FULL TRANSCRIPT: Marketplace’s conversation with Toys "R" Us CEO Jerry Storch

Kai Ryssdal Dec 6, 2010

FULL TRANSCRIPT: Marketplace’s conversation with Toys "R" Us CEO Jerry Storch

Kai Ryssdal Dec 6, 2010

Kai Ryssdal: Jerry Storch, good to have you with us.

Jerry Storch: It’s great to be here.

Ryssdal: You must think nice happy thoughts when you walk into the store on a mid week, at 2 in the afternoon and it’s just packed?

Storch: Well mostly it’s the smiles on the kids’ faces that can’t help but give you a great lift.

Ryssdal: It’s crazy. It’s all that is consumerism in America.

Storch: Well it’s not just consumerism. It’s the joy that you see when they’re playing with a toy that has an educational component. There’s excitement to it and of course, there’s consumerism too.

Ryssdal: Yeah. How are you doing this year over last? I mean, can we just talk sales and recession and economy for a second.

Storch: Well toys tend to hold pretty well in a recession and Toys “R” Us in particular has done very well because we have the products that the parents want. And when it comes to the Christmas season, the last thing parents want to cut back on is that Christmas present for their child. And at Toys “R” Us, we have the toys that wow. We have the better toys. We have a broader assortment. We really focus on having the special products. We focus on being in stock on the hot products all the way through Christmas. So we see parents come here; sometimes they only come once a year to Toys “R” Us, but they come for that Christmas present.

Ryssdal: Well if parents only come once a year, what do you do the other eleven months out of the year? How do you get people in the door?

Storch: Well we do have a strong, loyal group of customers too who come quite a bit more often. So they don’t come every week.

Ryssdal: I wanted to ask you about that hot toy concept you mentioned because you have taken this store and you have decided that you’re not going to sell what’s hot; you’re going to take something and make it hot so that people can only get it here. You are going to run it; I think the quote I saw of yours was “like a fashion house”. You decide what’s hot and by God you’re going to sell that.

Storch: We do both and when I say we decide what’s hot, we don’t manufacture the idea. We have hundreds of buyers around the world who work only on toys. And so we believe that we are uniquely positioned to identify the best products. And so we’ll find a product that could be in Japan, it could be in Germany, it could be here in the United States. We’ll find a product that we think is fantastic so we’ll make sure the customer knows that. We expose it to them and we talk about it a lot so they can see why it’s so great. So that’s what we mean by betting on the hot toy, betting on the fashion.

Ryssdal: So to go back to last year, the hot toy last year, those Zhu Zhu pet things?

Storch: No doubt about it.

Ryssdal: You’re the guy to blame for three of those things in my house.

Storch: Well, you could get more than that.

Ryssdal: No, we got the little “habitrail” thing that they use. I mean, we got the whole smash in my house.

Storch: They’re wonderful. They’re cute. They’re fantastic.

Ryssdal: And you found them and you made them hot.

Storch: We made sure that we talked about them to everyone. We bought a lot of them. We made sure that we were in stock all the way to Christmas, which again, is what we pride ourselves on, and the parents came. This year, there are other hot products.

Ryssdal: As long as we are on that, give me the inside line here. What do I have to go buy?

Storch: Well, a couple of my favorites, the La-La-Loopsy doll is something that kind of came out of nowhere and has burst onto the scene as this years’ must have doll. And it’s a cute doll; it looks like the kind of thing that your mother might have sewn for you even though the components are made of space-age materials. It’s doing fantastic.

Ryssdal: Do you get a vote in what is the hot toy that you are going to push or do you have a chief buyer who says, “No Jerry, we need to do this one, not that one.”

Storch: We have a team of buyers. We actually do have a meeting where we sit around the room and we look at the toys. And you could make a movie about this or a reality show, and we look at them and say, “This one’s great! This one’s terrible! This is the one we’re going to back. You know, this one we don’t care for this one.” We bring kids in. My son comes in very often.

