Not Playing Fair? : Toys R Us to ‘Vigorously Contest’ Antitrust Allegations
Toys R Us uses its clout to maintain high prices and limit consumer access to such popular items as Mr. Potato Head and versions of Barbie, the Federal Trade Commission contended on Wednesday in filing antitrust charges against the nation’s largest toy retailer.
The FTC’s action, if successful, could shake up the toy industry by forcing retailers and manufacturers to modify or abandon commonly used agreements that dictate where popular toys can be sold. That could make top-selling toys more readily available and possibly encourage the formation of new specialty toy outlets or more aggressive discounting. Deep price cutting of top-selling toys is rare.
However, some analysts questioned the merits of the FTC’s case, saying that the industry is very competitive and retailers are only likely to make modest changes in their practices, if any at all.
Toys R Us said it would “vigorously contest” the charges in court.
With 651 stores in the United States, Toys R Us enjoys a greater-than 20% share of the $19-billion U.S. toy retailing market.
But the Paramus, N.J.-based company has lost market share in recent years because of competition from discount retailers like Wal-Mart and Kmart, and warehouse clubs like Price / Costco Inc. and Sam’s Club. In February, it announced it was closing 25 stores worldwide and would consolidate some operations to boost profits.
The FTC contends such competition has spurred Toys R Us to use its buying power to coerce toy manufacturers such as Mattel Inc. and Hasbro Inc. into agreements that benefit Toys R Us to the detriment of consumers. Warehouse clubs, for example, have have been denied access to top-selling toys because of the deals, the FTC said.
“Toys R Us has violated the basic principle of fair play,” said William Baer, director of the FTC’s Bureau of Competition.
“Toys R Us was able to stop the steep discounting from going on and was able to prevent comparison shopping that Toys R Us worried would undercut its low-price image,” he said.
Mark Whitener, deputy director of the FTC’s Bureau of Competition, told Newsday that Toys R Us kept Hasbro’s Mr. Potato Head, Mattel’s Hollywood Hair Barbie, some types of Hasbro’s G.I. Joe toys and other merchandise out of the warehouse clubs because it feared being undersold. Whitener said warehouse clubs generally have been selling toys at 15% to 20% below the prices charged by Toys R Us.
If a manufacturer wanted to proceed with a sale to warehouse competitors, Toys R Us engineered agreements under which the manufacturer would sell warehouse operators “combination packs of two or more different items . . . that cost more to produce, which raised club member prices,” the FTC said.
Whitener said Toys R Us began making exclusive agreements with manufacturers in 1989, and the FTC began investigating the practice in 1994. He declined to say how the FTC had learned of the agreements. Toy industry experts said Price / Costco, which operates 250 warehouse shopping clubs, was among those that had complained. Price / Costco executives did not return calls seeking comment.
Smaller toy manufacturers have long contended that they have great difficulty getting shelf space at Toys R Us and other top retailers because of agreements between the retailers and manufacturing giants.
Many independent toy retailers have shifted to selling educational toys or merchandise for hobbyists.
Toys R Us did not comment on specific FTC allegations, but the company has argued that its deals with toy makers are a legal defense against tactics of warehouse clubs.
For example, Toys R Us Chairman Michael Goldstein on Tuesday said his company spends millions of dollars to promote and market toys year-round--only to see warehouse clubs “come along during the six weeks before Christmas, without making any such investment, and select the few hottest selling” items “at or below cost” to draw customers who also buy other goods at their stores.
Goldstein defended his company’s practices, declaring that it would continue to “reserve our unquestionable right to refuse to carry the same items as warehouse clubs.
“This,” Goldstein continued, “is central to our ability to compete, which we understand to be the policy objective of the FTC.”
El Segundo-based Mattel, the nation’s biggest toy maker, confirmed that popular items such as Barbie are not sold in warehouse clubs and other outlets. But that is because the company has a policy of providing such items only to retailers who agree to stock the toys year-round and who also help cover the cost of advertising, Mattel spokesman Glenn Bozarth said.
“We sell combination packets to other retailers, and that is a policy developed independent of Toys R Us,” Bozarth said.
He said Mattel has cooperated with the FTC during its Toys R Us probe. “At no point has it seemed that we were the subject of the investigation,” Bozarth added.
The FTC will seek an injunction in a trial before an administrative law judge. The agency is seeking an order to prohibit the firm from entering into any agreements with manufacturers similar to those the FTC said it already has established.
The proposed order also would prohibit the company from asking suppliers about their sales to discounters or from taking any adverse action against a supplier that deals with discounters.
Some retail industry analysts raised doubts about the FTC’s case.
Barry Rothberg, an analyst at Furman Selz in New York, said agreements between retailers and producers are commonly used by Wal-Mart, Kmart and others.
“This action is new legal ground and fairly controversial,” he said. “Wal-Mart and Kmart are big players. It’s not as if Toys R Us has benefited inordinately from these agreements.”
The five-member FTC voted 3-2 to file an administrative complaint against Toys R Us, meaning that an FTC administrative law judge will hear the case later this year. If the FTC wins the case before the administrative law judge, Toys R Us can appeal it to a federal court.
If the FTC wins, it will likely challenge other retailer-supplier relationships it deems to be anticompetitive, said Roger Spaeder, a Washington-based antitrust lawyer.
An FTC victory “could have a chilling effect on these deals,” Spaeder said. “Some large companies might decide to avoid these arrangements because big retailers definitely do not want the FTC scrutinizing their contractual relationships.”
Instead, retailers may adapt to avoid any legal entanglements of exclusive deals, said analyst Barry Rothberg of Furman Selz.
“This might force Toys R Us to protect itself by being more proprietary,” Rothberg said. “For example, they might try to develop a special Toys R Us Barbie by getting involved in product development with the manufacturer.”
Toys R Us shares fell 75 cents to $29.125 in active trading on the New York Stock Exchange.
Times wire services contributed to this report.
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Market Share Is Us
Toys R Us, which faces antitrust charges brought by the Federal Trade Commission, holds the largest individual share of the U.S. toy retailing market and has nearly doubled its stores worldwide over the last five years.
MARKET SHARE (1994)
Toys R Us: 20.7%
Wal-Mart: 13.6%
Kmart: 7.1%
Target: 5.7%
Kay Bee/Toy Works: 4.7%
Others: 48.2%
TOYS R US INC. STORES
1995: 1,115
Sources: Bloomberg Business News, NPD Group, Toy Manufacturers of America Inc.
Researched by JENNIFER OLDHAM / Los Angeles Times
