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Correction to This Article
An article about toy sales that ran on Page One of the Nov. 4 early Sunday edition and on the front page of the Nov. 3 Business section misstated the results of a consumer survey by Deloitte & Touche. According to the survey, 58 percent of shoppers said recent news stories about product recalls will influence some of their purchasing decisions this holiday season, not 82 percent.

What's the Toy Story?

KB Toys of Pittsfield, Mass., has experienced a series of setbacks.
KB Toys of Pittsfield, Mass., has experienced a series of setbacks. (By Ben Garver -- Associated Press)
By Ylan Q. Mui
Washington Post Staff Writer
Saturday, November 3, 2007

KB Toys has targeted 156 stores across the country for closure -- six of them in the Washington area -- according to internal company documents, underscoring the cutthroat competition facing toy retailers this holiday season.

The company, which has fewer than 600 stores, plans to hand over management of the selected shops to Gordon Brothers liquidators on Thursday and shut them for good in January, according to a memo from a KB executive to employees. In another memo, dated Oct. 29, KB said it planned to close stores at Fair Oaks Mall, Manassas Mall and Dulles Town Center in Virginia and Bowie Town Center, Montgomery Mall and Silver Spring's City Place Mall in Maryland.

The documents were provided by a store manager, who spoke on the condition of anonymity because the company has not publicly released the information. Geoffrey Webb, KB Toys director of advertising and sales promotion who also handles media inquiries, declined to comment on the documents or potential store closings. KB Toys Chief Executive Andrew Bailen had said in news reports in August that the company planned to close a significant number of stores this fall.

"Making the decision to close your store was very difficult for KB Toys," Gerry Murray, senior vice president of human resources, wrote in a letter to employees. "We recognize the effect this will have on you, your associates and your customers."

The store closures are the latest setback for the embattled company, which replaced its chief executive this summer and has had substantial turnover in top management.

"I just think that KB Toys is in a death spiral," said C. Britt Beemer, chairman of America's Research Group, a consumer behavior research firm.

KB Toys filed for bankruptcy protection in 2004 after a bruising holiday price war with Wal-Mart caused sales to plummet. The chain, based in Pittsfield, Mass., then operated 1,231 stores. Now it has less than half that number. The private-equity firm PKBT Funding, an affiliate of Prentice Capital Management, became majority owner in 2005 when the chain emerged from bankruptcy and has been attempting to turn it around.

KB Toys is not the only retailer facing a tough holiday season. Several industry experts said the next two months will be difficult for all toy stores, which have been battered by this summer's massive recalls of defective and lead-tainted merchandise.

According to a survey released this week by the accounting firm Deloitte & Touche, 82 percent of shoppers said safety concerns will influence their buying decisions. The report said consumers will try to stretch their dollars further. The average amount they plan to spend on gifts this year is slightly less than in 2006 -- $569 compared to $584. But they will be using the money to buy more presents, according to the survey.

Exacerbating the dour outlook for consumer spending is the lack of growth in the toy industry. Gone are the days when a cuddly teddy bear tied with a bow satisfied children. Now kids and adults alike are clamoring for laptops, iPods and high-definition TVs. Annual sales of toys have stagnated at about $22 billion over the last three fiscal years, while consumer electronics have skyrocketed 19 percent, to $121 billion in 2006 from $102 billion in 2004, according to the consumer research firm NPD Group.

That means retailers must fight to increase sales by stealing market share from each other. Wal-Mart came out swinging early, announcing Oct. 1 that it was cutting prices on some of the season's hottest toys by 10 to 50 percent. The NASCAR Ride-On went from $199.97 to $177.72. On Friday, Wal-Mart cut the price to $144.72, part of blockbuster discounts on a handful of items that are normally reserved for the day after Thanksgiving.

"Did they make the announcement to tell the consumers, or did they make the announcement to tell the competitors?" Beemer said. He said Wal-Mart's message was, "Look, guys, if you take any of our customers away, you're going to be in for a battle."

Wal-Mart's aggressive posturing intensified the pressure on KB Toys. The retailing giant dominates almost every category it enters, elbowing competitors out of the way by undercutting them on price. Wal-Mart is now the top U.S. toy seller, with about 26 percent of the market, according to Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consultant and investment banking firm. KB Toys' market share is negligible, he said.

"When Wal-Mart gets into something and starts focusing on price and it's a commodity, watch out," Davidowitz said.

Wal-Mart has also felled other toy retailers. A consortium of private-equity groups bought Toys R Us for $6.6 billion in 2005 after it struggled unsuccessfully to compete against the behemoth. FAO Schwartz filed for bankruptcy protection in 2003 and was purchased by investment firm D.E. Shaw.

KB Toys' operating model made it particularly vulnerable. Its stores are mostly in malls, which charge high rents and have declined in popularity in recent years as outdoor pedestrian shopping areas took off. The company's assortment of merchandise is also constrained by the small size of its stores compared to the big boxes of Toys R Us.

Still, Davidowitz said, no toy retailer is safe this Christmas.

"The bottom line is the consumer has never been weaker," he said. "We're going to have a terrible holiday."

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