Toys R Us Needs a Business Model Makeover: Roth

Shopper at Toys R Us
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Shopper at Toys R Us

On Friday, Toys "R" Us Inc. pulled its IPO offering, facing year-over-year quarterly declines in revenues, profits and comparable store sales. However, these are only symptoms of a larger issue facing the chain: a business model in desperate need of an overhaul.

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When I was growing up in the 1970s and 1980s, Toys R Us was the "world's greatest toy store", bar none. I can't think of a place that my adolescent self would have rather spent time. The stores were packed with every toy and kids' entertainment product imaginable. Walking up and down each long warehouse-style aisles to view items from bicycles to dolls to crafts and building sets was entertainment.

Today, there are electronic gadgets and video games galore competing for kids' attention. In addition to the attention issue, Toys R Us has to contend with one-stop shops like Wal-Mart that use certain brand-name toys as a "loss leader" (i.e. they sell these products at little to no profit, or even take a loss on them, in order to entice people into their stores to purchase other higher-margin items), as well as where toys can be purchased at low prices from the convenience of one's home.

With all of these shifts in the landscape, Toys R Us has lost its relevance. While it used to be entertainment to shop the store, now with so many other sources of entertainment, there is no critical pull into the Toys R Us store. While any kid would still love to go there (and let's call it like it is, kids are greedy monsters, they will go anywhere they can score a toy), busy parents don't want to have to make an extra stop to purchase toys and prefer the one-stop-shopping appeal of Wal-Mart, Target and other mass retailers where they can kill many birds with one stone, and/or the low pricing and home shopping convenience of Amazon.

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Toys R Us needs to give kids and their parents a reason to need to go to the store or to use its website, above and beyond the draw of its current toy offerings. I have a few suggestions to accomplish this much needed change in their business model.

Offline and online, Toys R Us needs to transform from a pure retailer to an entertainment draw. In store, TRU must create a proprietary on-site entertainment option that is only available in their stores to create a need to go there. TRU should carve out some square footage dedicated to interactive experiences. American Girl has created an entire business out of this. TRU needs that type of draw- it's much easier for TRU to sell their core toy products when there are people inside their stores.

An adjunct to the transformation to an entertainment venue could be implementing an on-site birthday party program. TRU has already recognized the importance of birthdays with their website. They need to take it further. Every kid in America has a birthday each year and a large percentage of those kids have birthday parties, each inviting a few or even dozens of kids to attend their party. What kid wouldn't want a birthday party in a toy mecca? By carving out square footage in the back of the store for a party room and implementing toy and entertainment-themed parties based on various age groups Toys R Us can boost traffic at each location. Having parents walk their children through the store to attend a party is a sure fire way to get additional sales.

Also, Toys R Us can cater to attending parents' busy schedules by offering a birthday gift service. The parent can go online or phone the store and choose a gift in their desired price range for the birthday girl or boy. Toys R Us can wrap the gift and the parent would be able to pick it up on-site the day of the party or have it delivered directly to the party room, allowing the parent to avoid a separate shopping trip. This would ensure that TRU captures a large percentage of the birthday purchases instead of having them go to competitors and generate incremental revenue from upselling gift-wrapping services.

Online, TRU must also transform from a retailer and information resource to an entertainment venue. It can highlight exclusive products or characters and create a reason for kids and their parents to interact with the site. Although parents are ultimately making the purchases, having the kids becoming engaged with Toys R Us as a brand is critical to its success.

Finally, both online and offline, TRU must cultivate partnerships with collaborative partners for more TRU must-have exclusives. They should use what Target has done with fashion designers ranging from Missoni to Jason Wu as a model for the toy business. More brand collaborations with both existing and new brand partners will also inject life—and traffic—into the stores and website.

Times have changed and so has the toy business.

Toys R Us needs to create an entertainment draw for its online and offline business in order for the concept to be competitive vis-a-vis all the other options competing for kids and parents time these days.

Carol Roth, CNBCContributor, Radio Host and Former Investment Banker.