Ryssdal: How old is your son?

Storch: He’s now 14, so he’s been doing this for awhile. And we try to get a lot of input on what has that pizzazz factor. Usually, we find that it is something that has that unique technology factor or is just so dang cute that you look at it and you have to have it.

Ryssdal: So here’s this cynic in me, right? Nobody needs anything that’s in this store. You don’t have to have anything that’s in this store and yet, people come.

Storch: To me, I think that it’s one of the great necessities in life is toys for your children. Certainly fun in and of itself is enough of a reason, but there is study after study after study which showing that children learn from their toys. You don’t know how many times I’ll go and visit with executives of a major American corporation, or with politicians or with doctors or lawyers and they start talking about the role that toys played in their childhood and in their development. They remember, to a person, the toys they played with and the influence they had on them.

Ryssdal: This company was for many years the biggest toy retailer in the country. You sold more, you had volume and all of that stuff. And then along came these companies named Wal-Mart and Target, and took your lessons of big box and low margins but high volume and took you out of the game a little bit. How do you do now what nobody else has really been able to do which is steal back business from Wal-Mart and say “We’re going to do this better”!?

Storch: We have a lot of respect for our competitors but principally they are limited-assortment discount chains, which means they don’t carry the breadth of product which we carry. There is no confusion when you ask our customers, “Why do you come to us?” They come because we have more toys. We have the better toys and we’re in stock on the toys. That’s why you come to any specialty player in retail so customers come to us because of the product. They want what we have to sell. Beyond that, we have service in our stores. We have people who work in our stores who understand the product, who know what’s the right toy for a seven year old girl. And let me tell you, if you have a seven year old girl you’ll know the truth of what I say here. If you get something for a seven year old that’s really built for a five year old and you give that as a present, she’ll look at it and she’ll say, “What do you think I am, A baby?!” And if you get something that’s too old for the child, they’ll also be bored with that. You might as well have bought them a sweater with little knits all over it as opposed to a toy because they want something that’s appropriate for them. Our people can answer that question.

Ryssdal: But here’s the thing, this is an amazing store! I mean, it’s got a four-story Ferris wheel,it’s got a roaring dinosaur in the background, it’s got everything you could want in a toy store. This is not your typical Toys “R” Us. When I go to the one near me in Burbank, it’s disheveled looking, the staff is less than completely well-trained, it’s not always the most pleasant experience. And you hear those stories over and over again. What do you do with those stores of yours that don’t meet the code?

Storch: Well first of all let me tell you, we have twenty five million children a year visit Toys “R” Us. And if you have one or two children and you need to clean up after them, you might have some idea what it’s like when you have twenty five million children a visiting your place. And so we do a lot of work to keep our stores nice but part of the joy is the fact that there is a scavenger hunt. There is something for everyone. There is something everywhere in the store. I like it when children hop on to the bicycle and ride it around the store. That’s OK with me that they are interacting with the product. I remember one time I was in a store in Los Angeles and La Cienega and I saw this child and this Grandparent and this mother, and they had brought their own folding chairs and they were sitting in front of a display of Tickle Me Elmos. And this was their Saturday recreation; they had come to the Toys “R” Us store. And the young child would run up to Elmo, push the demonstration hand and Elmo would start laughing. And the child would break out laughing! Then you say, “OK, that’s done.” Well no, not for this young man, he’d go up and push Elmo’s hand again. Elmo would laugh again, and he’d laugh again like the first time he’d ever heard it! That’s the beauty and the joy of a Toys “R” Us. And when you ask customers and you do the research, you know, “How do you view the Toys “R” Us?” To the parents, they view it as the place that has everything. To the child, it is right up there with Disney World. It’s a place of enjoyment. We’re here in Times Square today and this store of course, is unique in the world. It’s the largest toy store in the world. It’s one of the top five tourist destinations in Manhattan! People come and visit the Toys “R” Us store here. While every store around the country doesn’t have all the props and everything, they all have feature shops and great giant displays. And when a child stands in front of Barbie or Iron Man, and larger than life, even if it’s made principally out of cardboard, to them,they’re at the amusement park. And that’s what is so beautiful, the child’s imagination and that’s what we work on. Meanwhile, we’re working to renovate all our stores and we are about a third of the way through the chain. We’ve been modernizing them. We’ve hired some of the best people in the retail industry to do this. I can point to different sources in different markets you might want to visit so that you can see what those are like. They are every bit as neat and great and cool as if they were built just yesterday. And yet they still have this interactive component, they still have the reality that you’ve got millions of kids going through these stores.

