Last summer, Toys ‘R’ Us shuttered the toy retailer’s famed FAO Schwarz store. Less than half a year later, itclosed the iconic Toys ‘R’ Us flagship location in Times Square. There’s a simple reason: They were money losers.
“If the definition of a flagship store is you are going to lose a lot of money, I’m not big on flagship stores,” said Toys ‘R’ Us Chief Executive David Brandon during this year’s Fortune Brainstorm TECH conference. He explained that traditional flagship stores—massive behemoth locations with several floors full of inventory—can’t always afford to be profitable these days. At least not in the toy industry, where average orders are too small and margins are too thin to make money.
There’s a reason why Toys ‘R’ Us needs to be purposeful about how it invests these days. It operates in the very competitive $19.4 billion U.S. toy market whereWalmart WMT 0.07% , Target TGT 0.18% duke it out in the brick-and-mortar side of the business. AddAmazon.com AMZN 0.32% into the mix, and you’ve got an even more competitive e-commerce rivalry. Brandon says Toys ‘R’ Us generates about $1.4 billion in annual revenue from the website today, but he admits that business should be “double or triple” that size.
That explains why Brandon finds himself at a tech conference. Toys ‘R’ Us is a specialty retailer that generates billions by selling dolls, toy cars, action figures and bikes. But it needs to think more digitally than ever before it if wants to stay competitive, especially as a specialty retailer with such a narrow focus.