blu-ray and HD DVD disc formats could “expand the lifespan of packaged media, and that’s good for us,” he said. Mr. Kaplan declined to comment on whether the company would consider going public. Blockbuster concedes that the vending concept is convenient. But “they don’t generate significant revenue. They PDF GENERATED BY SEARCH.PROQUEST.COM Page 2 of 4 don’t have the capacity to do that,” said Randy Hargrove, a Blockbuster spokesman. The company offers 70,000 titles between its stores and online operations. “We think it makes more sense to invest our money where the majority of customers want to rent,” at stores and online, Mr. Hargrove said. He noted that 70% of the U.S. population is within a 10-minute drive of a Blockbuster store. Netflix spokesman Steve Swasey said that unlike the focus of Redbox, the bulk of its business isn’t in new-release rentals. “The breadth and depth of Netflix’s catalog is what consumers really want,” he said, noting that 70% of shipped movies aren’t new releases. DETAILS Subject: Rentals; Competition; DVD Company / organization: Name: Redbox; NAICS: 512120 Classification: 9190: United States; 8307: Arts, entertainment &recreation Publication title: Wall Street Journal, Eastern edition; New York, N.Y. Pages: B.5D Publication year: 2007 Publication date: Jun 27, 2007 Publisher: Dow Jones &Company Inc Place of publication: New York, N.Y. Country of publication: United States, New York, N.Y. Publication subject: Business And Economics–Banking And Finance ISSN: 00999660 Source type: Newspapers Language of publication: English Document type: News ProQuest document ID: 399084396 Document URL: https://search.proquest.com/docview/399084396?accountid=30530 Copyright: (c) 2007 Dow Jones &Company, Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission. PDF GENERATED BY SEARCH.PROQUEST.COM Page 3 of 4 Last updated: 2017-11-02 Database: US Newsstream Database copyright  2018 ProQuest LLC. All rights reserved. Terms and Conditions Contact ProQuest PDF GENERATED BY SEARCH.PROQUEST.COM Page 4 of 4 ECONOMIC HISTORY The Rise and Fall of Circuit City BY J E S S I E RO M E RO The Richmond-based retailer became wildly successful — and then disappeared ne of the great success stories of American retailing, Circuit City got its start in 1949 as a tiny storefront in Richmond, Va. From that modest beginning, founder Sam Wurtzel quickly built the company into a national chain, and his son Alan turned it into a household name. By 2000, Circuit City employed more than 60,000 people at 616 locations across the United States. Circuit City is also one of American retailing’s great failures. In November 2008, the 59-year-old company filed for bankruptcy. Within months, it closed its stores and liquidated more than $1 billion worth of merchandise, and on March 8, 2009, the last Circuit City store turned off its lights for good. Today there are few reminders of the groundbreaking retailer; the company’s 700,000-square-foot headquarters complex outside Richmond is filling up with new tenants, and the empty stores have been taken over by new retailers. In part, Circuit City was just one of the many victims of the financial crisis and recession, which also brought down other large national retailers such as Linens ’n Things and The Sharper Image. And businesses fail even during the best of economic times, as part of the natural process of “creative destruction” that is the engine of capitalism. But at business schools across the country, Circuit City’s story is taught as an example of what can happen when success breeds complacency. O PHOTOGRAPHY: COURTESY OF AL AN WURTZEL From Tire Store to Fortune 500 In 1949, New Yorker and serial entrepreneur Sam Wurtzel was having his hair cut in Richmond on his way to a family vacation in North Carolina. The barber mentioned that the first television station in the South had opened in Richmond less than a year earlier. Wurtzel, fresh from a failed importexport business, thought this new entertainment device might be his next opportunity. The first experimental television stations began operating in the early 1940s, and commercial broadcasting began after World War II. Few households owned sets at the time of Wurtzel’s barbershop visit, but the medium was growing rapidly: The number of TV stations in the United States nearly tripled in 1949, from 27 to 76. Through a friend, Wurtzel knew someone at Olympic Television, a small manufacturer in Long Island City; through relatives, he had connections to bankers and businesspeople in Richmond. Within a month, Wurtzel had moved his family from New Circuit City got its start as Wards TV, which had a bustling showroom in Richmond, Va., in 1960. York to Virginia and was selling televisions out of the front half of a tire store on Broad Street, a few blocks west of downtown Richmond. Wurtzel thought his last name might be hard for people to pronounce, so he named his store Wards, an acronym for his family’s names: W for Wurtzel, A for his son Alan, R for his wife, Ruth, D for his son David, and S for Sam. Rather than try to compete directly with the big department stores, he catered to lower-income consumers by offering installment payment plans. He