Ryssdal: I get all that and I appreciate that you try to make a positive out of this feature of your stores, but how long can you afford to have parents and potential customers walk in and wander around aimlessly for twenty minutes trying to find Candyland or whatever the game is, get frustrated and leave?

Storch: Well again, our customer satisfaction scores are up tremendously in the last few years. I came here about five years ago and we watch it every year. We measure it and we manage to it. And our customers are telling us that we are improving tremendously and getting better every year. Year after year after year we measure it, we reward our team members based upon it and we train to it. We have interactive on-line training for our team. We work with people to get the right product knowledge as well as service knowledge. I would challenge you to find a limited assortment mass merchant where the people in the store know as much about the product as our people know about toys.

Ryssdal: You are an old retail guy and came from the Target Corporation to Toys “R” Us five-ish years ago. So you can sell stuff but how do you sell toys? Why did you get this job?

Storch: Well I love toys and when I heard about this opportunity, I thought about the brand name was one of the best known in the world. You would need to spend billions and billions of dollars to create anything like the Toys “R” Us brand name. It has 100% brand name recognition. There are few other consumer brands that come anywhere close. And not only that, people like it. When you mention Toys “R” Us and a smile comes on everyone’s face because that’s where we got our toys when we were kids. Toys “R” Us has been around for sixty two years! So most of us, even Grandparents, they got their toys from Toys “R” Us. So people love the brand and so there’s a lot to work with here and as we continue to improve and offer products that you can’t find anywhere else in the world, we continue to grow and grab back market share.

Ryssdal: Who’s your customer? Is it the seven-year-old girl who wants the doll or is it the parent who has got to pay the money?

Storch: You know, it’s them and it’s the Grandparents. It’s everyone. And usually what you see is that the parent takes the child to the store and they make the decision together. Now, when it comes to Christmas time, what you find is the parents walking around the store with our Big Book in hand or another one of our advertising pieces; and the pages are often very heavily dog-eared and with little circles in crayon on them as to which products people want to buy or they’ve checked off in the little check me box the products that they want. And the parents are looking for the products that their children have selected. So it’s a joint exercise between the parent and the child. I wanted to mention this because of the time we have to interview, this year we have the second Big Book and usually we launch our Big Book around Halloween time at the very, very beginning of the season and it contains all the years toys and kids go through it and they pick the toys they want and they give it to their parents. But we’ve seen usually that the sales come much later from Black Friday forward and into December. So this year starting this coming Sunday on December 5, we’re launching our biggest Christmas sale ever. And we have a Big Book that’s just as big as our original Big Book and it’s got all of the hot toys of the season. Just in case you didn’t keep the one that came out a month ago. And again, kids and parents can pick out the toys they want together and go in the stores and find them and these are the toys that we have now and will be in stock on all the way to Christmas.

Ryssdal: Isn’t it just too much though?

Storch: I don’t think it’s too much when you think of the smile on the child’s face on Christmas morning. And the toy is not trousers. A toy is not tomatoes. This is not a commodity. We are certainly in love with toys because we see the greater value they create beyond simply a moment, which is a great moment when a kid opens up the present and they see what they got for Christmas and they are so excited! But it’s the joy of all they time they play with it afterward, the learning that they get from it, the development they get from the toy, the imagination, the development of the creativity that occurs,that’s what toys are all about. I don’t think it can be too much given the importance to the life of the child.

