GROUP ASSIGNMENT

CASE STUDY ANALYSIS

TOYS R US
IN
JAPAN

BY
MOHD.SHAZALI SHARIF
NADER GERGES
VENKAT RAMAN RAJA GOPAL
STUDIES IN

MASTER OF INTERNATIONAL
HOSPITALITY MANAGEMENT

5 August 2003

TOYS R US JAPAN
The Case Analysis
Introduction
In this case analysis we are going to discuss and identify the problems of Toys R Us
TRU) Company in expanding their business to Japan. TRU which was established in
1957 and had captured more than 20 % of US toys market, with sales more than $4
billion dollars in 1988. TRU sourcing directly from manufacturers, used its huge
buying power to offer goods at 10%-20% discounts compared to other toy retailer and
the company put efforts on year-round advertising campaigns to encourage consumers
to buy toys at all times of the year, instead of just during the Christmas season.
Currently TRU has invested in more than ten countries around the world. Japan is the
second biggest consumer of toys in the world. (Prof Debora Spar 1995).
In this case analysis we are going to discuss the history of TRU, the company mission
and vision, the company internal and external analysis, over viewing Japanese rules
and culture. Base on the analysis we going to identify some of the main problems
faced by TRU to enter Japanese market. To overcome the problems, we will
recommend the objective, alternative, action and contingency plans.

History of Toys-R-Us
Charles Lazarus started Toys-R-Us in 1948 in Washington D.C. He started out in
business with a baby furniture store and he discovered that the customer requested
toys too. Hence he gradually moved into the toys business. In 1957, Lazarus opened
the first toys supermarket. Speciality retailing and off-price positioning were
revolutionary concept in those pre-mall, pre-discount store days. With the success of
these stores, Toys-R-Us became a public company in late 1970s. Lazarus pioneered
the toys supermarket concept and led Toys-R-Us to dominate the industry (Prof
Debora Spar 1995).
The Toys-R-Us strategy is based upon price, selection, and keeping enough inventory.
As Lazarus explained, When a customer walks through our doors with a shopping
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list, we better have 95 percent of whats on their list or were in trouble.3 The EDLP
(every day low prices) strategy and in-stock image stimulates purchasing year-round
instead of primarily during the Christmas season. Baby diapers and formula are sold
at or below cost, with the hopes of winning over new parents and keeping them as
customers as their children mature (Toys R Us Inc 2001).
Toys-R-Us shifted its goals for expansion dramatically in 1983. The firm entered the
childrens clothing market with Kids R Us and established the International
Division. Joseph Baczko, who was chief executive of the European operations of Max
Factor, was recruited by TRU to lead international expansion. The company has
evolved an US$11 billion dollar business with over 1,581 stores worldwide (Toys R
Us Inc 2001).

Toys-R-Us Vision, Mission and Goals

The companys Vision is to put joy in kids hearts and a smile on parents faces. While
their mission is a commitment to making each and every customer happy and their
goals is to be the Worldwide Authority on Kids, Families and Fun (Toys R Us Inc
2001).

Toys-R-Us Internal Analysis

Organizational Structure

The philosophy of the company was Consumer want value today. With this in mind
and the success story of foreign investment, in 1991 the company decided to enter
Japanese toy market (1992). The first international store opened in 1984 in Canada. In
1986, TRU struck joint venture deals in Singapore and Hong Kong. The company
next expanded to the United Kingdom in 1987, to Germany in 1988, and into France
and Taiwan in 1989. TRU had penetrated the Nordic countries and developed new
franchise relationships with Top-Toy A/S, the leading Scandinavian toy retailer. The
franchise division also led to the entry of TRU to Israel, Saudi Arabia, and the United
Arab Emirates, markets which would otherwise be prohibitive because of both
cultural differences and restrictive laws. By 1991 the chain owned and operated 97

stores abroad. The international sales volume accounted for 14% of the total turnover
of the company. (journal 1990)

Financial Situation

The company is basically a trading company. An analysis of the financial results of

the company for the period ended January 1991 highlights below. The company is
financially strong since it has enough working capital, net profit revenue is 6%, the
inventory turn over is three times, and the gross margin earned per unit of sale is 31%.
The ratio as listed below clearly proves that the company trading strategy is very
strong (Prof Debora Spar 1995).
(Millions of US$)
a. Working capital

176.70

b. Current ratio

1.14

c. Acid test ratio

382.20

d. Solvency ratio

311.52

e. Net Profit to revenue

5.92

f. Inventory turnover

3.00

g. Gross margin earned per unit of sale

0.306 (31.00%)

Base on the above analysis TRU it shows that the company have the ability in
financial source to expand their business in Japan as the second largest toys market in
the world.