also developed a unique sales technique: free in-home demonstrations. A salesman would drop off a television at a customer’s home for the night, free of charge, and offer to pick it back up the next day. Once the set was in a family’s home, they nearly always bought it. Wurtzel had correctly foreseen the growing consumer demand for televisions — the number of households with sets grew from under 1 million in 1949 to 20 million by 1953 — and Wards TV grew quickly. In 1952, Wurtzel started selling appliances to capitalize on the post-war demand for refrigerators, washing machines, and electric stoves. Richmond was soon home to four Wards TV locations. Wurtzel soon decided to join another retail trend: discount stores. The first discount store — a huge retail space offering a smorgasbord of merchandise below the manufacturer’s list price — opened in New England in 1953, and the format spread quickly. In 1960, the discount chain National Bellas Hess invited Wurtzel to open a store-within-a-store called a “licensed department” at their new Atlanta location. Wurtzel quickly followed up with licensed departments in Norfolk, Va., and Camden, N.J., and in December 1961 he took Wards TV public to finance a nationwide expansion. Excited by its success, the company embarked on a brash ECON FOCUS | THIRD QUARTER | 2013 31 expansion strategy and nearly went bankrupt in 1975. But led by Wurtzel’s son Alan, who had become CEO in 1972, the company closed or sold a number of unprofitable outlets, and by the late 1970s it was ready to start expanding again. It did so with a new name and a new retail model inspired by the early discount stores: the Circuit City “superstore.” The superstores featured a large showroom attached to an even larger warehouse, with custom-built display areas to show off the merchandise. Most significantly, there was no central checkout area and customers couldn’t pick up merchandise themselves. Instead, there were multiple sales terminals throughout the store and commissioned salespeople helped the customers make their purchases. Those sports-jacketed salespeople were central to Circuit City’s business model, which depended on selling big-ticket, high-margin items and lots of extended service plans. They were also what customers wanted at the time. “Circuit City was at their strongest when consumers didn’t really understand what they were buying and were nervous about it,” says Doug Bosse, a strategy professor at the University of Richmond. “When my family bought our first VCR, it was $600. That was a pretty big chunk of a family’s discretionary budget. You would go into Circuit City and talk to a salesperson and ask for advice, and have them teach you on the floor how it would work in your family room.” Circuit City superstores, which sold both electronics and appliances, spread rapidly, from just eight in 1983 to 53 by 1987, in addition to the company’s 37 smaller electronicsonly stores. Just like Wards TV, Circuit City was in the right market at the right time. As the baby boomers came of age and the country entered the 1980s boom, consumer demand for VCRs, CD players, and microwave ovens exploded. Factory shipments of consumer electronics doubled between 1980 and 1986, and the share of households with a VCR grew from 1 percent in 1980 to nearly 70 percent by the end of the decade. As Alan Wurtzel wrote in his memoir Good to Great to Gone, “I often thanked my lucky stars that Sam had decided to go into the retail electronics business and not the retail shoe business.” Wurtzel stepped down in 1986 and was succeeded by Rick Sharp, an executive vice president, who served as CEO until 2000. During Sharp’s tenure, sales increased from $1 billion to $12.6 billion, earnings increased from $22 million to $327 million, and the number of stores increased from 69 to 616. In 1995, Circuit City entered the Fortune 500 at number 280, climbing as high as 151 by 2003. Circuit City was so successful that management expert Jim Collins featured the company in his 2001 book Good to Great, a study of the country’s most profitable companies. But Sharp championed two projects that might have been the beginning of the end, according to Collins, who wrote about Circuit City again in his 2009 book How the Mighty Fall. The first project was CarMax, which applied “big box” retailing to used-car sales. The initial CarMax opened in Richmond in 1993 and was 32 ECON FOCUS | THIRD QUARTER | 2013 immediately successful, and the chain expanded to 40 outlets by 2000. Circuit City spun off CarMax in 2002, and today there are more than 120 locations. Less successful was a new DVD technology, called DIVX, which launched in 1998. The premise was that consumers could buy a DIVX-encrypted movie and then watch it on a special DVD player as many times as they wanted within a 48-hour period. In theory, DIVX was more convenient than renting tapes from a video store, but consumers didn’t like it and other electronics stores refused to stock DIVX movies. Circuit City abandoned the idea within a year. The issue was not the success or failure of these projects per se; CarMax was a great move, and DVIX was “costly but not critically wounding,” according to