In fact, soon after this meeting, Mr. Moog quit; by August, the Benchmark deal unraveled. That left Mr. Nakasone, who had boasted that Toys "R" Us would become "the clear leader in the online retail market for toys and children's products by fourth quarter," with egg on his face and a lot of explaining to do to investors and the press.
Actually, the initial inability of Toys "R" Us to puzzle out the Web and to grasp how influential e-commerce would be should not have come as a surprise. After all, it was the second business transformation Toys "R" Us failed to respond to quickly enough. And the same root causes were responsible for both missteps.
At the heart of a retail dislocation when it first opened its doors in the late 1970s, Toys "R" Us was once a retailing revolutionary. But in later years, it forgot what had made it so noteworthy, as management quit taking chances and got so drunk on early success that it lost the focus to revisit and rewrite its basic business model to reflect changes in the retailing environment. In other words, Toys "R" Us stopped evolving its brand.
That's a sad reflection on a company that pioneered the category-killer concept when Charles Lazarus founded the chain in 1978. The idea at that time was to adapt the broad discounter model of Wal-Mart and the Kmart Corporation to a focused product line. These category killers, which eventually included Best Buy, Circuit City, Barnes & Noble, and Tower Records, among many others, relied on just-in-time logistics systems and vast amounts of customer data and buying power to offer a huge number of items at the lowest prices. Although margins were low, profitability was assured by turning over the inventory as many as five times a year.
Mr. Lazarus was able to keep Toys "R" Us a step ahead of imitators like Child World, but when he left the CEO slot in 1994 at the age of 69, the company began a slow downhill slide. His successor, longtime associate Mr. Goldstein, "just didn't have the instincts that Lazarus did and that every visionary does," a retailing analyst close to Toys "R" Us says. "Missing was that ability to anticipate what's changing around you and to immediately know the right reaction."
By that time, Toys "R" Us was facing two threats. One was that discounters like Wal-Mart, Kmart, and Target had added toys to their product mix. Today, more than 40 percent of toys are sold through discount stores, and only 23 percent at toy chains. And while their selections aren't expansive, these discount stores generally charge less and offer a more comfortable customer experience than Toys "R" Us, whose stores have aged badly, are poorly designed, and aren't known for knowledgeable salespeople. The second threat that emerged was a new breed of toy stores stressing educational and creative products — retailers like Imaginarium, Store of Knowledge, and Zany Brainy. Their price tags are higher, but they have excellent customer service and items that Toys "R" Us usually doesn't carry.
Mr. Goldstein, and his successor, Mr. Nakasone, who became CEO in 1998, reacted to these developments in all the wrong ways. To fight off the education-minded upstarts, in 1996, Toys "R" Us launched Concept 2000, an expensive plan to revamp its stores with a more open, less maze-like design and to add some higher-end products as well as features like photography studios, hair salons, and snack centers. After overhauling about 10 percent of its more than 1,500 stores, Toys "R" Us scrapped Concept 2000; it didn't attract enough additional customers to make up for the cost.