By Jessica DiNapoli and Melissa Fares
WALLKILL, NEW YORK, Dec 21 (Reuters) - Joshua and Amy Hightower drive 40 minutes to a Toys "R" Us Inc store in a blue collar neighborhood in Wallkill, one of the farthest reaches of the New York City suburbs, so their children can try toys at an amusement area dubbed the "play lab."
"We were actually here last night and last week," said Amy Hightower, a 30-year-old stay-at-home mom as her daughter played house and her two sons raced cars in the play lab, which Toys "R" Us launched in 42 of its stores this year.
"It is hard to get them away from this area," she said.
The Hightowers may be ideal Toys "R" Us customers, but so far there has not been enough of them. Many shoppers now make their toy purchases online. Foot traffic at Toys "R" Us, the largest U.S. toy retailer, has declined, as consumers turn to e-commerce sites such as Amazon.com Inc, mass discount chains, like Wal-Mart Stores Inc, and some small independent toy stores.
For a graphic on the changing toy retailer landscape, click tmsnrt.rs/2BuQGMW
As Toys "R" Us aims to exit bankruptcy in 2018 after defaulting on its debt last September, its efforts to reinvent its stores with play labs will shape how other retailers look to experiential shopping to tackle e-commerce.
The holiday shopping season, when 75 percent of all toy sales are made, is a key test of this strategy.
Toys "R" Us has set aside more than $400 million out of its $3.1 billion in bankruptcy loans for sprucing up its approximately 900 stores over the next three years with more experiences and better-paid staff.
The company's creditors are wary of these plans, according to sources close to the situation who requested anonymity to discuss confidential deliberations. Creditors can ask the bankruptcy judge to stop Toys "R" Us from spending on play labs or other experiential aspects, if they view the costs as excessive.
In bankruptcy court papers, Toys "R" Us has argued it cannot wait until it emerges from bankruptcy to invest in its stores. The retailer also plans to close unprofitable locations and improve its website and loyalty programs.
Dave Brandon, who became Toys "R" Us chief executive in 2015 after spearheading a turnaround at Domino's Pizza Inc, defended the strategy in an interview, saying that bricks-and-mortar stores and experiential shopping were important to the retailer's brand.
"We think our scale is a huge advantage, because we have a brand that's nationally and globally known," Brandon said.
Toys "R" Us aims to offer shopping experiences like those found at Dick's Sporting Goods Inc, Best Buy Co Inc and Ulta Beauty Inc, Brandon added.
To be sure, Toys "R" Us may end up with little to show for its investment, industry experts said. Experiential shopping is expensive to scale up for big box retailers that rely heavily on seasonal hiring, they said.
"There is a chance that Toys "R" Us could be out of business in the next two years entirely in the United States," said Stephanie Wissink, a consumer products analyst at investment bank Jefferies LLC. "My fear is that they are not selling goods to a consumer that values that experience."
Other toy retailers offering shopping experiences, such as stuffed animal shop Build-A-Bear Workshop Inc and The Lego Group have also posted sales declines. Sales at Build-A-Bear declined 7 percent to $364 million last year from $392 million two years prior.
Regional independent toy retailers have also been taking market share away from Toys "R" Us, thanks to merchandise that extends beyond mass-market toys, strong customer service and products that accompany school lessons.
Those chains also seek to cater to local tastes in a way Toys "R" Us has not. "Stores in Texas buy cheerleading stuff a lot, there's a big football community," said Sharon DiMinico, chief executive of Learning Express Inc, a U.S. toy store franchiser with about 120 independently-owned stores.
Steven Aarons, the owner of four-store chain Barstons Child's Play in the Washington, D.C. area, said he is able to offer entry-level wages of $15 per hour and health insurance to full-time workers because he has cheaper rent and does not have to answer to investors.
In Wallkill, Toys "R" Us hired new employees like Nora Hanlon to oversee the store's Play Lab, which is a cordoned off foam mat, scattered with toys and a picnic table nearby where parents can sit. Boxes marked for layaway surround it.
"I get minimum wage, but it's a really fun job," said Hanlon, a high school student and part-time Play Lab Coach, sporting a reindeer headpiece.
Toys "R" Us also plans to hire more skilled workers. About $72 million of the $400 million the retailer will use for its redevelopment will go toward wage increases.
The chain's efforts to emulate features of independent stores underscores the dramatic reversal of its fortunes. As the chain grew its national footprint, it wiped out mom-and-pop shops decades ago. But its glitzy Fao Schwarz store and flagship Times Square location featuring a Ferris Wheel were too pricey.
Earlier efforts with experiential stores called "Geoffrey," named after its giraffe mascot, failed. Its $6.6 billion leveraged buyout in 2005 led to expensive interest payments that ate up cash Toys "R" Us could have used to improve stores.
"Can they somehow turn their stores from a warehouse into a play area?" said retail consultant Howard Davidowitz. "That is a big jump."
Reporting by Jessica DiNapoli and Melissa Fares in Wallkill, New York; Editing by Greg Roumeliotis and Edward Tobin