Wurtzel. But in Collins’ analysis, the attention paid to these projects meant that the management team and the board weren’t paying attention to the company’s core business — or to the growing threat of Best Buy. Sacking the City Best Buy got its start in 1966 as Sound of Music, an audio specialty store with several locations in Minnesota. In 1981, the Roseville, Minn., store was destroyed by a tornado, so founder Richard Schulze and his employees gathered up the merchandise, stacked it on tables in the parking lot, and advertised a huge “Tornado Sale.” Customers lined up around the block, and the success prompted Schulze to pursue a discount sales strategy. Sound of Music changed its name to Best Buy in 1983 and opened its first of many superstores in Burnsville, Minn. While the basic model was similar to Circuit City, Best Buy stores had a central checkout and allowed customers to pick out their own merchandise on the floor. And unlike Circuit City, Best Buy carried a wide variety of low-margin products to get customers in the door, such as computer peripherals, videogames, and CDs. Best Buy’s store and staffing models were a better fit for consumers’ changing preferences; as consumer electronics became cheaper and more ubiquitous, customers no longer needed or wanted a salesperson to help them with many of their purchases. Circuit City, on the other hand, stuck to its commissionbased sales force and its reliance on high-margin products, and watched Best Buy take over its market share. But Circuit City didn’t see Best Buy as a threat. “We thought we were smarter than anybody,” says Alan Wurtzel, who remained on the board of directors until 2001. “But the time you get in trouble is when you think you know the answers.” In 2000, Circuit City’s earnings and stock price were at their all-time high — but Best Buy’s earnings were higher, and it was also beating Circuit City in profit per store, total sales, and U.S. market share. Under the new CEO, Alan McCollough, the company began making changes, but the moves appeared to backfire. For example, in 2001 Circuit City stopped selling appliances, which made up between 10 percent and 15 percent of the business. Appliances were expensive to move and store, and getting rid of them freed up space for new products. But getting rid of them also meant Circuit City missed out on the residential real estate boom, when appliance sales soared. In addition, the move was confusing to both employees and customers, and it might have helped the competition. “Best Buy still sold major appliances, and guess what, they also had TVs and computers and videogames,” says Tom Wulf, a former Circuit City manager and trainer who directed the 2010 documentary A Tale of Two Cities: The Circuit City Story. “We were basically pushing our customers out the door, saying we don’t want to sell to you anymore.” In 2003, Circuit City finally decided to eliminate its commissioned sales force. In one day, the company fired 3,900 of its highest-paid salespeople, with plans to replace them with 2,100 hourly associates. The move crushed employee morale and productivity. “Anyone who was working in the store thought, gee, if I’m too successful they’re going to fire me, because I’ll be making too much money,” Wulf says. “So there was no incentive anymore to take good care of the customer.” In Wurtzel’s opinion, it was “economically essential to reduce the cost of sales and to reduce commissions as a percentage of sales,” but the change was badly mismanaged. “The preferable way to have done it is to be open and honest with the salespeople, to do it sensitively and reluctantly,” he says. “Instead, it was done secretly and behind their backs, and they walked into work one morning and were told they were out of work.” Over the next five years, Circuit City’s management made a series of questionable decisions, including buying a Canadian electronics chain, embarking on a round of store expansions, and laying off 3,400 more of the company’s most experienced salespeople in 2007. “It’s not a story where they did one thing really badly,” says Bosse. “It’s a story of hundreds and hundreds of smaller decisions that added up to be destructive.” Perhaps the most damaging move was a series of stock buybacks. Despite declining sales, Circuit City had a lot of cash on hand from spinning off CarMax in 2002 and selling a private-label credit card bank in 2003. Under pressure from shareholders, Circuit City spent almost $1 billion between 2003 and 2007 buying back stock at an average of $20 per share. But the purchases couldn’t offset the fact that Circuit City’s business was failing, and the stock was worth only $4.20 per share by the end of 2007. The ultimate result was that Circuit City didn’t have any cash on hand to weather the economic storm that was coming. Everything Must Go Circuit City filed for Chapter 11 bankruptcy on November 10, 2008, and announced a restructuring plan that included closing 155 stores. But in the midst of the financial crisis, the plan wasn’t enough to satisfy the company’s creditors, and when Circuit City couldn’t find a buyer, a bankruptcy judge ordered the company to liquidate. At the time of the filing, Circuit