Toys R Us Starts Big Ad Campaign
Toys R Us took out full-page newspaper ads Thursday promoting “our biggest clearance event ever,” with some items marked 50% off, the day after the Federal Trade Commission filed an antitrust suit alleging the retail chain conspired to keep toy prices high.
The suit, which Paramus, N.J.-based Toys R Us vows to fight, accuses the chain of making deals with manufacturers to manipulate the supply of certain toys to its advantage--and to the detriment of other retailers and consumers. An FTC administrative law judge will hear the case late this year.
The dispute has shed light on the extremely touchy but timeworn practice whereby large retailers--from supermarkets to shoe stores--extract special deals with manufacturers to get price and volume advantages. The FTC alleges that Toys R Us exceeded legal boundaries in making those deals.
In today’s environment, dominated increasingly by nationwide discounters, retailers agree to give manufacturers prominent display and detailed sales information that helps them target the market better. In exchange, retailers get favorable pricing and “just in time” deliveries that minimize their inventory costs.
The arrangement is designed to “ensure the success of both,” said Tom Tashjian, retail analyst at Montgomery Securities in San Francisco. He added that the FTC suit is the largest and most prominent of its kind.
“This is the way it’s been done, so this suit represents a very different nuance, trying to bar these special relationships,” Tashjian said. “Just walking this out, the suit, if successful, would mean that a mom-and-pop operator should be entitled to the same type of [purchasing] deals as the warehouse club.”
But the FTC suit alleges that the purchasing leverage enjoyed by Toys R Us--the nation’s largest toy retailer, controlling an estimated 20% of the nation’s $19-billion toy market--is excessive. Among those who agree is Joel Benoliel, senior vice president and general counsel of the Price/Costco discount warehouse chain, based in Issaquah, Wash.
“In order for us to stock a popular doll sold at Toys R Us, the manufacturer was saying they would only ship it to us if they combined it in a package with a value-added item, which in one case was a comb that we rejected as not being value-added,” Benoliel said. Toys R Us pushed the deal so that shoppers could not “comparison shop,” Benoliel said.
Price/Costco “cooperated fully” with the FTC in its investigation, Benoliel said. “We are not going to try to fool our members. It just raises the costs,” he added.
Toys R Us Chief Executive Michael Goldstein fired his own salvo as he defended the manufacturer arrangements and accused unnamed discount warehouse chains of selling goods below cost to attract shoppers.
“Given the combined impact of the practices of warehouse clubs, our own contribution to the industry and the intensity of the competition in our marketplace, we reserve our unquestionable right to refuse to carry the same items as warehouse clubs,” Goldstein said.
Price/Costco’s Benoliel denied selling goods below cost, saying that would be against the warehouse chain’s policy. “We don’t have loss leaders,” he said.
The FTC alleges that as far back as 1989, Toys R Us began forcing toy makers to agree not to sell the same toys to the warehouse clubs that they sold to Toys R Us. Manufacturers also agreed to let Toys R Us approve certain transactions with warehouse clubs, William Baer, director of the FTC’s bureau of competition, said in announcing the case.
Retail analysts said the FTC suit will hurt the public’s perception of Toys R Us and that the sales announced Thursday are a way of reinforcing its tarnished image as a discounter.
The ads, which will run for three days in most major newspapers across the country, are not related to the FTC’s action, spokeswoman Carol Fuller said. “Gosh no. These ads have been planned for a while--months in advance.”
But analysts agreed that the retailer needs a dramatic gesture to help counteract the negative publicity.
“In a world of increasing competition, you sure don’t want to have the Federal Trade Commission come in and help your competitors by saying you’re keeping prices high,” said analyst Jack Trout, who tracks the toy industry at Trout & Partners in Greenwich, Conn. “I think a lot of people went to Toys R Us because they thought it had low prices.”
Toys R Us shares closed unchanged at $29.125 in New York Stock Exchange trading Thursday.
Associated Press contributed to this report.
