Wal-Mart Triggers Tumult in Toyland

For example, a Kid Connection light and sound robot with matching action figures and helicopter cost $3.11 to manufacture in China, said the toy executive, who has visited the factory in Shenzhen where it was made. Last week, it cost $9.88 at an Oklahoma City Wal-Mart Supercenter, giving the chain a profit of $6.77 per toy.

Wal-Mart declined to comment on private-label pricing.

Wal-Mart also commands deep discounts from toy manufacturers because it orders such large quantities of toys. "I have a price sheet for Wal-Mart and a price sheet for everyone else," said the same toy executive.

Under federal law, such discounts are legal if a toymaker can show it saves more money by selling to Wal-Mart than to its competitors, said Joseph P. Bauer, a professor of law at Notre Dame Law School. The more toys Wal-Mart buys, the more discounts it can demand from a manufacturer, he said.

Money in Mass Marketing

This leaves manufacturers in a dilemma. They like being in the small specialty toy stores but the big money is made in mass marketing.

"I don't think you can have very much success by selling to 3,000 independent toy stores," said Matt Brown, co-founder and president of Big Boing LLC, a small toymaker in Sausalito, Calif.

But manufacturers who take their toys from specialty stores into Wal-Mart face some risks. In 1994, Hands on Toys Inc., a small toymaker in Wilmington, Mass., launched Toobers & Zots, a foam construction kit, in the specialty store market. It was an overnight success, earning the company $4 million in its first year, the company's president, Andy Farrar, said.

Hands on Toys declined an offer from Sam's Club, a unit of Wal-Mart, to stock its products. Soon after, Farrar said, Sam's Club introduced a line of toys strikingly similar to Toobers & Zots, which began eating into his sales. To regain ground, Farrar licensed the toy to Hasbro, one of the nation's biggest toymakers, which in turn sold it to Wal-Mart and Target Inc.

In response, hundreds of independent toy stores across the country canceled their orders. "People felt that we had betrayed them," Farrar said. "They were screaming at me at toy conferences." To this day, he said, some independent toy stores will not carry his products.

To avoid such a pitfall, Lights, Camera, Interaction Inc., a toymaker in Westport, Conn., reserves some toys for independent stores and others for national chains. "We have products these larger stores will never see," said Rick Davis, the company's marketing director.

Small-Shop Specialties

Independent stores are not totally powerless, as Hands on Toys and Shelcore found out. When toy manufacturers decide to sell to the big chains, small stores quickly dumped their products.

Independent stores are finding other ways to compete. Earlier this year, Jeff Franklin, the owner of Be Beep A Toy in Annapolis, hired a therapist to teach his staff of 10 about the developmental benefits of play, hoping to give them an edge over their big-box counterparts. "You cannot find that kind of training at Wal-Mart," he said.

At Tree Top, employees invite representatives from toy manufacturers to teach children how to use their toys. They hold book readings. They stage themed events, such as a Harry Potter Day, in which the store staff dress up as characters from the book. And to help first-time gift-givers, they have drawn up toy guides, each based on a child's age.

Davidowitz said independent stores will succeed only by outperforming the chains where they are weakest: product selection and service.

"They can't compete on price but they can compete on the overall shopping experience," he said. "The Wal-Mart shopping experience is not so good. If you go to one of these Wal-Mart Supercenters, the store is a zoo. It is not fun shopping at a zoo."