(FORTUNE Magazine) – IF EVER A COMPANY earned its reputation as a category killer, it's Toys ''R'' Us. With huge selection, low prices, and superior logistics, this giant has crushed competitors from Long Island to Los Angeles. Along the way it has captured a dominating 21% of America's $17-billion-a-year toy market. What do you do after you've obliterated the competition? Deny it, naturally. Says Michael Goldstein, 52, who in February took over the top spot from the founder and chairman, Charles Lazarus, 70: ''We're going up against very, very smart players. We don't assume anything.'' Among his tough competitors -- Wal- Mart, a like-minded merchant, which has grabbed 10.4% of the U.S. toy market. Goldstein has a three-part strategy, the first of which is something you don't hear retailers talking much about these days -- fun. ''People expect good prices and huge selection from us,'' he says, trailing remnants of his Queens, New York, accent. ''Now we have to take it to the next level and make shopping more entertaining.'' Look at the Disney and Warner Bros. studio stores, he says. These retailers use dazzling multimedia presentations to merchandise myriad studio-related items, from Tweety mugs to animation cels from Pinocchio. The sales help is upbeat and friendly, and often a life-size Mickey or Bugs is on hand to schmooze with the customers. ''You look at these stores and get the sense customers really like shopping there,'' says Goldstein. ''We need to get some of that feeling in our own stores.'' Along with fun comes an effort to boost service -- that is, make the shopping experience more fun for grownups too. The company has added employees known as Geoffrey Helpers -- named for the giraffe character used in advertising -- who wear smocks that say ASK ME on the back. They patrol big- ticket areas like baby furniture and bicycles, where customers frequently want help. UPC scanners now being installed in the aisles will let shoppers self-check shelf prices. Strategy Two is to milk more money out of every outlet. How? By adding in- store shops. For example, Books ''R'' Us was introduced last year and will be rolled out to 300 of the company's 582 locations by fall. These mini- bookstores probably won't ever account for more than 4% of sales, but wringing more business from every square foot of space is vital for category killers once they've covered a market. Says Lynn Sawyer, a retailing analyst with NatWest Securities: ''Anytime Toys ''R'' Us taps into other income spent on kids it has potential to win big.'' The company carves the bookshops out of excess backroom space -- freed up by improved inventory management -- and spends $20,000 to $30,000 designing and furnishing them. Compared with the usual barebones Toys ''R'' Us, a Books ''R'' Us section looks positively plush, with carpeting, sharp presentation, and bright lighting. The shops carry about 1,900 titles, only a third that of most children's bookstores but four times the customary Toys ''R'' Us offering. Goldstein says fun is a big part of the equation: ''Most kids hate bookstores, but they love Toys ''R'' Us. By doing the in-store shop, we're telling kids books are fun. And parents love it because at least some of the time they want to buy their kids something educational.'' The company is also testing in-store formats dedicated to Lego building blocks, party supplies, and stuffed animals. Finally, although growth opportunities in the U.S. are incremental, those overseas are still geometric. Since 1984 the company has opened 234 stores in 11 foreign countries. It plans to add 70 to 80 more a year through the end of the decade, nearly double the rate of U.S. expansion. International sales now account for 21% of total revenues, up from 11% in 1990. Says Lazarus, who still exudes the enthusiasm of a winning coach and acts as a sort of roving ambassador for the company these days: ''We can go anywhere that has a supermarket, 'cause it's the same kind of shopping experience. There is no reason the international business can't be bigger than the business in the U.S.'' Whether in Boise or Belgium, customers will be demanding more from Toys ''R'' Us than low prices. Goldstein knows he'd better give them service, selection, and fun -- or he'll be having no fun at all.

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