New play for toy market: Retailers challenge big-box chains

By Ylan Q. Mui
Washington Post Staff Writer
Wednesday, December 22, 2010; 10:48 PM

Toy sellers have been fighting hard this holiday season to win over tiny tots - and their harried parents - after years of brutal price competition and the economic downturn ravaged the industry.

Novelty retailer Spencer Gifts quadrupled the number of temporary ToyZam stores it opened in malls across the country. Kmart slashed prices on 1,400 toys last week. And Toys R Us is keeping its stores open 24 hours a day through Christmas Eve.

They're all jostling for a slice of a $22 billion industry that has flatlined for nearly a decade as kids' playrooms hit the saturation point. Even this year's projected 3 percent uptick in sales would only put the industry back where it was three years ago. That means one retailer's gain almost inevitably results in another's loss, amounting to a zero-sum game of survival.

"You basically have a set number of kids every year," said Jim Silver, editor in chief of Time To Play, a trade publication. "The overall sales are not going to change that dramatically. ... It's really a fight for the market share."

Behemoth retailer Wal-Mart has long dominated the industry, battering its rivals in an aggressive price war earlier in the decade. The competition helped force famed FAO Schwarz into bankruptcy in 2003 and prompted restructuring at Toys R Us. KB Toys filed for bankruptcy in 2004 and attempted a comeback - only to be felled two years ago by the financial crisis.

But the pendulum may have swung too far, and several toy sellers believe that there's now room in the market to mount a challenge.

Take Jerry Pierce, former senior vice president of merchandise for KB Toys. He has since signed on with Spencer Gifts to create a toy store that would be open only during the holidays, which account for roughly 40 percent of toy sales. ToyZam debuted last year with about two dozen stores and this season opened 100 locations in shopping centers across the country.

Although the stores stock national brands including Barbie and Legos, they also sell specialty items, such as Madame Alexander dolls and eco-friendly products that help insulate them from big-box stores' discount pricing.

Pierce said he also made a point to keep clutter from the front of the store, a mistake that he acknowledges KB made. At the ToyZam in Westfield Montgomery mall, the entrance is reserved for demonstration toys, such as an electronic keyboard, a Paper Jamz guitar and a combination tricycle-dump truck that little boys used to zoom through the store's extra-wide aisles.

"The one problem that we may have is that parents have a hard time getting their kids out of the store," Pierce said.

Pierce is not the only one who spied an opportunity. Toys R Us opened 600 temporary stores in shopping malls this holiday season and is selling merchandise from FAO Schwarz, which it acquired last year. One of the cornerstones of the retailer's new strategy is to sell the newest toys before the competition - and before the battles over price. Greg Ahearn, senior vice president of marketing and e-commerce, cited the Nerf Sonic Series as a product slated for release next year that Toys R Us has already put on the sales floor.

Sears began putting toys back in its stores last Christmas and expanded the program to 99 locations this year. Julia Fitzgerald, chief marketing officer for toys and seasonal products at Sears Holding Co., said the merchandise focuses on what she calls "good for you" toys that develop creativity, motor skills, critical thinking or social development. Think LeapFrog, not Black Ops.

"It's as much about as what we don't have in there as what we do have in there," she said.

According to the consumer research firm NPD Group, more than half of toy purchases are planned rather than impulsive. Among shoppers who hit the stores with an item in mind, 42 percent said they would go to another store if they couldn't find what they wanted. That statistic should be a "wake-up call for retailers," NPD analyst Anita Frazier said.

"Picking the right product selection and then managing the inventory to keep those items in stock is more important than ever before," she said.

That's why Wal-Mart placed a last-minute order for literally boatloads of Squinkies and Sing-a-ma-jigs, two of the season's hottest toys, which arrived last week, said Laura Phillips, Wal-Mart's senior vice president for toys. It also scrambled to stock the surprisingly popular Fushigi magic gravity ball, which wasn't even on shelves in August but was one of the top five sellers last week.

Still, Phillips said, many of the retailer's customers are continuing to feel the effects of the recession, and she called the season "challenging." Price still matters, as Lydia Colon of College Park can attest.

She made multiple shopping trips to find the perfect gifts for her two sons at the right price. A visit to Wal-Mart unearthed a SpongeBob Lego set for her 7-year-old - it was $5 cheaper than at its competitors. But her 9-year-old fell in love with ToyZam when they strolled past it at Westfield Montgomery recently. She returned this week to buy him a plastic safari play set, even though at about $30, it cost more than she planned to spend.

"They don't have this kind of toy anywhere," Colon said.

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