Marketing and Distribution Systems

Toys R Us is a company that purely operates on retailing. The company has no facility
to manufacture the end products, wherever they operate. Therefore the companys
marketing activities are purely in the form of retail concept, the philosophy being
procure local and international products and sell the same through the chain of
superstores, which it owns and operates, in each country, in association with the local
partners.

The purchasing policy of the company was to source products from large
manufacturers, make bulk purchases at a discounted price and sell the same to the
consumer directly thorough the self-service superstores. The prices were very
reasonable and offered good discount, since middlemen were eliminated(Prof Debora
Spar 1995)
The company had a very good system of controlling the inventory through computer
network. The superstores were very large and extensive with variety of toys available
and the required stock level maintained at all times. The strategy of bulk purchase
from the manufacturers, yearlong advertising campaign, together with the inventory
formula had positive effects on the sales turnover. (Spar 1995)
Japan was considered to be the worlds toughest retail market for foreign investors
mainly because of the cartel created by the local manufacturers, suppliers and the
distributors in connivance with the local and the government bureaucrats. There were
lots of restrictions, hurdles for foreign investment.(Weekly 1993).

Toys-R-Us External Analysis

Consumer
Customer preferences can vary enormously among countries. Hence TRU had to
carefully control its product mix. Porcelain dolls are carried in Japan, while
Germans prefer wooden ones. TRU sells a version of Monopoly in Hong Kong
that replaces Boardwalk and Park Place with Shako and Repulse Bay, and
those in France stock scale models of the French high-speed train. While about
70% to 80% of its European toy sales are the same items as those in America, in
Japan, this number is only about 30% to 40% (Eisner, Kuperman et al. 2003).
TRU learned to adapt to the different competitive retail situations in each country
that it operated. Different countries can have drastically different competitive
environments. For example, supermarket toy sales as a percentage of all toy sales
range from about 4% in the United Kingdom to 48% in France. High costs in land,
labour, and distribution created problems in maintaining the TRU price and

selection strategy. Low-cost retail sites proved difficult to find in England, leading
TRU to try smaller store formats. In Germany, competing retailers initially
pressured vendors to not sell to TRU. Nevertheless, sales increased and store
expansion was rapid. Even in England, where British parents spend less on toys,
the number of shoppers per store was very high. New store openings attracted
40,000 shoppers in Hong Kong and 20,000 to a one-acre site in Frankfurt.
International sales grew to about one-quarter of company revenues by 1994
(Eisner, Kuperman et al. 2003).

Competitor
Currently Wal-Mart Stores is the main competitor of Toys R Us. Wal-Mart Stores,
Inc. is the world's largest retailer, with $218 billion in sales in the fiscal year
ending Jan. 31, 2002. The company employs more than 1.3 million associates
worldwide through more than 3,200 facilities in the United States and more than
1,100 units in Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea,
Germany and the United Kingdom. More than 100 million customers per week
visit Wal-Mart stores worldwide (Eisner, Kuperman et al. 2003).

Supplier
Toys R Us is a company whose operational core is purely in retailing. The
company has no manufacturing capabilities and relies on developing business
strategies of fulfilling consumer needs. Basically the company obtains the supplies
directly from the local manufacturers especially for the international outlets in
order to maintain the competitive price offer to the consumers (Prof Debora Spar
1995).

