Sales Failure: Toys-R-Us Lost the E-Commerce Game
Why You Should Never Outsource Your Competitive Advantage
In 2000, Toys-R-Us made a critical mistake that would ultimately lead to its downfall. Instead of building its own e-commerce platform, it outsourced its online sales to Amazon, believing this partnership would give it a strong online presence without the hassle of running its own website. For a few years, the deal seemed to work. But then, Amazon started selling competing toys on its platform, gradually taking control of the online toy market. By the time Toys-R-Us realized its mistake, it was too late. The company never recovered its e-commerce foothold, and in 2017, it filed for bankruptcy.
Toys-R-Us’ failure was not just about trusting the wrong partner, it was about failing to adapt to changing consumer behavior, handing over its competitive advantage, and underestimating the power of e-commerce. Today, we will break down three critical lessons from this failure and what founders can learn about owning their sales channels before it is too late.
Do Not Rely on a Partner for Your Core Business
Toys-R-Us was the dominant toy retailer of the 1990s, but as e-commerce grew, it failed to develop its own online presence. Instead, it trusted Amazon to handle its digital sales, believing it would be a seamless way to transition into e-commerce. Trial e-commerce with a partner would have been fine. You need to find ways to test new markets. But over the long-term you want to ensure that you have control over the platform. Yes, start on a platform, but build your own when you know the that is the path forward. Consider these keys that Toys-R-Us missed:
They handed over their direct customer relationships. Instead of owning customer data and engagement, they let Amazon control the online shopping experience.
Even when you outside parts of your platform you need to know the customer data.
What do they like?
What do they dislike?
What engages them with your content?
They assumed Amazon would remain loyal. Amazon initially agreed to be the exclusive online seller for Toys-R-Us, but later, Amazon started selling competing toys, directly undercutting them.
While it may seem dark to assume, but assume that someone will always try to undercut your deals. How can you build the best relationship with the customer?
Again, this is why you need the direct customer engagement and data.
They underestimated the importance of e-commerce. Toys-R-Us treated online sales as an afterthought, while Amazon treated it as the future.
See where the market is going and prepare your business to move in that direction.
What does this mean for your business?
If something is core to your business, do not outsource it own it.
Even if you trial it on someone else platform have a long term plant to own your own platform.
Be cautious when partnering with larger companies that could become your competitors.
Do not put all your eggs in one basket. Have a back-up plan, or two.
Maintain direct relationships with your customers whenever possible.
Customer insight and data is key to your success. Collect as much of it as you can directly.
Remember the more layers you put in the middle the more you end up in a game of telephone. Then you may never know what the customer really wants.
E-Commerce Is Not Optional It is Essential
Today this actually seems like a dumb thing to even say. We buy almost everything online. But consider this point in time. By the early 2000s, online shopping was growing rapidly, but Toys-R-Us dragged its feet in adapting. When the Amazon deal collapsed, Toys-R-Us had to scramble to build its own e-commerce platform, but by then, Amazon had already won. So while the fact that “E-commerce is essential” may seem obvious today, consider what might not be so obvious. Keep that in the back of your mind and you will stay ahead of the market. Which Toys-R-Us did not, here is what they missed:
They ignored shifting consumer behavior. Parents were increasingly shopping online, but Toys-R-Us relied too heavily on physical stores.
What sunk costs do you need to forget about?
Remember the market will change with or without you.
They were late to develop their own website. By the time they tried to build their own e-commerce operation, Amazon was too far ahead.
If you rely on a partner today, how quickly can you adjust if they stop working with you? Or if you stop working with them.
They did not see digital as a priority. Instead of investing in a robust online platform early, they treated it as an add-on rather than a core part of their business.
Where is the market going? As Wayne Gretzky said, “Skate to where the puck will be.” Look ahead of the market, not where it is today.
What does this mean for your business?
Digital is not an option anymore it is a necessity in nearly every industry.
While you may outsource some parts of your platform to start. Build a path to owning your platform in the future.
If you are late to e-commerce or digital transformation, you may never catch up.
Watch how customer buying habits are changing and adjust before it is too late.
Where is the “puck” going? How can you get to where it will be?
Short-Term Convenience Can Lead to Long-Term Disaster
The Amazon partnership seemed like a great idea at first it allowed Toys-R-Us to quickly enter the e-commerce space without heavy investment. But by taking the easiest path, they lost control of their future. It is ok to take the easy path to start and to get your feet wet. However, once you know it is working and you see this is where the “puck” is going, then invest in your own platform. Relying on partners for too long will lead it more pain in the future. It also leads to blinders for you and your leadership team. Do not make these same mistakes that Toys-R-Us made.
They took the “easy” path instead of the right one. Rather than investing in their own platform, they took a shortcut one that Amazon ultimately controlled.
They never understood the power of the platform.
They lacked a long-term strategy. Had Toys-R-Us built its own e-commerce system from the start, it could have competed directly with Amazon.
This is also a case of sunk costs. Toys-R-Us had stores, why would they need online? Because that was the way the market was going. Had they shifted to e-commerce they likely would have taken market share away from their stores, but they would have kept it under the Toys-R-Us umbrella, instead of losing it to Amazon.
They did not pivot when warning signs appeared. Even as Amazon began selling competing products, Toys-R-Us stayed dependent on the partnership for too long.
When you see shifts from your partners and the competition you need to react. You are already late to the party, but acting fast you may be able to save yourself. If you continue to wait, you will lose.
What does this mean for your business?
Easy solutions are not always the best solutions. If something seems too convenient, think about what you might be giving up.
They can be a great way to start and to test the waters. Do not rely on the easy path. They will always lead to more trouble long term.
Always have a long-term strategy short-term gains are worthless if they lead to long-term disaster.
Where is the market going?
How do you stay ahead of it?
What are the key trends to watch for?
If a partnership starts to turn against you, act fast do not wait until it is too late.
Have a back-up plan or two.
When you do your annual planning, consider your partnerships and how you would react if one stopped working for you this year.
Remember that could be their choice, or your choice.
Action Step
Take 30 minutes this week to evaluate your business.
Are you outsourcing a critical part of your business that you should own?
How are customer buying habits shifting in your industry, and are you adapting fast enough?
Are you taking a short-term shortcut that might hurt you in the long run?
Write down one step you can take to protect your competitive advantage this quarter. What is one back-up plan you can create this week?
Additional Reading:
“Toys ‘R’ Us Might Be Dying, but Physical Retail Isn’t” - Harvard Business Review
“The Importance Of Building Customer Relationships In The Golden Age Of E-Commerce” - Forbes
“How distributors can self-disrupt to win in the new digital world” - McKinsey & Company
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