Toys R US vs KB Toys | Category Killer | 1

0:07It's February 1988 and at 205th Avenue in Manhattan, Toy Fair is back again. Every year, 18 ,000 toy store buyers descend on this building. They're here to check out the products manufacturers hope will become the big hits of the next holiday season. And in the corridor leading up to the showrooms, an intern for Louis Galoub Toys runs as fast as he can. Excuse me. Out of the way. Move, move, move. Out of the way. Hey, watch it, bud. The intern glances over his shoulder. At the far end of the corridor, he sees him coming. Charles Lazarus, the 64-year-old founder of Toys R Us, surrounded by his senior team.

0:50The intern's got no time to waste. He turns a corner, races down another corridor, and bursts into the Louis Galoub showroom. Inside, the sales team is introducing a handful of store buyers to the company's new toys. The intern yells. Toys R Us is coming! Mmm, wow, Toys R Us? Yeah, that's a big ticket. Panic ripples through the sales team. They move fast to round up the mom-and-pop store owners checking out the products and clear the room. One woman objects as the sales chief guides her out the door. Hey, I was about to place an order. The sales chief doesn't care. He wouldn't even care if she was the buyer for KB, the nation's number two toy chain.

1:34Because this is the 1980s, and only one toy store matters. Seconds later, Lazarus and the Toys R Us team enter the deserted showroom. Louis Galoub's sales chief rushes over to them. Charles, glad to see you. Lazarus nods. He's used to the royal treatment. Toys R Us has 338 stores generating sales of$3.2 billion a year, enough to claim 25 % of toy sales in America and make Lazarus the highest-paid CEO in the country. Last year, he banked$69 million. He looks at the sales chief. Let's see what you got. The sales chief starts with a toy that buyers have been shunning all throughout the fair. He figures it'll make the toys he shows afterwards look better.

2:26He leads Lazarus and his team over to a display of army toys. In the middle of the display is a large box that resembles a wooden cargo crate. Now this is our new Army gear playset. Every toy in this range has a hidden action inside. You can think of it as a military twist on Transformers, right? So this canteen right here turns into an aircraft carrier. Look at that. This compass doubles as a satellite station. And this pistol, it becomes a missile silo. See? The Toys R Us executives move in and start playing with the items. One turns to Lazarus. So what do you think of the crate? It's going to take up a lot of shelf space.

3:09The sales chief gulps. Most of the buyers who've gone through this showroom have objected to the crate on the same grounds. He knows if Toys R Us doesn't like it. The army gear line is toast. So he makes a preemptive move. Of course, we can always change the packaging if that's a problem. Lazarus holds up his hand. No need. I like it as is. It's different. Distinctive. Might appeal to shoppers. You should stick with it. Okay, what's next? The sales chief high-fives a colleague. With Toys R Us' backing, Army Gears got a shot at the big time. But it wasn't always this way. Toys R Us spent much of the 1970s on the verge of closure.

3:56During the 1960s, it was largely unknown outside the D.C. area, and when it opened in the 1950s, it sold nothing but baby furniture. There's carnage on toy store floors around the country. KB Toys is still holding on, but Toys R Us has turned children into toy-seeking missiles who relentlessly hound their parents into submission. Question is, can KB return fire?

4:49their loved ones and plan for whatever comes next. Whether you're looking for life insurance, employee benefits, or retirement income solutions, when your future is on the line, you want history on your side. And believe me, Pacific Life has been there, always there through changing times, always focused on your needs. Ready to secure your tomorrow? Ask a financial professional how Pacific Life can help you feel prepared for what's next. Pacific Life Insurance Company, Omaha, Nebraska, and in New York, Pacific Life and Annuity, Phoenix, Arizona. Because with Pacific Life, you're not just planning for the future, you're partnering with trusted experience.

5:27Closing the books, getting your people paid, and bringing on new hires. Running a small or mid-sized business can be exciting and also a little chaotic. Workday Go makes simplifying your business, well, simple. Imagine all the important aspects of your company, HR, finance, and payroll, all on the AI platform. No more juggling multiple systems, no more worrying about growing too fast. Just the full power of Workday Go, helping small to mid-sized businesses like yours scale and run more smoothly. Think about what that means. Seamless onboarding for new team members. Real-time insights at your fingertips.

6:06and payroll that works perfectly every single time so you can focus on the big picture and go after your big ambitions. And with Workday, you can activate quickly in as little as 30 to 60 business days. So simplify your business. Go for growth. Go with Workday Go.