Governments / Political
The United States and Japan are closely linked economically. Japan ranks the third
largest single-country to U.S. export market and is actually the leading market for
U.S. agricultural exports, such as corn and wheat; for U.S. crude materials, such
as wood; and for U.S.-produced aircraft. Japan is also the second largest supplier
of U.S. imports, including cars, consumer electronics, telecommunications

equipment, and computers. The United States is Japans largest export market and
import supplier (Cooper 2000).
The United States and Japan have been among the most important architects of the
General Agreement on Tariffs and Trade (GATT) and among the most significant
members of the World Trade Organization (WTO), the successor organization to
and the implementing body of the GATT. Both countries are also founding
members of the Asian-Pacific Economic Cooperation (APEC) forum, a fledgling
body of 21 member economies of the region. (Cooper 2000).

Process of Internationalisation and International Strategic Analysis

Realising the demands and opportunities of toys business in other countries, the
company started to look its retailing concept globally in 1984 by opening its first
outlet in Canada and after that going to Europe and Asia. The company
implemented their global business by having an alliance and joint-venture with the
local partners of each country, which is one of the important criteria of most
countries in allowing foreign investor to invest in their country. On an average
Toys R Us holds 50%-60% share of the company established in overseas. In 1989
Toys R Us had appointed someone as Head to look after and monitor the
international business operations (Prof Debora Spar 1995).

General Overview on Japan

Japan is a medium size country located off the East Asian coast in the North Pacific. It
comprises four major islands and over 3000 smaller islands. The terrain is mostly
mountainous, with fertile coastal plains; over two thirds is woodland. Most cities are
located by the sea. Japan is a well-developed country. Japan is the world's second
most powerful economy. It includes being the world's most competitive producer of
high-tech electronic products and cars. Having few commercially exploitable
resources, Japan is heavily dependent on large quantities of imported oil and coal
(Weekly 1993).
Population of Japan is 125.5 million as of February 1996. Land Area: 145,868.72 sq.
miles or 377,800 sq. kilometres. Japan is slightly smaller than the state of California
7

& have four major islands: Honshu, Hokkaido, Kyushu, and Shikoku. Cities: The 11
largest Japanese cities are: Tokyo Today Japan has the 8th largest population in the
world. It comprises approximately 3.9% of the Asian population and 2.3% of the
entire world population (Weekly 1993)..

Japanese Toy Market Industry.

Japan was an extremely attractive market for toys. The market share of Japan was
second in the world, first being USA. According to one banks statistics the annual
retail trade sales grew by 94%, during 1980s. Japanese children largely benefited
by this boom in economy and the sales.
Though the education system was very rigid and demanded lots of childrens time,
still toys was considered to be very significant in the life of each Japanese child.
The spending on childrens product was very significant in Japan. The parents
showered the children with toys mainly that they could overcome the tension of
the education.
The birth rate of Japans child population was coming down. Hence the
grandparents were also buying lots of toys for their grandchildren. The parents
and the grandparents did not mind spending on the children and grandchildren
because; they did not have many children, and hence sizable disposable income
was available for childrens recreation.(Post 1991)

Japanese Business Culture

Japanese business culture is more towards traditional methods in providing the
goods to consumer. The retailers got their supply from the supplier and the
supplier got it from the selections of manufacturer. The manufacturer normally is
suggesting the price and as the results most of the price are standard and similar
with other retail outlets.
Japanese were very suspicious and were averse to any foreign investment in their
country. The strong cartel of manufacturers of toys together with their peculiar
distribution system, and in connivance with the politicians made Japan extremely

a difficult market for any foreign business national to get into. Japans Large-Scale
Retail Store Law (LSRSL), on one hand, has protected small retailers in Japan. At
the same time, it had limited the competition among the existing large retail stores
as well. Small storeowners and farmers in Japan were well protected throughout
the post-war period. Japan's large store regulation has its origin in the pre-war
period. Expansion of department stores in the early 1900s caused conflicts with
smaller retailers. The Department Store Law, passed in 1937, regulated large
stores larger than 3,000 square meters in the six largest cities, and larger than
1,500 square meters in other areas.
The Japanese distribution system involves many middlemen and includes 1.6
million mom and pop stores, half of which sell only food items. The average
Japanese retail store has only about 3,200 square feet of floor space and limited
storage capacity. Distributors make small deliveries of less than full case
quantities. Japanese consumers tend to make frequent small purchases from shop
owners who they know within their neighbourhood setting, particularly in the food
sector. Small shops account for 56% of retail sales in Japan as compared with 3%
for the U.S. and 5% for Europe. The number of retail outlets in Japan is nearly the
same as the U.S., despite the fact that its population is roughly half that of the U.S.
and Japan is slightly smaller than California

