A Nose For Growth

It's been a long, strange trip for the specialty toy business. Ten years ago, specialty stores looked to be on solid ground as independent retailers' efforts to carve out a market for themselves distinct and seemingly separate from big-box category killers like Toys "R" Us and mass market competitors from KB Toys all the way up to Wal-Mart began to find favor with families. Then suddenly, such stores had their own trade association and segment-specific chains, with enough money to ramp up from just a handful of locations to dozens—then hundreds—throughout the land.

Today, those chains are gone and the toy business hasn't been any kinder for those independents that stayed small and local. Social changes among kids continue to hurt small retailers as much as they do TRU, and the biggest retailers, such as Target, have taken notice of their once too-small-to-spot niche and moved to take possession of specialty toy stores' biggest advantage: shelves full of hard-to-find, often European-manufacturered or designed, mostly educational toys that resonate with upscale consumers.

Yet, despite all of the upheaval, there are independent specialty toy stores that are thriving, or at least steadily surviving, with micro chains having anywhere from three to a dozen locations making their presence more prominently felt in markets like Boston, Minneapolis and Cleveland. In San Diego, Calif., the specialty retailer to watch is Geppetto's—A Child's Fantasy, a 14-year-old operation which opened its sixth and seventh stores within six weeks of each other in the run up to this past holiday season.

Despite Geppetto's steady growth, the overall specialty toy business has gotten tougher since 1992 when Brian Miller, owner of Geppetto's, took over his parents' shop following his father's death, Miller says.

"There has been some resurgence in regional toy chains, but the market's definitely harder today because there's less distinction between specialty product and mass product," Miller says. "Our vendors, who might have been true specialty before, are now in lots of different outlets, so it's harder, if not impossible, to find product that's truly special to our market. I don't consider Target a specialty toy store, but because of retailers like Target, we can't distinguish ourselves just by the product we carry anymore."

In order to compete, Miller's stores have placed even greater importance another core principle for keeping shoppers returning to specialty stores—customer service, whether that's by being more knowledgeable about the products they carry, offering free gift wrapping or carrying customers' toy purchases to their cars. "If that's what they need, we'll bend over backwards for the customer," Miller says. "I tell my staff all the time that we can't compete on price, so what distinguishes us in the customers' eyes has to be the person behind the counter, the services we offer and what we do to give back to our community."

Regardless of how they do it, for those independent retailers who manage to remain viable in the face of such growing competition, the most common roadblock to expansion beyond an initial store or two is no different than that faced by small retailers in other product segments—money.

"It's expensive to have one store and do it nicely," Miller tells Playthings. "For example, we have all custom fixtures that we do when we build-out a store, and that gets costly. I think growth has to be slow unless you're getting some outside money, which we haven't had. It's a slower-paced growth than for a big chain that has deep pockets and can afford to launch 100 stores. We're talking about smaller-scale businesses without the money to grow quickly, which isn't to say they aren't successful businesses; there are plenty of single or two-store groups that are very successful individually."

Geppetto's growth was a slow but steady process, Miller says, expanding outward from that initial 600-square-foot store, located within the galleria of a Coronado, Calif., resort, to a second store a year later "after I saw I could make a success out of the first one," Miller remembers. "I saw the potential of the business, and then every few years or so we'd open another one. This year was unusual, but there were two locations available that were hard to beat."

Those new stores are a 2,000-square-foot location in a Chula Vista, Calif., lifestyle center that opened in late October and a 2,200-square-foot shop in San Diego's 4S Ranch area that opened on December 1. They followed the September 2005 opening of Geppetto's largest store, a 2,500-square-foot unit in a former Learning Express location in San Diego's "super affluent" Carmel Valley neighborhood. "All we did was remodel it a little bit and restock it and our sales have virtually doubled there in a year; it's now one of our best performing stores," he says.

The San Diego area's affluence is a factor that has helped Geppetto's keep growing while other specialty toy retailers have struggled, Miller admits. "I have no control over the economy here, but it's done nothing but help me. Our economy has been very strong, which is a huge plus." The 4S Ranch store that just opened, Miller notes, is in a new development where 6,000 homes were built in the last five years. "That kind of growth is hard to argue with," he says.

While the number of store fronts has grown, Geppetto's is still a small business when it comes to day-to-day operations, Miller says. He still personally picks every product that goes into the stores with help from "a very talented buyer," but this year, he also felt the need to open his first stand-alone office. And there is still no centralized distribution facility so "we just turn the merchandise and keep reordering," he says, adding, "Because our stores are small, if something doesn't work, I don't want to waste the real estate. We'll mark it down and get rid of it. I'm happy to try new things, but if it doesn't perform, it's out of here quickly."

Overall, "it's been a plus and a minus to be where we're at in size," Miller says of Geppetto's growth. "One of the pluses is that it gives us more buying power, but operationally, it certainly is a challenge with the more stores you have. It's harder to maintain the same kind of consistency and control between the stores and in the services that you offer. Those are the kind of challenges that a chain faces."

Those challenges, though, won't stop Miller from continuing to expand. "We're going to take a little breather after doing these two stores within six weeks—let the growing pains go away," he says. "But number eight will happen. We're working on it."