6:30From Wondery, I'm David Brown, and this is Business Wars.

6:56I don't want to grow up. I'm a toy for a kid. There's a million toys that's toy for us that I can play with.

7:18For millions of Americans who are now all grown up, that song and the store it promoted are seared into their childhood memories. Together with its rival KB Toys, Toys R Us captured the hearts of kids nationwide and pocketed their parents' dollars. At their height, these two stores made billions and set the weather for the entire toy trade. But today, KB is dead, and Toys R Us limps on as a shadow of its old self. In this series, we'll follow the heady climb and brutal downfall of KB and Toys R Us. It's a story of a retail revolutionary and a plucky mall rat underdog. Toy makers living under tyranny, crazy fads, and a private equity firm that will leave both brands bleeding out.

8:09This is Episode 1, Category Killer.

8:211950, Washington, D.C. On 18th Street, a pregnant woman pauses outside a three-story row house and peers through the window of the store on its first floor. Inside, she sees strollers, cribs, and high chairs. She thinks this store has just what she's looking for. The woman enters and the clean-cut young man behind the counter greets her. He's the 27-year-old owner, Charles Lazarus. Good morning, ma 'am. Welcome to Children's Bargain Town. You looking for anything today I can help you with? No, I'm just browsing. Thank you. Well, I'm right here if you need me, ma 'am. Lazarus gets back to filling in sales orders as the woman checks out the merchandise.

9:07Lazarus started this business two years ago, but he and this store go way back. He was born in its back room and raised above it. His father used this place to sell reconditioned bicycles, and Lazarus learned the ropes of the retail business while helping out after school. But Lazarus never planned to follow in his father's footsteps. He intended to go to college instead. But then came World War II. Lazarus joined the army and by the time he got back home at 22, he felt too old for college. So he set his sights on a career as a businessman and soon spied an opportunity. The servicemen returning from war were making up for lost time by getting married and starting families.

9:52And with a baby boom underway, Lazarus recognized that demand for baby furniture was about to soar. So he took over the family store and used the$5 ,000 he had saved for his college tuition to turn it into a baby store. The pregnant woman stops browsing and approaches Lazarus. Excuse me, do you have any baby toys? No, ma 'am. Only baby furniture. Not even a rattle? No, sorry, ma 'am. The woman looks disappointed. Like many post-war parents, she wants to indulge her children. Okay. I'll try somewhere else. Lazarus watches the woman leave and remembers he's gotten that question before. Suddenly, he realizes his mistake.

10:39His customers want toys for their babies, so why is it he's selling them?

10:47Lazarus adds rattles, cradle gems, and other baby toys to his shelves. And he soon notices that higher sales aren't the only benefit of stocking toys, because toys also mean repeat business. Baby furniture is a once-in-a-lifetime purchase. When families have a second child, they don't buy new furniture, they just reuse what they already have. But those same families keep buying toys. Their kids grow older and need new toys. Toys get broken and replaced. Different children like different toys. And birthdays and the holidays come around every year. The only downside is that every year during the holiday season, the big department stores expand the size of their toy selections, undercut independent retailers on price, and grab the lion's share of sales.

11:37But then, a trip to New York changes everything for Lazarus.

11:48It's 1952, and Lazarus is wandering wide-eyed through the vast EJ Corvette discount store in Manhattan. And it breaks every rule. It's more warehouse than store. The merchandise is piled high and in disarray. The floors are bare, the signage minimal, and the employees, few. Customers are left to fetch items themselves. and wheel them to the cash registers and shopping carts. A man pushing a cart approaches. I need to get past. Lazarus steps aside to make way, and then notices a booster seat in the man's cart. Sorry, excuse me, how much is that booster seat? $3.49. Lazarus blinks. In his stores, booster seats cost more than$5.

12:37Where can I find them? Into the aisle, then left two aisles. Thanks. Lazarus follows the directions and reaches the baby furniture area. He stares at the price tags in disbelief. Crib mattresses 44 % off. Toy chest 33%. Teddy bears 27 % off. With prices that low, it's no wonder that customers will put up with a Spartan interior and bare-bones service. He remembers how his father told him big stores sell items for less because they buy in bulk and so get lower prices from manufacturers. He decides then and there that he needs to go big. Bigger than any toy store's ever gone.