Foreign Investment in Japan

The level of foreign direct investment in Japan is lower than in other fully
industrialized countries. Beginning in the 1950s, the Japanese government
severely restricted foreign direct investment to build up Japanese ownership in
fledgling industries, such as the automobile sector. Many U.S. companies that
have a large presence in Japan, such as IBM and Coca-Cola, originally established
themselves before restrictions were put in place (Cooper 2000).
Although Japan has liberalized controls, foreign direct investment has remained
low. Some analysts point to the high costs of establishing business in Japan that
results from high price for land, especially in business centres like Tokyo. The yen
appreciated sharply against the dollar since 1985, which increased costs for dollar

holders. Analysts and companies that want to do business in Japan also cite
Japanese government regulations that indirectly inhibit foreign investment. For
example, Japan's Large Retail Store Law has protected small retail outlets from
competition by imposing burdensome requirements on foreign and domestic
entities that wanted to establish large, more efficient retail operations. As a result
of pressure from the United States and domestic consumers, the Japanese
government revised the Large Retail Store Law to ease entry (Cooper 2000).

The Outlook for U.S.-Japan Economic Relations

The U.S.-Japan relationship is a long-term one involving mutually accepted
principles -- regional economic and political stability; market-driven economies;
and democratic systems of government. The relationship is also complex,
encompassing many factors. The United States and Japan are closely tied
economically. Japan ranks third to Canada and Mexico as the largest singlecountry market for U.S. exports. Japan is the leading market for U.S. agricultural
exports. Japan is also the second largest supplier of U.S. imports. The United
States ranks as Japan's number one export market and import supplier. The two
economies are also tied by financial capital flows.
The size of their economies dictates that the United States and Japan will remain
significant economic players in the world economy and important partners for one
another for the foreseeable future. The scale of that importance might change over
time as other countries, especially Mexico and the Asian economies, increase their
strength as trading nations. Japan's share of U.S. exports has declined from about
l1.0% in the early 1990s to 8.2% in 1999, as Mexico has become a more important
market. Also Japan's share of U.S. imports has dropped from 20.8% in 1987 to
12.8% in 1999, as China has become an increasingly significant source of U.S.
imports. Good indicators of the future climate in U.S.-Japan economic relations
and the progress they are making on pending and upcoming issues, including the
following:
a. The trade imbalance -- an increasing U.S. trade deficit with Japan has
often led to growing tensions; economic growth and reform in Japan .

10

b. Growing imports of steel into the United States from Japan that the U.S.
steel industry charges are being dumped on to U.S. markets; and
implementation of the auto and auto parts agreement (Cooper 2000).
Base on the above relationship TRU has a good advantage as an American company
to proceed their investment in Japan since the Japanese investors have capture large
number of investment opportunity in United States. TRU can use this issues to the
United States Government in supporting the US Companys increase their investment
in Japan.

The Japanese International Trade Rules and Regulation Policies

The emergence of supermarkets and their unregulated growth during the 1960s
irritated both small retailers and the already regulated department stores. MITI
initially optimistically predicted that economic development and the resulting
enlargement of the market would ease tension between supermarkets and small
retailers, and hoped that supermarkets would be the leading force in the retail
reform. However, increasing political pressure from small retailers forced MITI to
issue several administrative guidance to regulate supermarkets laws. The DSA
took the lead in discussion in the Small Commission on Retail Problems of the
Distribution Division of the MITI Industrial Structure Council (Yoshitada 1989).
Opening of new supermarkets continued during the 1970s, and some stores scaled
down their sizes to evade regulation. Many local governments passed their own
ordinances to regulate these middle-sized stores. MITI intended to integrate the
LSRSL and other retail regulations into one law and regulate the opening of
middle-sized stores based on voluntary reporting. However the plan backfired in
the LDP-PARC Commerce and Industry Division. In 1978, a new category, Class
II Large-scale Retail Store, was added to the law in order to regulate stores
between 500 and 1,500 square meters. Prefectural governors were given authority
to screen the reporting from these middle-sized stores and express their objections
in consultation with prefectural Large-scale Retail Store Advisory Council (LSRSAC). This enhanced the authority of local governments (Yoshitada 1990).