City had 567 stores and about 34,000 employees nationwide. And although layoffs had begun at headquarters several years earlier, the company was still one of Richmond’s largest employers, with about 2,000 people. Many employees remained hopeful that Circuit City would find a way to bounce back; the company had rebounded from near bankruptcy once before. “Up until the day they announced the liquidation, there was still a group of associates that were quite hopeful about the Phoenix rising again, the company being reborn and coming out of the ashes,” Wulf says. When that didn’t happen, many of those same employees lost their life savings. Circuit City had offered an employee stock purchase program, whereby employees could invest up to 10 percent of their salary in company stock — which became worthless. “All those years of investing meant nothing in the end,” says Wulf. “It really ruined some people’s lives.” Circuit City’s departure left a huge hole in the commercial real estate market as well, which was a loss not only for the landlords but also for the nearby coffee shops and restaurants that catered to Circuit City employees. Other Richmond companies also suffered or closed. While business failures are painful for the people affected, however, they are an inevitable and even a necessary feature of capitalism, which the late Joseph Schumpeter, an Austrian-American economist, described as “the perennial gale of creative destruction.” Circuit City isn’t the only company to have been surpassed by a similar competitor, and in the long run the economy and consumers might be better off with Barnes & Noble instead of Borders or Kroger instead of A&P — or eventually with an online retailer instead of any of them. If Circuit City had done things differently, would it still be around today? Maybe. It’s possible the company could have found a way to “combine the strengths of Circuit City, which was very high touch, with the strategic vision of Best Buy, which was low prices and mass merchandising,” as Wurtzel says. But it’s also possible that the company was bound to be swept aside by Schumpeter’s “perennial gale,” leaving behind only bittersweet memories for ex-employees and a cautionary tale for everyone else. EF READINGS Collins, Jim. Good to Great: Why Some Companies Make the Leap… and Others Don’t. New York: Harper Business, 2001. Wurtzel, Alan. Good to Great to Gone: The 60 Year Rise and Fall of Circuit City. New York: Diversion Books, 2012. Schumpeter, Joseph A. Capitalism, Socialism, and Democracy. 3rd ed. 1942. New York: Harper and Brothers, 1950. ECON FOCUS | THIRD QUARTER | 2013 33 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Toys ‘Were’ Us?; Undercut by Big Discounters, Toys ‘R’ Us Is Indicating It May Get Out of the Business Joseph Pereira, Rob Tomsho and Ann Zimmerman . Wall Street Journal , Eastern edition; New York, N.Y. [New York, N.Y]12 Aug 2004: B.1. ProQuest document link ABSTRACT (ABSTRACT) “This just might be a sign that Toys ‘R’ Us is throwing in the towel,” says Bill Simms, an analyst for Citigroup Inc.’s Smith Barney division. “Given the competitive threat of Wal-Mart today, Toys ‘R’ Us will not be able to continue as a going concern in the long term without drastic structural changes.” The irony is that Toys “R” Us declared victory as the dominant toy retailer 10 years ago, when it forced Child World and Kiddie City into back-to-back bankruptcies and liquidation, says Burt Flickinger, managing director, Strategic Marketing Group in New York. “It’s a sad day in retailing when Toys ‘R’ Us declares victory, runs all the competition off the cliff and then Wal-Mart kills off the only surviving toy retailer.” Game Over? Wal-Mart is beating up on the big toy chains that did the same to small toy stores two decades ago. — 1948 Charles Lazarus launches Children’s Supermart, which became Toys ” R” Us in 1978. — 1998 Wal-Mart overtakes Toys “R” Us as top toy retailer based on annual sales. Toys “R” Us ranks second followed by KMart, Target and KB Toys. — March 2001 Online seller eToys files for Chapter 11 bankruptcy protection (KB Toys buys the company later that year.) — January 2003 FAO Inc., parent company of FAO Schwarz, files for Chapter 11; it emerges from that status April 2003. — December 2003 FAO files for Chapter 11 again, closes Zany Brainy stores, some FAO Schwarz stores. — January 2004 KB Toys files for Chapter 11, closes hundreds of stores. — April 2004 KB Toys sells KBtoys.com and eToys.com, which account for about two-thirds of the company’s net revenue. — August 2004 Toys “R” Us says it is considering selling its chain of PDF GENERATED BY SEARCH.PROQUEST.COM Page 1 of 6 1,200 stores. Market Share: Where U.S. Consumers Buy Toys ANNUAL ANNUAL 2002 2003 Mass merchandisers/discounters (Wal-Mart, Target) 47.3% 48.6% Toy stores (Toys “R” Us, KB Toys) 26.3 25.1 Specialty and hobby stores 8.8 7.0 Department/major chains (Macy’s) 2.1 2.5 Food/drug stores (Rite Aid, grocery stores) 2.6 2.5 Direct mail/online-only toy sellers 5.1 4.5 Other 7.7 9.8 * Percentages based on all toy industry sales in the U.S. for each year. Sources: NPD Group, NPD Funworld, Consumer Panel; WSJ research FULL TEXT IT