13:29Back in D.C., Lazarus turns an empty supermarket next to his baby furniture store into a toy supermarket. It's a high-risk move. He has to buy a lot of inventory up front, but nowhere else in DC can beat him on choice or price. His store offers 4 ,000 toys at 30 to 60 % off the regular price. And his timing's perfect, because the toy business is about to transform. Before the war, kids knew very little about what toys were for sale. Their knowledge was limited to what they saw in their local toy store or department store catalogs. Toymakers rarely bothered to market their products directly to children.

14:13Instead, they focused on convincing stores to stock their creations. But now, there are televisions in millions of homes. And that lets toymakers showcase their wares to children all year round. On Christmas morning, Tommy's dream came true. because Tommy had told his father that he wanted Lionel, just the low-priced Lionel Scout train set with a few Lionel accessories. Yes, even the simplest of Lionel train sets and track layouts is a wonderful, thrilling, complete model railroad. TV advertising flips the industry on its head. Kids now lobby parents to buy the name brand toys they've seen on TV.

14:56Parents now want stores that sell the hottest toys at the lowest prices. And that makes Lazarus' super-sized toy store a prime destination.

15:13It's 1960, and inside the new Children's Super Mart in Bailey's Crossroads, Virginia, the pre-Christmas rush is on. Kids run riot through the aisles, ride display hobby horses, and burst into tears as their outraged parents refuse to buy them that salacious new Barbie doll. For the kids, this is a wonderland. 20 ,000 square feet filled with every toy imaginable, and then some. For the parents, it's Christmas shopping made cheap and quick. No more trawling multiple stores for that elusive toy. Children's Supermart has them all, from the ever-popular Shirley Temple dolls, the season's big new board game, The Game of Life, all at unbeatable prices with no-questions-asked returns and 200 parking spaces outside.

16:05Those savings also mean no Santas, no credit, no carpets, no deliveries, and no gift wrapping. But that's a sacrifice many are willing to pay. Now, thousands of D.C. area shoppers choose Children's Supermart over the toy sections at local department stores. In just eight years, Lazarus has gone from a small neighborhood store to a multi-million dollar empire with three supersized Children's Supermart stores, a warehouse, and a small fleet of trailer trucks. But he's still perfecting the concept. He wants the signs for his stores to be in huge letters, but that's not possible with a name as long as Children's Supermart.

16:49So he thinks of the shortest name he can. Toys R Us. Then he reverses the R in Toys R Us to make the logo more childish and memorable. Teachers and some parents object, but Lazarus ignores them. In 1965, he makes a dewy-eyed cartoon giraffe called Jeffrey the official mascot of Toys R Us. By then, there are four Toys R Us stores, all in the D.C. area, selling$12 million of toys a year. But Lazarus isn't satisfied yet. He thinks Toys R Us could go national. But every new store costs more than a half a million dollars to open. and he doesn't have deep enough pockets to take the chain to the next level.

17:40So in January 1967, Lazarus sells Toys R Us to department store operator Interstate for$7.5 million. As part of the deal, he stays on as the toy store's CEO. But as Lazarus prepares to supersize Toys R Us, In a New England shopping mall, two former candy men are about to make a move on the toy scene.

18:29You can earn bonus daily cash. To qualify, you must apply at apple.co slash getdailycash. Apple Card issued by Goldman Sachs Bank USA Salt Lake City Branch. Offer may not be available elsewhere. Terms and limitations apply. As business owners and managers, you use software for your business every day. You use one piece of software to manage your customers, another to manage your employees, another to manage your finances, and the list goes on. You buy these pieces independently and hope they fit neatly together like a puzzle. And then you find out the hard way that they don't, and you end up with a mess at the heart of your business operations.

19:08Does any of this sound familiar? Well, fortunately, Zoho offers a solution to this chaos. It's called Zoho One. Zoho One is a suite of around 50 pre-integrated business applications that fit together beautifully. So instead of dealing with disparate software from multiple vendors with multiple contracts and price points, you deal with one vendor with all the pieces of the business software puzzle neatly put together offered at a very attractive price. Now if this sounds interesting to you, you gotta check out Zoho One at Zoho.one. That's Z-O-H-O dot O-N-E. With Zoho, you're not just licensing apps.

19:50You're licensing peace of mind.

20:06It's June 1963 at a strip mall on the edge of Pittsfield, Massachusetts, and Dick Kaufman is showing a local newspaper reporter the latest addition to his family's toy business. Playworld is the only dedicated toy store in the area. There are 2 ,000 square feet of toys here. The reporter dutifully jots down the number and then follows Kaufman through the aisles. We've got toys for all ages. Fisher-Price Creative coasters for youngsters. Chemistry sets for older children. Electric trains for fathers. Tonka trucks, board games, tiny tears dolls. Kaufman is buzzing about the opening of this store.

