Fear Factor: Toys

Predatory pricing. Serial Chapter 11s. Product cloning. Inventory liquidations. Price wars. Lease auctions. Intelligence property law suites. Toys of Christmas Past. Talking giraffes.

Welcome to Fear Factor, the toy edition. In this showdown, keeping a share of the $20-billion traditional toy market is the only prize.

But small as that prize may be, there are plenty of players—in spite of the events that were making prime time newscasts at year-end '03.

When a toy retail icon like FAO Schwarz, for instance, teeters on the brink of extinction—as its parent FAO Inc. sought Chapter 11 protection for the second time in a year—newscasters take notice. A toy pricing war launched by Wal-Mart also made headlines (not that the big-box giant was in need of news coverage). But setting prices on popular toys at wholesale or below, well before the traditional launch of the holiday shopping season, set the industry in a tailspin, as Toys R Us and Target tried to follow suit.

Indeed, the reverb of price wars and toy store doors slamming shut is noisy all right. It's the kind of noisemaking that may also loosen the foundation of the industry, say some. Others maintain that it's just part of a cycle.

"People forget about Ames" and others like it that closed in great numbers over the past several years, Wayne Charness, Hasbro's senior vice president of corporate communications, tells PLAYTHINGS. "There have been plenty of Chapter 11s in the past," he recounts, adding that the toy business survived the likes of two world wars and The Great Depression. It will survive this latest challenge too, he suggests. Even the current price wars.

"The reality is," Charness says, "is that our business has consolidated so much."

"It is a cycle," agrees Susan Reynolds, a 16-year industry vet whose agency represents several small manufacturers.

"We were 'over-retailed' in the '90s," she tells PLAYTHINGS. "Chains grew faster than they should have. We are at the tail end of that cycle; the market just can't support those chains," she says referring to the mid-tier multi-chains like Zany Brainy and the now-defunct Noodle Kidoodle.

Scott Wisner, another industry veteran, agrees that the fallout from fourth quarter '03 is "the final act" of a 10-year cycle. It finally allows the gap between specialty and mass to be seen by the public, he says. Wisner, vice president of sales at CoopSport, adds that the shakeout doesn't mean the "average consumer will understand the difference, but they can at least see what is different between them."

As another industry pundit tells PLAYTHINGS: "When the dust settles, the consumer will be offered a quick delineation of who's who in the market," adding that the key players will need to further differentiate themselves from one another.

And that does not necessarily mean by price.

Toy industry analyst Sean McGowan doesn't see the price war that was prevalent at year-end '03 continuing indefinitely, at least not for toy specialists like Toys R Us. Having addressed the topic of predatory pricing with this writer recently, McGowan said that he didn't think TRU, for example, could continue "doing what it's been doing—trying to compete on price where appropriate and re-model stores every few years." He pointed out his belief that the retailer needs "to decide how they're going to change their strategy, so they can compete more effectively. But I think it will be a survival-by-niche strategy," he added.

Brian Miller, owner of four specialty toy stores—Geppetto's—in California, is a prime example of success through niche strategy.

"This is an opportunity for the specialty retailer," he tells PLAYTHINGS, referring to the fourth quarter "shakeout." "Consumers will want to shop specialty. I can't compete on price, but I can offer service and special orders," he says, adding that he can't imagine mass-market retailers will continue selling toys at wholesale prices year-round.

But while the big boxes were busy undercutting each other on price during the last quarter, Miller was enjoying a double-digit sales increase compared with the same period the previous year .

"We had a phenomenal fourth quarter. But I don't think it's typical," he quips.

Wisner concurs that specialty retailers who have survived the most recent market upheaval "can show how different they are." He suggests that they will have to "de-commoditize" toys, however, which presents an all new challenge.

What toys there are, that is.

Manufacturers hoping to withstand the upheaval of the last quarter will have to rethink their strategies in order to make up for miles of lost shelf space.

"We are looking at non-traditional stores," Hasbro's Charness tells PLAYTHINGS. Chain drug stores and supermarkets are two opportunities, he agrees. "We have to be creative. We plan to sell product to every nook and cranny in the world," he states.

Over the past decade toys have, indeed, found new shelf space. PLAYTHINGS research for its recently published Industry Almanac presented a diverse—eclectic, really—list of top 25 toy retailers; at least compared with a few short years ago! But as traditional toy retailers become more non-traditional, the opportunity for manufacturers grows exponentially.

Miller points out that manufacturers like Melissa & Doug and Wild Planet have been quite successful in marketing their toys to the non-traditional retailer. Toys are finding new shelf space—and new life—in venues like Michaels, Linens 'n Things, and Bed, Bath and Beyond, for example.

"You just can't put all your eggs in one basket anymore," Miller notes.

Charness also stresses that innovation is now key more than ever, starting with product, and by brand-building as well; by developing toys that "can't just be knocked off," for example. He added that brands cannot simply be "extended. Innovation is the lynchpin of future success," he tells PLAYTHINGS.

The consensus, though, is that the going will be tough for smaller manufacturers; those who have been stung badly by the string of Chapter 11s by the so-called specialty chains.

"The short term is not good. It is going to hurt financially where product development is concerned. It's already been tough," Miller says, adding that some products shown at Toy Fair never even made it to market last year.

"The market," Alan Dorfman tells PLAYTHINGS, "is heavily dominated by promotional toys—either TV or licensed." Dorfman, president of Basic Fun, says, "The concentration of customers will have a severe affect on the number of manufacturers, as well as on the entire creative process. Only a fraction of new and innovative toys will be made in the coming years, as there is not enough support to carry the cost of R&D and tooling."

Reynolds sees "exclusives" as a strategic option for manufacturers. She sees the potential for manufacturers to develop a different product mix for mass and for specialty. "Some manufacturers won't survive this latest shakeout," she admits. But those that do, she adds, will run their businesses better, develop unique product with patented design and concentrate on brand building.

Miller adds that it is a good time for manufacturers to be proactive. He suggests that they ask retailers what their particular needs are and provide incentives for business building. "Rebates and discounts work!," he adds.

Dorfman believes the market will still be extremely competitive. "It will definitely be a buyers' market," he says, meaning retailers will be in charge.

"The punch words are 'exit strategy.' Retailers will expect an offset against all merchandise that doesn't sell through," he surmises.

"There will be lower margins all around, as retailers price toys lower and lower to use them as traffic builders," Dorfman forecasts.