COULD BE curtains for a onetime category killer. After years of battling cut-throat pricing from Wal-Mart Stores Inc. and other discount chains, Toys “R” Us Inc. indicated it may be ready to get out of the toy business altogether. In a surprise move, the once-dominant toy retailer said it is exploring a sale of its core 1,200-store toy chain. At the very least, the company said it plans to separate the toy unit from its smaller but faster-growing baby-products business — in a possible spinoff — and to significantly cut spending on the toy operation. The retreat by Toys “R” Us is the most dramatic sign yet of Wal- Mart’s growing supremacy over chains once thought to be category killers themselves. Toys “R” Us during the 1980s and early 1990s drove dozens of smaller toy operators out of business with lower prices and pile-’em-high selection. But Wal-Mart, slashing prices even further and using toys as loss leaders, slowly eroded Toys “R” Us’s grip on the market. The toy chain has seen its share of the U.S. retail toy market slip from 25% in the late 1980s to just 15% today, industry analysts estimate. Wal-Mart passed Toys “R” Us as the industry leader in 1998, and now commands about 25% of the U.S. market. Aiding Wal-Mart’s rise to the top has been a transformation of the toy industry from that of a fashion business in which consumers thronged stores in search of the hottest new crazes, to that of a commodity market of staples and evergreen products in which shoppers browse for bargains. “This just might be a sign that Toys ‘R’ Us is throwing in the towel,” says Bill Simms, an analyst for Citigroup Inc.’s Smith Barney division. “Given the competitive threat of Wal-Mart today, Toys ‘R’ Us will not be able to continue as a going concern in the long term without drastic structural changes.” PDF GENERATED BY SEARCH.PROQUEST.COM Page 2 of 6 The irony is that Toys “R” Us declared victory as the dominant toy retailer 10 years ago, when it forced Child World and Kiddie City into back-to-back bankruptcies and liquidation, says Burt Flickinger, managing director, Strategic Marketing Group in New York. “It’s a sad day in retailing when Toys ‘R’ Us declares victory, runs all the competition off the cliff and then Wal-Mart kills off the only surviving toy retailer.” Toys “R” Us isn’t the first category-killer to be bloodied by Wal- Mart and likely won’t be the last. As the Bentonville, Ark., retailing giant has attempted to dominate more merchandise categories, the companies that once dominated them have become increasingly threatened. Today, Wal-Mart is the single biggest seller of consumer electronics, pressing players like Circuit City Stores Inc. Viacom Inc.’s Blockbuster, the largest video rental chain in the country, has been struggling for the last several years — in large part because Wal-Mart prices DVDs so low that it’s almost as cheap to buy them as rent them. WalMart’s sales of health and beauty products are squeezing the giant drugstore chains. And its more than 1,500 combined grocery and discount stores are putting pressure on giant supermarket chains and have contributed to bankruptcy filings by 25 regional grocers, many of which drove scores of neighborhood grocers out of business earlier. “Wal-Mart is putting pressure on everyone, indirectly and directly,” says Jeff Lenard, spokesman for the National Association of Convenience Stores in Alexandria, Va. In the toy business, Toys “R” Us has held out longer than other major chains. KB Toys Inc., a big mall-based chain, filed for bankruptcy last year, and FAO Inc., parent of FAO Schwarz Stores, slipped into bankruptcy for the second time last holiday season. Parts of the chain have since been bought by a private equity firm. Toys “R” Us’s announcement suggests that its management prefers to retreat from direct competition with WalMart by focusing on its Babies “R” Us chain, which sells everything from diapers to strollers to baby furniture. With nearly 200 stores in the U.S., the Babies unit has been one of the rare bright spots for the company in recent years. In fiscal 2003, the Babies unit had operating earnings of $202 million, up 16% from a year earlier. It accounted for about 15% of the parent company’s fiscal 2003 revenue of $11.6 billion. Toys “R” Us, based in Wayne, N.J., said its vice chairman, 50-year- old Richard Markee, has been appointed president of its Babies unit and will become its chief executive officer and president after the separation is complete. John Eyler, Toys “R” Us chairman and chief executive, said in a statement that the move reflects “the fact that our global toy business and our Babies “R” Us business operate in distinct markets and are at fundamentally different phases in their growth cycles.” He said the separation would “provide a better opportunity for Babies ‘R’ Us to continue its healthy growth.” In a bid to cut costs, Toys “R” Us also said it would restructure operations at its headquarters and record $14 million in related charges in its fiscal second quarter. The company also said it plans to take $150 million in writedowns to liquidate inventory in its U.S. stores, and to cut operating expenses at its headquarters and U.S. toy unit