About two years ago, Toys R Us was trying to convince a bankruptcy judge to approve a financing package meant to keep it alive through Chapter 11 and beyond. A lawyer for the retailer argued at the time that Toys R Us was the last toy chain — and thus the last toy show room — of national reach and that made it indispensable.
The company won the financing but lost its war against Amazon, Walmart and Target. After a disastrous holiday season, lenders pulled the plug and sent Toys R Us into liquidation. And just like that, the once-quintessential category killer, and last national toy store, disappeared.
If only being the last competitor left in a field was as unambiguously secure as it sounds on its face. It seems like the dogfight should be over, that the last survivor should be able to revel in its status as the winner, and reap the rewards. The reality is more complicated.
There are some in that position today who are relatively stable and strong, such as Dick's Sporting Goods and Best Buy, whose closest competitors in scale and proposition have fallen. Even so, their market position and future isn't as secure as it once seemed.
"It is a very mixed bag. I think sometimes it is a good thing because it means that you are then the focal point for consumers," according to GlobalData Retail Managing Director Neil Saunders in an interview. "And also, of course, when competitors drop out, there is the opportunity for the one that remains to mop up that market share. So, being the last man standing is a favorable position, at least from a market share game point of view in the short term."
But, Saunders adds, "There is a reason that your competitors failed, and often that reason is because a lot of consumers have drifted off to use other options."
"As the last remaining sole survivor, it says a lot about the ability to read the customer, adapt to the consumer and meet their needs, but it should not be considered a safe harbor," says Michael Brown, a partner in A.T. Kearney's retail practice. "The changing behaviors of the consumer will continue, and new competitors will continue to arise."
Being the last also presents a critical choice that is not easy for successful retailers to make. "When you become the biggest in your category, or maybe knock everybody else out, you have this dilemma between operating what you think is the best of all the other competitors, because you beat them all, right?" says Nick Egelanian, founder and president of SiteWorks. "But if you're in retail and you're not evolving and changing, you're dying."
He adds, "And I'm telling you, I've worked in retailers, they don't like to change, and yet they have to change."
How does a category come down to one national specialist chain in the first place? Very often, as Saunders explains, the customer base of a category specialist gets siphoned off by generalists like Walmart, Amazon and Target, and niche players or brands themselves going straight to consumers.
"Are we the last standing competitor because we're the best, or are we the last standing competitor because we're the best of the weak in a weak industry?"
Founder & President, SiteWorks
The trend represents a broader cycle in the evolution of retail. "The 1990s were the most intense period of growth of new retail concepts. Because it was the beginning of big boxing, and every category had multiple players, usually regional players, and one or two would emerge at the national [level]," Egelanian says. "It's also at the nature of retail, that the strongest survive. But categories also become irrelevant for various reasons."
As Brown points out, there are typically two reasons why a field of category players wanes. One is that "what you sell is being sold somewhere different or by somebody else," he says, pointing to e-commerce and mass merchants like Walmart and Target.
"The other [reason] is that the products that you sell have completely been changed," such as through digitization, Brown adds.
Being the last means having to ask, as Egelanian says, "Are we the last standing competitor because we're the best, or are we the last standing competitor because we're the best of the weak in a weak industry?"
And what about Toys R Us' argument that it was indispensable? Walmart, Amazon and Target have mostly divvied up the retailer's market share, which is not to say the retailer and others like it are not missed.
"Some sales are lost to the sector because although a lot of the sales, the majority of them, will be reallocated elsewhere, there is a degree of impulse buying that is lost because you lose a store in a location," Saunders says. "It also does create problems for suppliers very often because the specialist will be big buyers of product."
The loss of a distribution channel could mean pain for small or niche suppliers. With the toy market specifically, Saunders notes, "When Toys R Us dropped out, one of the concerns [among suppliers] is look, they're going to be very reliant on what the manufacturers view as cut-throat retailers like Target, like Walmart, and Amazon — very, very focused on price."
With all of that in mind, we took a look at retailers who are the last of their kind: national category specialists whose closest peers have disappeared, through bankruptcy or acquisition. Which of course is not to say they don't face competition, because they absolutely do: from regionals, from mass merchants, from Amazon, from direct-to-consumer plays, from niche sellers and hyper specialists — from pretty much every direction.
Comparisons between GameStop and Blockbuster are inevitable.
