I. Summary of Cases
A. FAO Schwarz
The 142-year-old toy company was forced to closed shop on that year after it declared bankruptcy twice in 2003. FAO Schwarz got into financial trouble after it could not keep up with the heavy price discounts offered on toys by Wal-Mart and Target. They were selling toys that were pricier than those also being sold by the two chain store giants.
But the turnaround for the toy firm came when new management came in, making it possible for the reopening of its Manhattan and Las Vegas stores. The new owners attributed their success to going back to what the toy company had offered way back when it first opened its doors in 1862-- and that is, being a toy specialty store selling ``high-end, hard to find toys and products.'' The new owners also extended ``outstanding customer service.''
B. Toys `R' Us
Just like FAO Schwarz, Toys `R' Us found itself losing much money from intense price competition coming from retail giants Wal-Mart and Target. The toy store reduced prices of its toys in 2004 that it lost $25 million for a three-month period ending in October. The amount of money lost during that period was less than the $46 million loss in the same period last year. But this was only because the toy company resorted to huge cost-cutting measures to cut its losses.
1. Why did FAO Inc. have to declare bankruptcy?
FAO Inc. had to declare bankruptcy twice because it was not able to keep up with the price discounts offered by retail giants Wal-Mart and Target. An article by the National Real Estate Investor on Feb.1, 2003 reported that the toy company filed for bankruptcy on January that year and planned to close 75 to 80 stores or``nearly one-third of its outlets.''
It said the company was facing ``fierce'' competition from Toys `R' Us and Wal-Mart. Prior to its second bankruptcy declaration, the toy company was again reported in deep financial trouble in November 2003. A Nov.10, 2003 report from Puget Sound Business Journal quoted the lenders of the company as saying that the latter could not meet its loan payments and the banks will no longer extend them credit.
The same article noted that while the company was able to get out of its first bankruptcy in January, the effort to save it ``faltered.'' In September that year, the company lost $18.8 million in its most recent quarter ``on sales that were down nearly 53 percent to $46.3 million.
2. Describe the issues with FAO’s original business model.
FAO's original business model was simple. When it first opened in 1862, it was a toy specialty store selling unique items to its customer. Through its original owner, German immigrant, Frederick August Otto (FAO) Schwarz and his brothers, their first store offered hard-to-find German toys, according to a Feb. 1, 2008 article from Kids Today titled `` Rebuilding an Icon: FAO Schwarz.'' The toy company was also the first one to come out with a toy catalog in the United States in 1878.
3. Identify the toy retailer’s new business model. Do you believe it will keep the new company in business? Why or why not?
Under the new management, the toy company drifted back to its original business model. That is, it went back to being a toy specialty store, offering hard-to-find items. Even if these items are pricey or not, it made sure it was a store to go for customers on the haunt for rare and unique toys.
This kind of exclusivity made FAO Schwarz an imposing figure in the toy industry because the company was no longer competing alongside retail stores like Wal-Mart since it no longer carries mainstream toys. It also helped that the new owners opened again its store on Fifth avenue in New York because as FAO chief executive officer Jerry Welch said that address was something ``people all over the world know.''
I believe going back to the original business model was a good move for the company. This had been its winning formula since opening more than two centuries ago. The company had been able to find, develop and keep a special group of customers for centuries. And this niche or specialized market had made its business successful. So it was only make sense to continue on with this business strategy. In sum, if it ain't broke, don't fix it.
4. What strategy can Toys `R' Us follow that will help it compare with the big discount chains like Wal-Mart and Target?
I think it would help if Toys `R' Us adopt the business strategy of FAO Schwarz. It shared the same problem of FAO Schwarz in a way that it could not keep up with the price competition from big discount retail stores like Wal-Mart and Target.
Since Toys `R' Us carry more items than Wal-Mart, it can also keep a line of toys that are hard-to-find and exclusive to some customers. The toy company should take up the offer of Mattel and Hosbro to sell some of their exclusive items. In this way, while the toy firm sell mainstream items, it also offer hard-to-find and unique toys. In some ways, it was like killing two birds in one stone. The toy firm would be offering variety. This is better than just going the way of retail giants like Wal-Mart which sells mainstream items. This proven that it could not keep up with their pricing.
D. Significant points
One of the interesting points of the readings on FAO Schwarz and Toys `R' Us had to do with the fact that a business strategy does not work necessarily for all firms. FAO Schwarz tried to keep up with the competition -that is discount retail giants like Wal-Mart – by slashing its prices. This only led to the company to gain more losses. But when it went back to its old business strategy of catering to specialized customers, business boomed again. Another interesting point was that once a niche is developed, or in this case a specialized market for one's wares, it can be tapped anew. This was shown when FAO Schwarz was able to get back its old customers when the toy firm re-entered the hard-to-find toy market.
Kasinger, L. (2008). Rebuilding an Icon: FAO Schwarz. Kids Today.
Phillips, H. B. (2008). Business Driven Technology, 2nd Ed. Columbus: The McGraw-Hill Companies.
Valley, M. (2003). Retailers Have New Resolve: Pare Down or Perish. Seattle: Puget Sound Business Journal.