20:45He's the son of one of the two founders of Kaufman Brothers. Kaufman Brothers opened in 1922 as a candy wholesaler, before reinventing itself as a toy distributor in the 1940s. Now, the company supplies toys to stores within a 100-mile radius from its base in Pittsfield. But with the opening of Playworld, it's expanding into retail. At the next aisle, Kaufman looks at the reporter with a twinkle in his eye. And here, and this is something I'm really excited about, we have our imported toys. We have troll dolls from Denmark, matchbox cars from Britain, Steve teddy bears from Germany. You'd be hard-pressed to find these even in Boston.

21:25The reporter makes a note, and then asks a question. So, will you open more stores like this? Kaufman looks alarmed, and shakes his head. Oh, no, no. We're a toy wholesaler. We don't want to compete with our own customers. We only opened this store here because Pittsfield didn't already have a toy store. But the Kauffman Brothers' one-off retail side hustle soon becomes two stores, then three. As the 1960s continue, the company keeps adding stores in malls around the northeast of the country. In 1971, with its retail presence growing, the company quits the wholesale business, and in 1973, they unite their 26 stores under one name, KB Toy and Hobby.

22:15But the Kaufman family isn't looking to replicate the toy superstore model of Toys R Us. Their plan is to get shoppers inside the nation's malls to make impulse buys. Families who go to Toys R Us arrive having already made the decision to buy toys. Most mall shoppers aren't looking for toys and games. They've come to shop at Sears or JCPenney. KB's plan is to lure those mall visitors through its doors, as once they step inside, there's a strong chance they'll leave with a toy bought on impulse. But as KB starts building its presence in the malls, Toys R Us unveils its first TV ad, featuring a tap-dancing Jeffrey the Giraffe.

23:00Toys R Us is expanding fast under its new owner, Interstate. The chain's founder, Charles Lazarus, is using Interstate's money to open new stores at a rapid clip. When he sold the business in 1966, there were just four stores all around Washington, D.C. Now, there are 47 Toys R Us stores all over the country, and sales are rising 30 % a year. The chain's also installed a mainframe computer that tracks the items sold and automatically orders new inventory. As a result, Toys R Us staff no longer need to roam the store counting inventory and then writing out orders for new ones by hand. But while Toys R Us appears to be thriving, the rest of Interstate is dying.

23:57At the same time as buying Toys R Us, Interstate began opening discount stores in an attempt to challenge the likes of Kmart and Target. Instead, it's racking up major losses. And in 1974, with losses of$60 million, its discount disaster drags the whole business under. The company files for Chapter 11 bankruptcy protection to stop its creditors calling in their debts, while it tries to fix the business by pairing it back to its profitable department stores and Toys R Us. The move saves Toys R Us, but also slams the brakes on its growth. For months, the future of the toy retailer hangs in the balance.

24:43Lenders cut off its credit. Investors sue in an attempt to seize control of the business. Then, they sue again, seeking$110 million in damages, enough to finish off the company for good. Meanwhile, Lazarus battles to keep Toys R Us stores stocked. Interstate's bankruptcy leaves him without the money needed to buy toys to put on the shelves. So, he begs the nation's biggest toy manufacturers for help, and they say yes almost immediately. None of them wants to see Toys R Us go down. Every year it sells$200 million worth of toys, and unlike other toy retailers, it's got the space to carry every toy.

25:28So the toy makers give Toys R Us many months to pay for the toys it buys, instead of the usual 30 to 60 days after delivery. And that gives the chain time to get toys onto its shelves and sell them before the toy maker's bills come due. But that doesn't mean Toys R Us is about to go soft on the toy makers it buys from.

25:571975, El Segundo, California. In the Mattel boardroom, the toy giant sales team is hosting a private showcase of its latest prototypes for Toys R Us chief buyer, Cy Ziv. He's a square-jawed man with short, messy hair, and for 25 years he's been Lazarus's right-hand man. His instinct for hit toys is legendary, as is his temper. He takes a sip of his coffee and watches a Mattel sales executive remove the lid of a miniature plastic garbage can, and then holds it upside down. Ziv leans closer as a lump of yellow-green gunk slips out of the can and onto the meeting room table with a splat. Looks like snot, the Mattel executive grins.