In 2004, just before Christmas sales really started to pick up, Wal-Mart announced that the Elmo toy they had been selling for 25 dollars would now be sold for 19.50. This put pressure on other retailers to follow suit.
Toys R Us executives quickly followed suit and lowered the price of their Elmo toy to 19.99. Their desire was to keep market share. The price war contnued among several other toys as well. This was really an issue of misalignment.
Toys R Us is not really set up to compete with Wal Mart on Price. Executives though, decided that they had to and so they neglected trying to focus on the experience at Toys R Us and this lead to a huge loss in sales. Although Wal-Mart was trying to compete on price, Toys R Us was lured from their position as a Kid Friendly toy store to a cost cuttting giant and missed the mark.
Really, this was due to the seperation of the business model and the desire of some execuitves to compete with Wal-Mart. Some predictions and analysis are that Toys R Us could have sold out of the Elmos at 25 or even 29 dollars each, but they lost their way and suffered from misaligning the pricing structure with their business model.