Ryssdal: The toy market though,sales are shrinking, sales are down. Kids have more options these days, there’s electronic this and gadget that. In my house if I bought an I-pad, I would never have to buy another toy. I mean there’s so many distractions for kids. How do you get them to the old-fashioned sit on the floor and play with this toy?

Storch: Well you know, toys are not shrinking. The toy market has been growing now and I believe Toys “R” Us has a lot to do with that. Kids love toys. Last year’s hot toy you mentioned earlier was Zhu Zhu pets. It was a little hamster! Yes there is technology in it but it wasn’t a computer, it was a hamster. This year, I mentioned one earlier that it might be La-La Loopsy the doll. Squinkies,these cute little eraser heads that come in an infinite number of characters is also one of the hot toys of the year. There is no limit on creativity. The toy market is not inherently a growing or a shrinking market. The growth comes from what we put into it, from whether we develop the products that people want. The obligation of any marketer or any retailer is to provide the customer with what they want. So we sell I-Pods. We love I-Pods. It’s a great product. we sell a lot of them. So meanwhile, lots of kids want a stuffed animal too, or a hamster, or a Squinkies, or a La-La-Loopsy, or Dance Star Mickey is one of the great toys we have this year. This is a Mickey Mouse who dances and sings to you. Now, you can’t tell me, as cynical as you are, that you wouldn’t like you own Mickey Mouse that dances and tells stories to you!

Ryssdal: Yeah,no. But O.K., I’ll accept your premise. What then is next for this company? Is it just more, more, more?

Storch: Well we want to keep getting better and we are working hard to make sure that we’re available for everyone so we have one of the best and the biggest internet sites in Toys “R” Us .com. We just came off a fantastic cyber-Monday! Thanksgiving Day was strong. Black Friday was strong. On line,you know people love shopping for toys on line and we have them at Toys “R” Us .com. We are the toy authority,we have the best toys in the world and it’s been doing great. It’s one of the first business-to-consumer websites and continues to be one of the fastest growing to this day. So we are thrilled we reach customers that way. This year we open 600 stores in malls and shopping centers around the country. These express store which are smaller stores, to more than double the number of physical locations where you can shop for Toys “R” Us and meanwhile, we’ve been renovating our standard toy stores and offering better and better products every year. So I don’t believe there’s any limit to what we can do. We start with one of the best customers in the world,parents and kids. As long as we stay focused on meeting their needs and having products that you cannot get anywhere but at Toys “R” Us, then the customers will come.

Ryssdal: I wanted to ask you about one of the things you’ve been doing lately to increase shelf space at low cost to you and in theory, greater convenience to consumers,the pop-up store, or temporary stores as you call them, the express stores,taking unused retail space and setting up for a month or a season and getting people in and out and bang. It’s been very successful for you.

Storch: Last year, we opened 90 express stores. This year 600 express stores in major malls and shopping centers around the country, more than double the number of locations you can shop at Toys “R” Us. Customers tell us they love it not for the major toy shopping event of the season but for that extra convenience toy purchase when they might be at the mall shopping their major Department store and they say, “Oh my God, I forgot that present for cousin Jimmy.” They can go into a Toys Express and get that last second gift and come out whole without having to make a special trip to a discount store or to a Toys “R” Us off the mall to do their shopping. So it’s for the convenience of the customers we feel is an extra occasion different than what was there before. There used to be a toy store in every mall in the country. Those have faded away. And we bought KB Toys last year and we used some of the knowledge and skill of that team to launch this initiative where we have toy stores in malls around the country.

Ryssdal: Do some of them become permanent? Do they merit that based on business?

Storch: Some of these stores will in fact become permanent. Last year, of the ninety stores we opened in our pilot of the Express strategy, thirty remained opened year round. So you can calculate it for yourself, out of 600 stores it’s possible that we’ll see if they remain opened year round. We’ll judge that after the Holiday when we see their success and in discussions with our customers and with our landlords.