by more than $125 million by fiscal 2005. Toys “R” Us announced the moves following a seven-month strategic review. A company spokesman declined to elaborate beyond statements made in a press release. PDF GENERATED BY SEARCH.PROQUEST.COM Page 3 of 6 Given the turmoil in toyland today, some industry observers say that the prospects for Toys “R” Us readily finding a single buyer for its toy business are uncertain — particularly with its profit margins under pressure. “I have no idea who would buy it,” said Chris Byrne, a private industry analyst. George Whalin, president of Retail Management Consultants, a consulting concern based in San Marcos, Calif., said that, while some financial concern might be interested, he can’t envision another player in the retail or toy industry making a bid. Some predicted that the company’s toy business might be divvied up among multiple buyers. “I could see different owners of the U.S. and international businesses, and I could see different participants in stripping out some of the real estate,” said Matthew Fassler, an industry analyst at Goldman Sachs. Smith Barney’s Mr. Simms reckons the company’s toy business carries a market value of between $1.65 billion and $2.68 billion, but he adds he doesn’t know how much the unit could fetch, if sold. In recent years, Toys “R” Us has attempted to increase traffic by renovating its stores, in a much publicized effort termed “Mission Possible.” It also sold more exclusive products, expanded distribution by offering its products in supermarkets and experimented with larger formats offering entertainment and services such as children’s haircuts. But revenues have been stagnant for the last several years, with profits seesawing in a generally downward direction. The price wars turned bloodier last Christmas, and Toys “R” Us reported U.S. same- store sales fell 5.1% in the fiscal year ended Jan. 31, 2004. The toy industry has also been under pressure for some time due to changing toy tastes among children, who are migrating to electronic and computer games at earlier ages. But even in electronics, Toys “R” Us has also felt the heat from Best Buy Inc., Electronics Boutique and other videogame purveyors. Earlier this year, Toys “R” Us shuttered its 146 Kids “R” Us clothing stores and all 36 educationally oriented Imaginarium stores. The company sold most of the Kids “R” Us stores to Office Depot Inc. and said it would convert 14 of the remaining stores to the Babies “R” Us format over the next two years. Although Babies “R” Us may be thriving for the moment, Wal-Mart and rival Target Stores Inc. have both set their sights on that market as well. The giant discount chains have begun creating areas within their stores devoted to a broad array of baby merchandise, with strollers, car seats, cribs, clothes and food all in one section for easy shopping. –Game Over? Wal-Mart is beating up on the big toy chains that did the same to small toy stores two decades ago. — 1948 Charles Lazarus launches Children’s Supermart, which became Toys ” R” Us in 1978. PDF GENERATED BY SEARCH.PROQUEST.COM Page 4 of 6 — 1998 Wal-Mart overtakes Toys “R” Us as top toy retailer based on annual sales. Toys “R” Us ranks second followed by KMart, Target and KB Toys. — March 2001 Online seller eToys files for Chapter 11 bankruptcy protection (KB Toys buys the company later that year.) — January 2003 FAO Inc., parent company of FAO Schwarz, files for Chapter 11; it emerges from that status April 2003. — December 2003 FAO files for Chapter 11 again, closes Zany Brainy stores, some FAO Schwarz stores. — January 2004 KB Toys files for Chapter 11, closes hundreds of stores. — April 2004 KB Toys sells KBtoys.com and eToys.com, which account for about two-thirds of the company’s net revenue. — August 2004 Toys “R” Us says it is considering selling its chain of 1,200 stores. Market Share: Where U.S. Consumers Buy Toys ANNUAL ANNUAL 2002 2003 Mass merchandisers/discounters (Wal-Mart, Target) 47.3% 48.6% Toy stores (Toys “R” Us, KB Toys) 26.3 25.1 Specialty and hobby stores 8.8 7.0 Department/major chains (Macy’s) 2.1 2.5 Food/drug stores (Rite Aid, grocery stores) 2.6 2.5 Direct mail/online-only toy sellers 5.1 4.5 Other 7.7 9.8 * Percentages based on all toy industry sales in the U.S. for each year. Sources: NPD Group, NPD Funworld, Consumer Panel; WSJ research –Corrections &Amplifications WAL-MART STORES Inc. in the past has sold certain toys below cost, according to executives at toy manufacturers and retailers. A Marketplace article Thursday didn’t mean to imply that Wal-Mart sold all toys as loss leaders. (WSJ Aug. 17, 2004) PDF GENERATED BY SEARCH.PROQUEST.COM Page 5 of 6 DETAILS Subject: Competition; Market exit; Retail stores; Toys Company / organization: Name: Toys R Us Inc; Ticker: TOY; NAICS: 451120, 451110; DUNS: 00-698-5808 Classification: 8390: Retailing industry; 9190: United States Publication title: Wall Street Journal, Eastern edition; New York, N.Y. Pages: B.1 Publication year: 2004 Publication date: Aug 12, 2004 Publisher: Dow Jones &Company Inc Place of publication: New York, N.Y. Country of publication: United States, New York, N.Y. Publication subject: Business And