Sales at the gaming retailer are sliding, profits are turning negative, and the core product market is changing and digitizing. "Their product is actually drying up and going away, on two fronts," Brown says. "The [game] publishers are beginning to sell directly to consumers" as well as opening up their catalogs to digital subscription services. That in turn is drying up the used product market, which is "really a driver of [GameStop's] business," he adds.
Bruce Kaser, head of equity research New Generation Research, notes that "the big picture narrative is clearly negative" for GameStop, with secular trends threatening the gaming retailer's primary business. But, with the company's stock cratering over the past three years, investors seem to think the end is near.
Kaser isn't so sure. "Is that narrative really going to happen quite that quickly? Or might it be stretched out long enough that the company can recover? A lot of it is timing," he says.
For one thing, GameStop has a relatively unburdened balance sheet. In its most recent quarter, the retailer reported $419.1 million in long-term debt, while it makes well over $8 billion a year in revenue, and it was only last year net income turned negative. The company also pays a $1.52-per-share dividend to stockholders that it could nix if it needed the capital.
By comparison, Blockbuster had around $1 billion in debt and pulled in much less in sales by the time it filed for bankruptcy nearly 10 years ago. The differences in balance sheets mean GameStop has more wriggle room and more ability to invest in transforming its business. Moreover, executives have said the retailer's average lease life is only two years, which means it can shed stores quickly as sales decline to reduce costs.
The company recently unveiled the main features of its "reboot" strategy focused on closing unprofitable stores, building out a digital partnership, capitalizing on its vendor relationships and trying to turn its stores into hubs for the gaming community.
Customer traffic in much of 2018 and 2019 has fallen below baseline levels but saw a modest spike in August, according to data from analytics firm Placer.ai provided to Retail Dive for this story.
"The near-term strategy is a little bit of turnaround by the Braille method, ‘let's just try things and see what works,'" Kaser says, noting the retailer is mainly focused on stabilizing the business and preserving capital. "It's really hard to have a grand strategy, because there's a lot of things changing in the business."
Barnes & Noble
In the heady early days of the e-book, nearly everyone was predicting the imminent end of physical books with confidence. The fall of Borders likely deepened the dark clouds around the physical book business. But years later, paper books still dominate the market. That is good for Barnes & Noble, whose efforts to transform into a proto-tech company (via its Nook reader) to get ahead of the e-book revolution has proved mostly disastrous.
"Barnes and Noble to date has been able to weather the digitization trend and might be starting to see potentially a return to people wanting physical products, wanting physical books," Brown says. "They're giftable, they're collectibles. So they have not lost their place in the market."
"But," he adds, "they've got to continue to evolve that business, bring the consumer more reasons to come into the store, bring more product assortment, change the positioning from maybe the books and the music and the other things they do to a broader product portfolio that they can they can offer the consumer."
Unfortunately for Barnes & Noble, good old fashioned books ship cheaply and easily through the mail and don't need trying-on. That could be why the biggest purveyor of physical books in the country is a digital bookstore that went on to become the largest e-commerce company in the country — Amazon.
To Saunders, Barnes & Noble's book dilemma represents one of the major challenges faced by category retailers. "If you look at Barnes & Noble, actually that whole way of retailing is really inefficient shelves," he says. "Shelves and shelves of books, most of which are very obscure, and will not sell — but you need them. Otherwise, what's the point in being a specialist?"
As for Barnes & Noble's e-commerce game, even the company's chairman has said "such a chasm" exists between it and Amazon. In fact, Barnes' digital sales have fallen in an era when so many healthy retailers' digital sales are expanding in double digits.
After a years-long, sputtering turnaround, and turnover and drama in the C-suite, Barnes & Noble was acquired this year by a hedge fund that also owns a major bookseller in the U.K. Going private could take some of the pressure off executives for quick results. The retailer, like GameStop, has a fairly healthy balance sheet and, also like GameStop, has been passing cash on to stockholders through dividends. That's money that could theoretically go into its business.
Also in its favor, Barnes has a strong loyalty program, expanded toy sales (thanks partly to the Toys R Us liquidation), other merchandising options (like gifts and collectibles) that could make up lost book sales, and a format that lends itself well to events and other experiential elements.
If you were looking for a lodestar guiding the way for sole surviving category retailers, Best Buy would be it. The liquidation of Circuit City during the Great Recession era, and later RadioShack, opened up potential market share for Best Buy. But they were also omens of a possible fate, as the internet ate up more and more consumer electronics sales
"Here was this big box store, not known for having great service. People thought it was getting killed on the internet," says Egelanian. "And Best Buy turns itself completely around."