Ryssdal: I had a conversation in this series with Alan Mulally, the CEO of Ford and there was a time when the automotive industry was in a little bit of trouble. So it’s an apples to oranges comparison but one of the things he said was, “We would rather be small and profitable than have huge market share and lose money.” Are you satisfied with being number two or three to Wal-Mart and Target so long as you have your dedicated customer base and they get those toys that you say you always have in stock?

Storch: You know there is no particular value in absolute market share. That doesn’t matter to us. What’s important to us is to satisfy the needs of the customer. We have been growing. We have been growing market share according to every report that I’ve been seeing for several years in a row. We are pleased with where we are right now in the United States. We are also in 33 other countries around the world and we are always number one or number two in every market including the U.S. in toys. And so on a global basis, we’re certainly the most important player in the toy business and we certainly know more about toys than anyone. So I’m focused on meeting the needs of the customer in the United States, in Canada, in Japan, and in France, Germany, and in Spain, and the U.K. and in every country in which we operate. And if we do that right, then we don’t have to worry about market share. Then that’s just a numerator and denominator, it’s not an end product.

Ryssdal: You’ve said a couple of times that things are going smashingly well for this company in almost every regard. I have to ask you then about your IPO filing. This is a privately held company. You’ve filed for an IPO a number of months ago, and yet you haven’t actually gone into the stock market yet. Why not?

Storch: Right now we are focused on Squinkies, La-La-Loopsy dolls and meeting the needs of our customers for the Holiday season.

Ryssdal: Right. You get through Christmas and then what do you do?

Storch: We’ll get through Christmas and then we’ll be focused on going to Hong Kong and going to Germany and making sure we get the best toys and the right toys for the future. Financing always takes care of itself in business. If you do the right things for your customer and if you manage your business correctly, the question of your debt or your equity or your capitalization,that’s all for the bookkeepers. That has nothing to do with what we do on a day-to-day basis or our strategy or our future. Our financial strategy is totally derivative of success in the business of meeting the needs of the customer. As long as you do that, the rest of it is kind of interesting background chatter.

Ryssdal: So are you making money now?

Storch: We are pleased with how we are doing. We just came off Black Friday. We’re sitting here in Times Square. There were approximately fifteen hundred people lined up outside this store when we opened for Black Friday at 10 PM on Thursday night. They stretched out that door, down Broadway, down 45th Street, across 6th Avenue. It took almost two hours to even enter the stores so I invite you to come back here next Black Friday and enjoy the experience.

Ryssdal: I wouldn’t be caught dead and I’m going to go back to you thinking I’m a horrible cynic here but,people lining up at 10:00 on a Thursday night at a toy store. Does that make sense?

Storch: I think you’re Scrooge! You need to look at the smiles on the faces of the people in the stores. Walk around the store right now! And we’re sitting here as we are having this discussion, it’s not Black Friday but it’s still pretty busy as you may notice.

Ryssdal: It’s a Wednesday afternoon at two o’clock and it’s packed.

Storch: They’re having fun. That’s the main thing to me. At ten o’clock on Black Friday night when the doors opened and the customers came rushing through the door, in a remarkably orderly fashion I might add. They came rushing through the door, they were happy. They were having fun! I’ve said this before,you know shopping is a form of recreation for people. They enjoy it. It’s an opportunity to take everything we work for all year long, all that hard work and the money that we generate and deter it into something that provides additional values. So in this case, they’re buying toys for their children. It was fun! It was a carnival-like atmosphere. It was positive and exciting, even exhilarating. Any day, any day of the week if I’m feeling a little glum about anything, all I have to do is put on my Toys “R” Us shirt, don a pair of khaki pants and go out on the floor and start working. And it takes about fifteen minutes before the joy that’s on the children’s faces and the excitement on the parent’s faces when they find just the right toy for their child, when that takes over. And all you can think about is just how much fun it is.

Storch: I actually encourage you to try it some time. We’ll invite you to come here and you can join me on the floor

Ryssdal: Retail is not my thing, I have a checkered history with that.

