Toys R Us to Revamp; Makers Likely to Suffer

By GREG JOHNSON

Sept. 17, 1998 12 AM PT

TIMES STAFF WRITER

Toys R Us Inc.’s plan to close 59 stores, cut 3,000 jobs and stock more electronics and children’s apparel is seen as a setback for Mattel Inc. and other toy manufacturers already in the process of restructuring their own businesses.

The Toys R Us strategy announced Wednesday--its second restructuring attempt since 1996--is designed to stop a years-long slide in market share. The industry’s once-dominant retailer continues to lose business to savvy discounters such as Wal-Mart that use low prices to lure customers, and upscale toy merchants like Zany Brainy and Noodle Kidoodle that cater to shoppers willing to pay a premium for service.

The world’s largest toy retailer said it would close 50 European stores along with nine troubled locations in the U.S. It will eventually switch most of its 697 domestic stores to a new format and close 31 Kids R Us stores in the U.S. The 3,000 jobs will be eliminated through layoffs and attrition, a company spokeswoman said.

Word of the restructuring prompted El Segundo-based Mattel’s stock to fall $2 to $33.63. Archrival Hasbro Inc.’s shares tumbled $2.50 to $30.75. Toys R Us shares fell 75 cents to $18.13.

Mattel and Hasbro have been scrambling to fit their product lines to a world where children are changing the way they play. The two companies have been shedding noncompetitive lines and buying other companies to build market share. Both are trying to rush electronic and computer games into the market, and Mattel said earlier this year it is placing a heavy emphasis on foreign sales.

Mattel on Wednesday, however, downplayed the significance of the Toys R Us restructuring. “We’ve not heard that their orders for our products are any different today than they were yesterday,” said Mattel spokesman Glenn Bozarth. “And as far as the [upcoming holiday season], we believe that we’ll have the brand names--Barbie, Fisher-Price and Disney--that will be in the most demand.”

While analysts agree that the $11-billion retailing giant no longer controls the toy world, it still casts a long shadow over manufacturers.

“When Toys R Us sneezes, the Mattels and Hasbros catch pneumonia,” said Kurt Barnard, an industry analyst in New Jersey. “Toy manufacturers that have grown big along with Toys R Us are now having to adjust to new market realities being created by Toys R Us.”

Mattel and other toy manufacturers will have to scramble for retail space in the future because Toys R Us traditionally has dedicated far more space to toys than competitors such as Wal-Mart.

Manufacturers will have to produce “seasonal hits early in the year that can stand on their own two legs,” said David Liebowitz, a managing director with New York-based Burnham Securities.

Toys R Us faces an uphill struggle. Wal-Mart, for example, now drives 16.4% of domestic toy sales, compared with an 18.4% share for Toys R Us.

Toys R Us ran into stiff competition overseas as well. Analysts say economies of scale haven’t materialized, producing operating margins overseas that lag domestic margins.

The restructuring was announced just weeks after the Paramus, N.J.-based retailer said that second-quarter profit fell by 57% to $15.9 million--the chain’s third quarterly drop in a row.

Toys R Us plans to add three new sections to its stores: Media World, an expanded electronics department; Kids Apparel, with lower-cost apparel; and Deal World, a bargain shopping area.

Nearly 75% of the chains’ 697 U.S. stores will switch to the new format in time for the 2000 holiday shopping season. Toys R Us will consolidate administrative offices and close 31 Kids R Us children’s clothing stores. The chain now has 1,462 stores, including 448 overseas, and 214 Kids R Us outlets.

The company will take a charge of $495 million in the third quarter to cover costs of the restructuring. Analysts are taking a wait-and-see stance on the retailer’s latest attempt to update its stores and cut costly inventories.

In 1996, Toys R Us unveiled “Concept 2000,” a new look that was supposed to make the chain’s cluttered aisles easier for shoppers to navigate. But the promised refurbishing stalled and most Toys R Us stores look much like they did a decade ago.

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Losing Share

Toys R Us has been losing market share in the U.S. to discount superstores like Wal-Mart, Target and Kmart for several years. Toy market share for 1994 and 1997:

1994

Toys R Us: 21.0%

Wal-Mart: 14.1%

Kmart: 7.4%

Target: 5.6%

Other: 51.9%

1997

Toys R Us: 18.4%

Wal-Mart: 16.4%

Kmart: 8.2%

Target: 7.1%

Other: 49.9%