Jerry Storch, CEO and Chairman of the Board for Toys R Us
had a message for the PlayCon audience.
He stated that he had never seen an industry that was as poor at channel
management as the toy industry. He
didn’t sugar coat it; he put it right out there. Jerry had other things to say but it was that
comment that stood out for the boldness of how it was stated.
First, however, let’s step back and define “channel
management.” The Rubicon website defines
it as well as anyone: “The process of
balancing allocation of product inventory and pricing across distribution
In terms of the toy industry, channel management means how you balance
distribution to the various channels (mass merchandisers, ecommerce, toy
stores, supermarkets, drug stores, etc.) in such a way that you maximize
distribution without hurting brand value.
What Mr. Storch was pointing out was that the toy industry tends to sell
into all channels at the same time; flooding the market with goods; crushing
the retail price structure; damaging profitability for everyone and ultimately
shortening the life of the product.
Anyone who is familiar with the toy industry recognizes
the truth in what Jerry has to say. Simply
put, the life cycle of toys has largely become reduced to months instead of
years. By flooding the market with
goods, the excitement of product shortages and the frenzy they can create
dissipates into shelves of post-Christmas markdowns. Heavy discounting by retailers who see toys
as loss leaders drives down prices and damages margins for those who depend
upon toys for their living.
How should the toy industry’s toy companies manage
distribution? Mr. Storch suggested that
specialty toy stores and, yes, Toys R Us, get exclusives in the first
year. In the second year he suggested
that the product be pushed out to other retailers. This would, he suggested, lengthen the
product cycle; expand profits and keep consumers interested. It would, in the long run, enhance brand
value and generate greater revenues with fewer markdowns.
Some expressed to me that they thought Mr. Storch was
correct but that his speech was self-serving in that his company would benefit
greatly from such an approach. I recall
that he recognized that what he was saying was self-serving but
none-the-less he believed he was correct.
I agree; you can be self-serving and right all at the same time.
Would everyone benefit; well yes and yes. Certainly Toys R Us would benefit and so
would the specialty toy industry. The
big discounters would have to wait a year but there is also a benefit for them
in knowing how the product did in year one.
It would certainly result in sharper buying and less inventory
carryover. They would not be the only
ones who would benefit. Toy companies
would conceivably be better able to manage their product rollouts with a longer
horizon bringing better controls and hopefully greater profits as well.
Jeremy Bentham, the great utilitarian philosopher
stated: “It is the greatest good to the greatest number of people
which is the measure of right and wrong.” Based upon that way of looking at it,
better channel management looks more right than wrong.
What do you think?