"Best Buy has turned the corner," Brown says. "They have successfully navigated what was supposed to be their eventual demise, by taking the digital players head on, by enlisting the support of the vendor community, and proving the need for them to still exist in the marketplace, for the vendors to be successful in the long term."
As he explains, the electronics retailer has done that by building out its omnichannel capabilities and trading out commodified products for services. The company has also held down prices, invested in its employees to boost its customer service, saved $2 billion in costs since 2013, partnered with Apple on repair services, dived into home fitness tech and home medical devices and spent $800 million acquiring its way into healthcare services, among other moves.
Those strategies have paid off. After declining in fiscal 2016 and 2017, revenue has increased for the past three years, to $42.9 billion in the most recent fiscal year. Operating income and net earnings have improved in that time, too. As the retailer has shifted more to online sales and focused on its core business, including by winding down its mobile stores, traffic to its locations have declined against its historical baseline, according to Placer.ai. But August brought a 7.5% spike in foot traffic, well above last year's 0.4% decline and 2017's 4.1% increase, Placer.ai data shows.
This year Best Buy promoted one of the architects of its turnaround plans, Corie Barry, to the CEO spot, and unveiled plans to reach $50 billion in revenue by 2025. Best Buy plans to get there by leaning on its bolstered suite of services, high-touch customer service and multi-channel model.
Bed Bath & Beyond
The trajectory of Bed Bath & Beyond, in Egelanian's view, is nearly opposite to that of Best Buy's, and to the home goods retailer's own early history.
"When they first came out, their first stores were 5,000 [square] feet. They were wildly successful. And they were innovative," he says. "Look at what they did. They took the linens department and the housewares department out of the department store, and they stacked it high. And they had relatively good prices, and they couponed the hell out of them."
Those strategies helped Bed Bath & Beyond survive in the market, even as the financial crisis and housing meltdown knocked out fellow household specialist Linens ‘n Things. But that's not the end of the story.
"Well, nothing changed [at Bed Bath & Beyond] in the in the last 25 years," Egelanian says. "And meanwhile, other things changed around them."
TJX Cos., with its strong home proposition at T.J. Maxx and Home Goods, exploded in the past decade. So did online specialists, mass merchants and Amazon. And while TJX, Wayfair and Amazon captured value buyers, Williams Sonoma picked off more upscale shoppers.
Bed Bath & Beyond's sales and profits have fallen recently, prompting dozens of planned store closures, while the retailer has become a target for activist investors. Moreover, the retailer's traffic has dipped the past two years, largely because of store closures, according to Placer.ai. But traffic in July and August jumped over Bed Bath & Beyond's historical baseline after falling below all year until the summer. The real test will come during the holiday season, according to the analytics firm.
Dick's Sporting Goods
While Dick's faces plenty of competition from regional chains, generalists, brands and niche players, the demise of Sports Authority left it alone among national sports goods chains covering the full range of the category.
Dick's just posted its best comps in three years, in a quarter that saw sales rise nearly 4% and digital sales rise 20%. CEO Edward Stack said that the sporting goods retailer's strategies were paying off, its "headwinds were behind" it and its sales had turned a corner. Yet, earlier this year the company felt a margin squeeze as it made investments in its private label and digital improvements, which left analysts uncertain about the timeline for Dick's turnaround.
All has not gone smoothly since the death of its biggest competitor. Dick's sales have expanded since Sports Authority's failure, but last fiscal year top-line revenue and profit both fell, as did comps even as the retailer expanded its digital sales. Still, the retailer's customer traffic has grown in key periods year-over-year, according to Placer.ai. This summer has brought especially high growth, with August traffic surging 50% above Dick's baseline.
To Saunders, Dick's represents another primary dilemma for category retailers. It faces lost sales to both generalists and niche players.
"They get this pincer movement, where at one hand they lose the general customers to the generalist. But at the other end, they also lose some of the very focused, high-spending customers to very deep specialists, who they can't always compete with," Saunders says. "That's a very uncomfortable position to be in. And Dick's is probably the best example of that. At the bottom, it's lost some customers to Target, to Walmart, to Kohl's."
"At the other end, it's lost some customers to the specialist players like Nike, when people go direct, or players like Lululemon," he adds. "And those erosions are small at the top end, but when you add them up, they are significant."