Back to the old drawing board

The fourth quarter of 2003 will likely go down in the annals of toy retailing as one of, if not the, most volatile in history. From the closing of free-standing Imaginariums, to the demise of the Zany Brainy chain, to the toy-pricing wars among the big boxes, the industry was shaken to its core and now faces a colossal paradigm shift. This new year may see additional Darwinian-type selection—or "survival of the fittest"—among the species, which include manufacturers as well as retailers. PLAYTHINGS talks to Joe Diaz, president of Learning Express—one of the remaining successful toy specialist chains—about the current industry environment and potential success strategies, especially for the specialty market.

PLAYTHINGS: Can you think of a period during the past two decades when the toy industry was in as fragile condition as it is today?

JD: Learning Express has been in the toy industry since 1987, and we have not seen anything that approaches the current conditions. The combination of retail consolidation, a poor economy, hypermarkets and price clubs selling for under cost, high retail rents, and the lack of hot toys, are all factors that have made profitability a challenge for even the best-run stores.

PLAYTHINGS: Is the small and mid-tier toy retailer an endangered species?

JD: Absolutely. There are clear challenges as demonstrated by the recent announcements about FAO and Imaginarium closings. There are also, however, real opportunities for the specialty retailers who manage to provide an affordable alternative to the big-box shopping experience.

PLAYTHINGS: How can these retailers survive extinction? What kind of restrategizing can they do?

JD: Alliances, partnerships and collective buying are all terrific strategies to compete and win in this environment. Product, service, convenience and an emotional connection to a brand or store are critical to specialty retail success. But today's consumer also demands value. Small retailers must find a way to work together to increase the size of orders and reduce the cost of goods.

PLAYTHINGS: Can retailers "grow" in the current environment?

JD: This question is somewhat difficult to answer because there is such diversity among retailers. Certainly, there are small retailers who are doing a great job and are in the right location, who will continue to grow. Others will not be able to overcome the pricing practices of Wal-Mart, Target and Toys R Us.

In spite of the challenging environment, we opened 12 Learning Express stores in 2003 and we expect to open 20 new stores in 2004. We have learned a lot from the past three difficult years, and we will open smaller footprint stores with as much uniquely wonderful products as possible. Learning Express stores will offer the best selection, customer service and convenience possible, but we will also be careful to provide value to the growing segment of the population for whom finding a bargain is essential.

PLAYTHINGS: How does all this consolidation and closure among retailers impact the small- to mid-size manufacturers? Are they an endangered species?

JD: Toy manufacturers of all sizes are at risk. Toys have been targeted by mass merchants as a loss-leader category. These retailers sell toys on little or no margin and have eliminated the ability of manufacturers to increase costs to cover research, development and marketing expenses.

The market clout of the few top retailers is so great that manufacturers are forced to grant terms that are inconsistent with their own long-term survival.

It is a vicious cycle. The big guys cut prices and force smaller retail competitors out of business.

Manufacturers then need to move product at any cost to make up for volume lost from the small retailers. The powerful retailers are able to exert even more leverage, which makes it that much harder for manufacturers and small retailers to survive.

Then, to add insult to injury, the big guys directly source whatever they can to create private-label programs that further reduce the shelf space available to manufacturers and the variety and innovation that toy consumers once enjoyed.

PLAYTHINGS: Is there a remedy to this current cycle?

JD: From where I sit, the fix is clear: Toy manufacturers must put in place long-term strategies designed to nurture the independent toy store sector. These plans must recognize the tremendous positive brand exposure gained by working with independent toy store operators who truly care about the products on their shelves, as well as the families who visit their stores looking for that special plaything.

There may be fewer homeruns like gaining a spot on a Wal-Mart shelf, but there will surely be fewer disasters like those experienced by creditors of the many once-strong retailers who failed in the last five years.

PLAYTHINGS: So is the onus on manufacturers?

JD: The responsibility to make this happen does not just fall on the manufacturers. Independent retailers need to wake up and realize that if they cannot find a way to cooperate, they will not survive. At Learning Express, we provide support to independent owner operators. Although store owners make their own buying decisions, we have a very strong team of buyers who view key product introductions, evaluate national sales results, make product assortment recommendations and put together marketing programs. We also produce semi-monthly catalogs and a big holiday book, both of which generate millions of impressions for vendors and allow us to negotiate terms that would not otherwise be available to an independent store owner.

PLAYTHINGS: What can the toy industry expect in the long term?

JD: Like the economy, the toy industry moves in cycles, and there will again be must-have toys that the big guys don't carry. We also think there will be a return to the values of the neighborhood toy store with unique high quality toys, great staff and meaningful connections to the community.