High rent and e-commerce didn't do in FAO Schwarz

They were just excuses for the closing of the chain's flagship toy store

fao schwarz
Credit: Rob Young, CC BY 2.0, via Wikimedia Commons

When FAO Schwarz closed its Manhattan flagship toy store on Wednesday (July 15), the media was full of stories pointing to a pair of culprits: soaring real estate prices and e-commerce competition. Although there's no doubt that high rents didn't help the chain, neither real estate nor online shopping are the culprits here; they are the excuses.

That flawed line of analysis is similar to the absurd notion that showrooming is an example of Amazon not playing fair. That argument ignores that the customer has driven to the physical store, parked, walked into the store, walked to the aisle and found the exact product desire, and yet the store's customer experience was so bad that it lost that sale to an e-commerce app, which will often charge a delivery fee and make the customer wait days for delivery. When showrooming requires all that physical effort and brings the shopper within meters of a checkout, how can it be construed as an unfair advantage? Rather, there must be something about the physical shopping environment that really turns shoppers off.

Let's get back to FAO Schwarz. Being in the toy business, its ultimate customers are young children, who are notorious for having short attention spans and little patience for waiting — not unlike C-levels. Are they at all likely to prefer an e-commerce experience to a brick-and-mortar, which offers the opportunity for interacting with toys and to truly evaluate product, in a brightly colored, music-filled, massive mock playroom.

There is a marketing concept called "creating a destination," of which FAO Schwarz is a prime example, part retail store and part tourist destination.

As for real estate, yes, Midtown Manhattan is ludicrously expensive, but the same can be said for similarly centralized addresses in Tokyo, Paris, San Francisco and Los Angeles. A celebrated downtown location is highly desirable for retail, which is why the rents are sky-high. Like any other prime location, it's up to the retailer to leverage the location and bring in the shoppers. The same rule applies to fending off rival attacks, whether it's via e-commerce, mobile commerce or a store a half-mile down the road.

Retailers like FAO Schwarz that have reached iconic status need to focus on quality, not price — quality of product and quality of experience. Overhead, coupled with Wall Street's insistence on quarterly profits, makes competing on price unsustainable.

Consider the Apple Store. Do you think Apple is worried about near-term sales losses for its iPhone because of some low-priced Android handset? Apple has used marketing muscle to make the iPhone into something perceived as much more than a smartphone. Do you think Mercedes is worried about being perceived as just a car? Or Starbucks about being compared to any street-corner coffee shop? Or Armani about being considered just a shirt?

All of these companies have status as high-quality brands, but interestingly enough, the top experts in their respective product areas do not give them top marks. Viewed with the cold eye of a lab reviewer, the top Android smartphones can easily beat the technical specs and capability of an iPhone. Blogs by coffee snobs are universal in their disdain for Starbucks. Feature for feature, dollar for dollar, Mercedes can rarely hold up to Lexus. And the quality and design from any of the top apparel makers — be it Armani, Oscar De La Renta, Hermes or any other — is also seen as overpriced by clothing specialists.

None of that matters, though, when you are selling emotion, attitude and perceptions. FAO Schwarz, as a toy seller that's been around since the Victorian age and had a truly Big moment in the pop-culture spotlight, should be able to do the same, and thus justify its central Manhattan location.

So let's forget about real estate costs and e-commerce competition. The reason FAO Schwarz is closing its flagship store is that it couldn't sufficiently connect with its customers and prospects.

And that is bitterly ironic: a toy seller suffering a setback because of a lack of imagination. Don't its executives remember the point of Big, the movie that had Tom Hanks and Robert Loggia dancing on an oversized keyboard at the Manhattan FAO Schwarz flagship? In the movie, a toy maker had lost touch with its customers — kids — and made a comeback when it hired Hanks, who had a 12-year-old mind in a 30-year-old's body.

If only FAO Schwartz had seen the point and tried to re-create the retail experience to deliver the 2015 experience that toy buyers — and toy users — want, this store might have had a better Hollywood ending.

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