Wal-Mart Triggers Tumult in Toyland

But even here, employees studiously examine what toys are in Wal-Mart and, whenever possible, avoid overlap. If Wal-Mart prices are too low, it will make Tree Top prices seem too high.

Thus it dropped Chunky Farms after Hancuff-Sellers discovered its drastically reduced price at a local Wal-Mart. "It can be really bad for business," Hancuff-Sellers said.

Chunky Farm's manufacturer, Shelcore Inc., said it has no control over what Tree Top or Wal-Mart charge for its toys. Suggested retail prices are just that, said Deke Jamieson, vice president of marketing for the Somerset, N.J., company.

When Tree Top employees believe the stores must keep a more expensive product on the shelves, they often cut back on quantity, leaving just enough inventory to satisfy demand. At the store in McLean, the LeapPad Learning System, a popular electronic reading tool, sells for $54.95, compared with $33.24 at the nearest Wal-Mart, in Alexandria. Lego's Spider-Man: The Final Showdown is $59.95, compared with $48 at Wal-Mart (and as low as $24 on clearance).

Deep Discounts

Wal-Mart was not always king of toyland.

The discounter surpassed Toys R Us as the No. 1 toy seller in the late 1990s with an aggressive push into action figures, dolls and video games, said Howard L. Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consultant and investment banking firm in New York. He estimated that the chain now controls 27 percent of the toy market.

Because of its size, Wal-Mart has the flexibility to break even or even lose money on toys, making up the revenue with sales in other departments. The tactic builds customer loyalty and helps steals market share from competitors, said Jim Silver, publisher of ToyBook, a trade publication.

That, toy analysts say, is what happened last Christmas. At Wal-Mart, the season's hottest toy, Hokey Pokey Elmo, sold for $19.46. KB Toys paid $24 for the same toy, and charged $24.99. At the time, KB Toy spokesman, John Reilly, said such pricing amounted to "giving away toys."

Karen Burk, a Wal-Mart spokeswoman, would not comment on the chain's pricing strategies, which she called "competitor-sensitive." She said toys "were a very profitable category this holiday season."

While it slashes costs on some toys, Wal-Mart earns a substantial profit on others, according to a toy executive who has sold products to the chain for 10 years. To save money, Wal-Mart contracts with manufacturers to make several private label toys, which are sold under names such as Wal-Mart's Kid Connection. Profit margins on these products, many of which are manufactured outside the United States, are often twice those of brand-name toys, said the executive, who spoke on condition of anonymity because he continues to do business with the retailer.