Economics–Banking And Finance ISSN: 00999660 Source type: Newspapers Language of publication: English Document type: News ProQuest document ID: 398915428 Document URL: https://search.proquest.com/docview/398915428?accountid=30530 Copyright: Copyright (c) 2004, Dow Jones &Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission. Last updated: 2017-11-02 Database: US Newsstream Database copyright  2018 ProQuest LLC. All rights reserved. Terms and Conditions Contact ProQuest PDF GENERATED BY SEARCH.PROQUEST.COM Page 6 of 6 Toys R Somebody Else; Chain’s Sale Ignites Speculation About Direction, Strategy Michael Barbaro and Ben White . The Washington Post ; Washington, D.C. [Washington, D.C]18 Mar 2005: E.01. ProQuest document link ABSTRACT (ABSTRACT) In an interview, Toys R Us chief executive John H. Eyler Jr. said the three investors “believe in the Toys R Us brand” and that he expects they will leave the chain’s management largely untouched. Under Eyler’s watch the company has continued to lose ground to Wal- Mart, but has tried to battle back by renovating stores, striking exclusive product deals with toy companies and training its staff better. Toys R Us founder Charles Lazarus opened Children’s Bargain Town in Washington in 1948 and the first Toys R Us in Rockville nine years later. The company evolved into a powerful international toy vendor, with Kids R Us, Babies R Us and Toyrus.com. It operates 1,500 stores worldwide, including 681 Toys R Us and 218 Babies R Us stores in the United States. The Bentonville, Ark., retailer dethroned Toys R Us as the nation’s No. 1 toy seller in 1998. Today, Wal-Mart controls 22 percent of the U.S. toy market, compared with 17 percent for Toys R Us, according to Davidowitz &Associates Inc., a New York-based retail consulting firm. FULL TEXT Toys R Us Inc. executives yesterday said the company’s takeover by an investment consortium will help the pioneering toy retailer survive in an industry dominated by discounters such as Wal-Mart, and played down predictions that the new owners will sell off the business store by store. The nation’s second-largest toy retailer, which started 57 years ago with a store on 18th Street NW in the District, announced yesterday it had agreed to be bought for $6.6 billion by the private equity firms Bain Capital LLC and Kohlberg Kravis Roberts &Co., and by Vornado Realty Trust, one of the country’s largest owners of retail and office property. In an interview, Toys R Us chief executive John H. Eyler Jr. said the three investors “believe in the Toys R Us brand” and that he expects they will leave the chain’s management largely untouched. Under Eyler’s watch the company has continued to lose ground to Wal- Mart, but has tried to battle back by renovating stores, striking exclusive product deals with toy companies and training its staff better. “To the consumer, the message is that these new owners have embraced our strategy and Toys R Us is going to be around for a long time,” Eyler said. But analysts warned that Toys R Us still faces daunting challenges. Competition from much larger discount chains is only likely to stiffen, while changes in the way children play may force the store from the familiar territory of Barbies and Legos and further into the realm of digital entertainment. PDF GENERATED BY SEARCH.PROQUEST.COM Page 1 of 5 Jim Silver, publisher of ToyBook, an industry trade publication, said the retailer must “transform itself into a store that sells all forms of family entertainment,” from Legos to iPods. “Five years from now, we may find a Toys R Us with as many problems up against an even stronger Wal-Mart,” said Sean P. McGowan, a retail analyst at Harris Nesbitt Corp. The proposed sale of Toys R Us highlights the decline of the first generation of big-box retailers, whose strategy of swallowing an entire category of goods, such as toys or electronics, drove scores of mom-and-pop stores out of business beginning in the 1950s. Now, in a twist of fate, those same chains are under attack from discounters, warehouse clubs and, in some cases, more nimble imitators. Struggling electronics retailer Circuit City just fended off a takeover bid and investors in OfficeMax, the office supply store, are pressing managers to consider breaking up the company or selling it. Toys R Us founder Charles Lazarus opened Children’s Bargain Town in Washington in 1948 and the first Toys R Us in Rockville nine years later. The company evolved into a powerful international toy vendor, with Kids R Us, Babies R Us and Toyrus.com. It operates 1,500 stores worldwide, including 681 Toys R Us and 218 Babies R Us stores in the United States. Analysts predict a sell-off of more than 100 stores, noting that the company’s real estate can be as valuable as its toy business. Such sales could leave some of this region’s more valuable retail real estate up for grabs. Toys R Us operates about 20 stores in the region, many in prime shopping corridors. “The hidden value of Toys R Us is in its real estate,” said Steven B. Greenberg, president of the Greenberg Group, which advises retailers on real estate. Toys R Us owns about half of its stores – – a high percentage — and pays relatively low