147-A Lay-up for Lay-away

Toys R Us has introduced a lay-away program for large ticket items that they sell. These items include bikes, dollhouses, play kitchens, car seats, cribs, strollers and other expensive items. This new program from Toys R Us follows successful similar initiatives by Sears and K-Mart last year.

Lay-away programs have been relatively scarce for the last forty years. They were popular during the Depression. However, over the last couple of generations they have given way to the easy credit that consumers have had from credit card companies, banks and mortgage lenders. Of course, this day of easy credit seems to have passed. Hence, the lay-away program recovery.

The customer who puts a product on lay-away deposits with the store 20% of the item’s price, plus all taxes and a $10 service charge. The customer, then, has until December 6 to finish the payments for the products. The customer may make these payments at any Toys R Us store.

Toys R Us incurs real costs to offer this program. It has administrative costs, and probably some additional inventory costs as well, in order to make these products readily available once the customer’s payment schedule has been completed. This price component pays for these costs.

This is an example of an optional price component. Optional price components include such additions to the base price as fees on top of the normal basis of charge, penalties or bonuses for the buyer or seller, price caps, differing periods of agreement to maintain a price and extended payment options. A lay-away plan is an extended payment option. The company is offering this price option in order to increase its sales during a period where sales may be slow due to the current recession.

We have found many other examples of these optional price components, which enable a company to be more flexible with prices in difficult times. You may find these examples in the Improve/Pricing section of StrategyStreet.

Posted 10/26/09

Update:

Most layaway plans disappeared in the 80s as customers used their credit cards for major purchases. The economic difficulties beginning in 2008 led to a resurgence in layaway plans. They are still rare. Not many retailers offer them. Walmart had offered a layaway plan for each holiday season until 2021. The company then replaced its layaway plan with a By Now, Pay Later plan with partner Affirm.

The layaway plan was one of several pricing initiatives Toys “R” Us tried as its business declined. None of them saved the company.  Throughout the 2000s, Toys “R” Us had a weakening Value proposition because it lagged the industry leaders on Function, Convenience and Price. On top of this declining value proposition the company lost share and was heavily burdened by debt incurred in a 2005 leveraged buyout. The combination of these factors led to the company’s bankruptcy in September 2017.

The company had already lost its leadership position by 1999. In that year Walmart surpassed Toys “R” Us in total toy sales. A few years later, Target also surpassed Toys “R” Us in toy sales. Toys “R” Us relied on the “big box” strategy of enormous choice (a Function benefit) at “everyday low prices”. Walmart and Target overcame that strategy by offering a Convenience benefit and even lower prices. These retailers succeeded by adding the most popular toys to its product offerings and then discounting the prices of these popular toys. A customer could get popular toys at the same place she bought groceries and other retail goods and got those toys at a discounted Price. These competitive benefits cut into the market share and margins of Toys “R” Us. The company became a relatively weak number three competitor in the industry.

To make matters worse, the company put Amazon in the toy business. In 2000, the company became Amazon’s exclusive toy supplier. Over the course of the next few years, Toys “R” Us taught Amazon how to succeed in the toy business. Toys “R” Us successfully broke this partnership but the damage was done. Amazon used its enormous customer base to offer the online customer even more choice of toys (a Function benefit) with the advantage of online shopping (a Convenience benefit). By 2005, Toys “R” Us was already at a significant Value disadvantage in the marketplace. It had also lost most of its Economies of Scale advantage.

In 2005, a group of private equity investors bought Toys “R” Us in a leveraged buyout with the intention of revitalizing the company. As is common in these kinds of transactions, Toys “R” Us became a heavily debt laden company. Its long-term debt rose from $1.9 billion in 2005 to $5.5 billion in 2006.

By 2017, the struggling company could no longer meet its debt obligations and sought Chapter 11 bankruptcy. Unfortunately, a few distressed company investment firms, who had advanced debtor in possession financing, decided that they would be better off if the company liquidated and forced the company into liquidating its assets.  The erstwhile industry leader was gone in a matter of months.

The liquidation of Toys “R” Us was likely a good thing. A company ranked number three in an industry has to follow a strategy very different than Toys “R” Us was following. As long as Walmart and Target offered popular toys at low prices, Toys “R” Us would have had to price its most popular toys below those competitors to offset their Convenience advantages and then raise prices on the less popular toys, a more complicated pricing strategy. Still, it was also likely that Next Leader Amazon would have drastically reduced its sales volume as well. See HERE for an explanation of Next Leaders compared to other types of leaders.
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