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Complaints by foreign exporters about Japan's complex retail system have been
heard since as early as the 1970s. However, it was only after the 1980s that the
matter came up in official bilateral discussions between Japan and the United
States. It is reported that an executive of one of Japan's largest supermarkets
informed the U.S. government about the LSRSL, and this triggered a detailed
analysis of the law by the American negotiators. The LSRSL became the symbol
of Japan's complex retail system, and its abolition was thought to be a part of
Japan's economic liberalization and import expansion (Clayton 1990).

The Identification of TRU Problems to Enter Japan

According to the TRU internal and external analysis together with the Japanese rules
and culture, we think the main problems that might face TRU are as followed: 1. The Japans Retail trade rules and regulations.
Japan has a very strong protection and regulation toward their local retailer and
businesses. In 1990 there were less than 50 international consumer retailer chains
operated in Japan. As the result the international trade with United States and
Japan was more favour to Japan with a different of over US$70 billion dollars in
1990.
2. To gain trust with local manufacturer.
The Japanese business culture is strongly favouring their local communities in
developing a business venture or cooperation. Majority of the local manufacturer
have a strong relationship with the local suppliers and retailers. Their close door
policy in working / dealing with foreign retailer for the local market will create
tremendous challenge for Toys R Us in gaining the trust from the local
manufacturer and supplier.
3. To gain Japanese consumer confidence and support.
The Japanese consumers are highly sensitive to the product they purchase. The
consumer always believed that when they enjoyed a personal relation with the

12

storekeeper they can get personalised service in the form of replacements, refund
or after sales and service.
The Objective of TRU to Over Come the Problems
To overcome the above problems we have discovered some of the solution to solve
the problem. The suggested objective of TRU to overcome the problems is as follows:
1. MITI and Daitenho law and regulation need to be amended.
2. Building and developing sufficient trust with local manufacturer.
3. Convincing Japanese consumer to visit larger retail store.
The Alternative of TRU to Enter Japan
1. To get US government involvement quoting on bilateral trade.
If TRU is not able to convince Large Scale Retail Store Law (LSRSL) to amend
their existing law suitable for the entry of TRU, then TRU has to make a
representation to US government, to take the matter at top level. This is possible
because the bilateral trade between Japan and US has been more favourable to
Japan than to US.
The US government has to twist the arms of Japanese government that trade
cannot be one-sided affair. If Japan wants to gain something from US, in turn
Japan should also reasonably allow US business to establish investment in their
country. Maybe this sounds like bullying or blackmailing but it is only fair and
reasonable.
2. Contracts of Agreements to be developed in black and white in line with the
Japanese corporate cultural philosophy. TRU has to enter into contract with the
Japanese manufacturers in black and white spelling clearly what are the terms and
conditions under which TRU will trade with them and how it is equally beneficial
for these manufacturers also to deal with TRU.
3. Provide free shuttle bus/mailing Brochures/advertising
Thirdly TRU has to convince the Japanese consumer an awareness about the toys
of TRUs by providing them with brochures, free shuttle service to the shops,
internet buying including free delivery etc. This kind of approach may soften the
13