Storch: Oh, I know but I invite you to come to the store and walk around the store. Watch the magic as it unfolds. People are buying toys here, this is all about toys. You know, we all love those movies where you see all the movies about fantasizing about toys. We own F.A.O. Schwartz and so you recall that movie Big with Tom Hanks?…

Ryssdal: Oh yeah!

Storch: …And we have that big piano over at F.A.O. Schwartz. And we sell, by the way, a version of that piano that you can,that’s one of our best selling products F.A.O. Schwartz piano products that you can buy! Well, there is a magic in toys. There is a joy in that and that’s a lot of the reason why we’re all in this business. And you know, tonight when we are done here, I’m going to a benefit for kids in distressed situations and the entire industry will be there. We have a Toys “R” Us foundation and it is one of the biggest events of the entire year in New York City. It’s right across the street here at the Marriott. We have our foundation gala. Everyone in the toy industry is there! Why are they there?, because everyone in this industry loves kids. Because you wouldn’t do this otherwise, it’s too much work.

Ryssdal: Take me through the process of that La-La-Loopsy Doll and how it got onto your list of let’s make this hot and sell it. Did you have some buyer at a Hong Kong toy show who said, “I’ve got to get on the line to the home office about this”?

Storch: There are toy fairs all over the world, there are manufacturers all over the world. We know there are certain products that are going to sell well every year. In the doll category, Barbie has been doing great! Barbie is an evergreen property. There was a little bit of a tough period for her a few years back but now she has been doing great. Everybody wants Barbie so we know Barbie is going to be strong but everyone is going to have Barbie so we look for what else is there? What else can you find? So we saw the La-La-Loopsy Doll which is made by the company that used to make Bratz so it’s not a small company but it’s not one of the biggest anymore. And we saw that doll and we fell in love with it from the beginning. So we said, “We want it.” We even said, “We’ll take all of it, everything your factory can make” you know like in the movies where they say, “We want everything you can make!” you know like that so we did, we bought it big, we bought a ton. We knew it was a great product. To some extent, fashion is all about taking risks so we took a risk that it was going to sell. Sometimes it doesn’t but in this case, the kids love the doll. Now we have some of the best doll buyers in the world. They know more about dolls than anyone on the planet so when they see a doll, they can evaluate it, they look at it, they see things in it that you or I could never see. They can tell you why it’s special, why children will enjoy it or they can say, “No, that’s nothing special. There have been hundreds like them before” and why they won’t work. But when everyone saw this La-La-Loopsy doll, everyone agreed that this is just great. So we backed it. It’s selling wonderfully and we are going to be in stock all the way through Christmas.

Ryssdal: What does that mean that you backed it? Did you put money into the company making it?

Storch: No, we bought a lot of product so we’ll be in stock all the way through Christmas.

Ryssdal: Think back to when you were a kid since we’ve been talking about kids all the way through this chat, what was your favorite toy?

Storch: I had this Carom board. And you can still buy it at Toys “R” Us.

Ryssdal: What is it?

Storch: A Carom board, it was a wooden board and it had two sides to it. On one side you could play Chess and Checkers and you could flip it over and you could play a game it was called Carom. It was kind-of like pool with some little disks. And it was just so, it was fun and you could do lots of things and again,Chess still sells today. You know, Chess has been around for over a thousand years and it’s still on the floor out here today.

Ryssdal: Is it a big seller or is it just one of those evergreens, right?

Storch: It’s definitely an evergreen but we have a number of different Chess sets, you know different tiers. And every year I can guarantee you, it’s still going to be a good seller. It doesn’t spike, you don’t get like that big rush for the Chess set at the last second but if I were buying for a child, I would tell you that it’s one of the first things that I would think about because I love the intellectual and educational component.

Ryssdal: Jerry Storch, Chairman and CEO of Toys “R” Us. Mr. Storch, thanks a lot for your time.

Storch: Thank You!

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