rents for the rest, making the properties ripe for resale or re-leasing, Greenberg said. But Eyler said the winning bidders’ final price reflected their interest in the Toys R Us business, not merely in its real estate. Competing alliances, which offered lower bids, had focused on the value of Toys R Us after “spitting out the pieces” and capitalizing on the land and leases it controls, he said. Those competing bidders “looked at the asset values,” Eyler said. “The KKR team looked at the future of the business.” Spokesmen for the three investment groups declined to comment on the acquisition beyond their official public statements. It is not clear if the new owners intend to keep Toys R Us as a public company or take it private. The acquisition price amounted to $26.75 a share and included a takeover of the company’s outstanding debt. Toys R Us closed yesterday up 1 percent, at $26. People close to the deal said the investors emerged as natural allies because each brought different strengths. Vornado is among the largest real estate owners in the country, with deep expertise in acquiring and selling retail space or converting it to other more lucrative uses. KKR, a longtime client of Toys R Us adviser Credit Suisse First Boston, is among the largest private equity firms in PDF GENERATED BY SEARCH.PROQUEST.COM Page 2 of 5 the nation and could take the lead in structuring an expected initial public offering of the Babies R Us franchise. Bain is viewed as having strong expertise in improving managerial operations at troubled companies. Sources close to the deal said Bain’s presence indicated that the acquirers would seek to restructure Toys R Us rather than liquidate it. Retail analysts predict the new owners will separate the more lucrative Babies R Us from its parent company and eventually spin it off as a separate public company. The baby division posted operating profit of $198 million in 2003, twice that of the company’s U.S. toy division. “I’d be very surprised if you don’t see Babies R Us as a public franchise in the near future,” said Gregg Tenser of NWQ Investment Management, which as of December owned 4.6 million Toys R Us shares. Analysts blame the bulk of the toy chain’s troubles on a single competitor: Wal-Mart. The Bentonville, Ark., retailer dethroned Toys R Us as the nation’s No. 1 toy seller in 1998. Today, Wal-Mart controls 22 percent of the U.S. toy market, compared with 17 percent for Toys R Us, according to Davidowitz &Associates Inc., a New York-based retail consulting firm. In 2000, Toys R Us lured Eyler away from competitor FAO Schwarz Inc. and tried to redefine itself. It built a new flagship store in New York’s Times Square, complete with an indoor Ferris wheel, and remodeled hundreds of stores, at a cost of about $600,000 each. But it could not stop Wal-Mart from beating it on toy prices. During the 2003 holiday shopping season, Wal-Mart undercut Toys R Us prices by an average of 20 percent, said ToyBook publisher Silver. Toys R Us scrambled to match those prices, a move that propped up sales but dampened profits. The chain’s profit fell 62 percent in its fiscal year 2003, to $88 million, and sales have remained flat at $11.6 billion. Other large toy chains have suffered even more. FAO Schwartz and KB Toys Inc. have filed for Chapter 11 bankruptcy protection, both citing competition from discounters. FAO recently emerged from bankruptcy, but now operates just two stores. Toys R Us has avoided that fate. Since 2003, the company has sold its 146-store Kids R Us clothing chain and closed 36 Imaginarium stores, which sold educational products. In early 2004, the company promised to cut spending by $175 million. White reported from New York. DETAILS Subject: Retailing industry; Investment companies; Acquisitions &mergers; Strategic planning Location: Washington DC PDF GENERATED BY SEARCH.PROQUEST.COM Page 3 of 5 Company / organization: Name: Bain Capital LLC; NAICS: 523110; SIC: 6799; Name: Kohlberg Kravis Roberts &Co; NAICS: 523110; SIC: 6020, 6720; DUNS: 06-022-3393; Name: Vornado Realty Trust; NAICS: 525930; Name: Toys R Us Inc; Ticker: TOY; NAICS: 451120, 451110; DUNS: 00-698-5808 Classification: 2310: Planning; 2330: Acquisitions &mergers; 8390: Retailing industry; 9190: United States Publication title: The Washington Post; Washington, D.C. Pages: E.01 Number of pages: 0 Publication year: 2005 Publication date: Mar 18, 2005 Section: FINANCIAL Publisher: WP Company LLC d/b/a The Washington Post Place of publication: Washington, D.C. Country of publication: United States, Washington, D.C. Publication subject: General Interest Periodicals–United States ISSN: 01908286 Source type: Newspapers Language of publication: English Document type: News ProQuest document ID: 409870234 Document URL: https://search.proquest.com/docview/409870234?accountid=30530 Copyright: Copyright The Washington Post Company Mar 18, 2005 Last updated: 2017-11-02 Database: US Newsstream Database copyright  2018 ProQuest LLC. All rights reserved. PDF GENERATED BY SEARCH.PROQUEST.COM Page 4 of 5 Terms and Conditions Contact ProQuest PDF GENERATED BY SEARCH.PROQUEST.COM Page 5 of 5
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