stands taken by the Japanese consumer and drive away the myth from their minds
that they should buy only from the shops that is situated near their house.
The Action Plans
1. TRU has to convince the Japanese government that Large Scale Retail Store Law
(LSRSL) has to be amended in the best interest of the consumer, the
manufacturers, which ultimately will benefit the government itself. This is
possible only when TRU spells to the government, how it intents to carry out its
business in Japan. The business policy of TRU is to buy the end product from the
local manufacturers in large quantity, pass on the benefit of discounted price to the
ultimate customer. Hence both the manufacturers as well as consumers are
benefited. There is also a possibility that TRU will try and export some of the
Japanese toys to their other overseas branches, which in turn will fetch good
foreign exchange revenue to the government, thereby boosting the economy of the
country.
2. TRU has to convince the local manufacturers of toys that it is going to buy their
product in bulk with favourable terms and conditions to suit the manufacturers.
The suitable terms and conditions could be in the form of cash and carry, free
advertising and publicity etc. They should also convince the local manufacturers
that in case their products are up to the international standard, TRU might even
export them to be sold in their other overseas outlets. TRU has to convince the
manufacturers that the demand for their products will only increase and not
decrease, because originally the consumer would have been paying higher price
because of their existing complex and multi layered distribution structure.
3. TRU will have to educate the Japanese consumers that by travelling a little
distance, and shopping in a superstore, they tend to benefit in so many ways. They
will have choice of variety of toys, at a discounted price, at the same time not
sacrificing their entitlement like, guarantee, replacement and refunds if necessary
which they were enjoying when they were purchasing their toys from the shops.
TRU will also have to convince the consumers that they will have access to some
of the toys of US and other makes, but manufactured in their own country. This
14

will create awareness of different culture in the minds of the Japanese children,
which is healthy. Finally TRU has to convince the consumer that should they feel
like shopping the superstores of TRU, they will have access to free shuttle service
from one point to the super store and back to that point, so that they dont have to
worry about taking their vehicle. The children will have access to some kind of
entertainment while they shop also. Please refer to appendix I.

The Contingency Plans

1. Promoting online sales and marketing.
Due to the development of current technology of information and computer,
online sales and marketing is the best solution to overcome, and capture the toy
demands in Japanese market. This concept may allow the consumer to make their
purchase directly from home by surfing the company website which provide all
the information and picture of the products. The product purchased will be door
delivered to the consumer.
This concept of sales and marketing will get positive response from the Japanese
consumer who not enjoy travelling to purchase goods. Majority of Japanese
community have a personal computer each home.
Conclusion
TRU is the largest toys retailer in US start in entering Japan, which is the second
biggest toys market demand in the world. In this case, we can observe how
important the political influence can be, in materialised the company mission in
established their business overseas. Here we can perceive how the American
Government consult the Japanese Government to revise their policies on
international trade and their Large Retail Store Law. TRU faced a tremendous
challenge from the local communities, retailer and manufacturer in Japan. Due to
changes of the Japanese trade policy and Large Retail Store Law, Toys R Us
manages to open their first branch in Japan.

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References

Clayton, J. (1990). "Attack from within: Japan Ratailer Bucks Establishment."

Christian Science Monitor 21 March(3): 7.
Cooper, W. H. (2000). U.S. - Japan Economic Ties:Status and Outlook. Washington
D.C, Foreign Affairs, Defence and Trade Division.
Eisner, A. B., J. C. Kuperman, et al. (2003). "Toy-R-Us in the Online Toy Business."
The Journal of Behavioural and Applied Management 4(1): 158.
Post, W. (1991). The average number of children per family.
Prof Debora Spar (1995). "Toys "R" Us Japan." Harvard Business School Case Study
For Class Discussion 9-796-077.
Spar, P. D. (1995). "Toys "R" Japan." Harward Business School 9-796-077.
Toys R Us Inc (2001). Toys R Us Inc. Year 2000 Annual Report. Washington D.C,
Toys R Us Inc.
Yoshitada, K. (1989). The legistration process and characteristics of the first
Department Store. Tokyo, Japan Local Trades Department: 85-103.
Yoshitada, K. (1990). The Amendment of the Large Scale Ratail Store Law and the
following tightening of regulations. Tokyo, Japan Local Trades Department: 122-140.

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APPENDIX I

TOYS R US ACTION PLANS TO ENTER JAPAN

Action

Task

Start Date

SLRS has to amend the

existing law and allow
foreign investors to enter
the field.

January, 1990

Convince the local

manufacturers and
suppliers
To gain the confidence
and support of the
Japanese consumers

January, 1990

July, 1990

17

Required
Responsible
Completion
Person
June, 1990
Joseph Baczko
(Head of
International
Div) And,
Den Fujita,
Joint Venture
Partner in
Japan.
June, 1990
Den Fujita,
Joint Venture
Partner in Japan
September,
Joseph Baczko
1990
(Head of
International
Div) And,
Den Fujita,
Joint Venture
Partner in
Japan.