Holiday Season Is No Fun for Toy Retailers

From Associated Press

The annual holiday wars between the nation's two largest toy sellers is well underway. Wal-Mart Stores Inc. and Toys R Us Inc. are cutting prices and deploying brigades of Barbie and Elmo dolls as they joust for market share.

In a move that took Toys R Us -- and the rest of the industry -- by surprise, Wal-Mart cut prices on more than a dozen hot toys in mid-October, a month earlier than normal. By selling some items below cost, the discounter is using toys as a loss leader to woo shoppers to other aisles elsewhere in the store, analysts observed.

Toys R Us countered with its coupon book, cutting the price gap and hoping its wider selection will make its stores the destination for holiday buyers, especially as inventories dwindle elsewhere. Still, it acknowledged in a recent conference call that Wal-Mart's discounting hurt third-quarter results.

"Things got a little more cutthroat earlier this holiday season," says Sean McGowan, toy analyst at Harris Nesbitt Gerard.

For example, Wal-Mart slashed the price of Mattel's Hot Wheels T-Wrecks play set to $29.74, from its original $49.88. Most retailers were selling the toy for about $50.

The struggle for holiday sales matters because about 40% of all toys are sold in the last two months of the year. Fierce price cuts by Wal-Mart already have bedeviled toy operator FAO Inc., which owns FAO Schwarz, Right Start and Zany Brainy. The chain, which emerged from bankruptcy protection in April, said it might not continue normal operations through the end of the month.

Analysts are closely watching how Toys R Us will do this holiday season, the first for which all the parts of its turnaround have been in place, including store remodelings, tighter inventory management and a better-trained staff.

In the last three years, Toys R Us lost money in its first three quarters, then made a big profit during the holiday season.

Wal-Mart, the world's largest retailer, supplanted Toys R Us as the nation's biggest toy seller in 1998, and observers suspect the gap will widen this season.

Wal-Mart's 3,000 U.S. stores account for about 21% of U.S. toy sales; Toys R Us, with 681 U.S. stores, has about a 17% share, McGowan estimated. Target Corp. is next with about 9%, and Kmart and privately held KB Toys each have 4% to 5%, he said.

The head-to-head competition between Wal-Mart and Toys R Us is only good news for consumers.

Barbara Murray of Oakland, N.J., was clutching a Toys R Us catalog with coupons as she was pushing her cart at a Wal-Mart in North Brunswick.

"The coupons expire this week," Murray said. "We just want to get the best deal."

"Generally, I think the prices are lower here," the former paralegal said, adding that she was buying gifts for her 1-year-old and 4-year-old daughters.

That assessment was echoed by teacher Tamika Johnson, 25, of Somerset, N.J., who said she was checking both stores as well as Target to find gifts for her 5-year-old son. She described the Toys R Us store five miles away in East Brunswick as her "last resort."

"I only go there when I can't find it anywhere else, because they're always more expensive," Johnson said.

Toys R Us Chairman and Chief Executive John Eyler said the company had "made it our biz to make sure that price is not the reason to go shop at a competitor."

"We're in the business 365 days a year. The big discount competitors start to run out of the big sellers at the beginning of December," Eyler said.

Independent surveys from various investment banks generally support Eyler's assertion that Toys R Us has similar prices on hot toys, now that it has responded with the price cuts. There's also no disputing his company's advantage on selection.

Eyler said his typical store had 9,000 different items, which he said was more than twice Wal-Mart's expanded holiday offering. Wal-Mart declined to give a figure.

Meanwhile, Toys R Us has increased the number of exclusive toys, which now account for about 20% of its selection, up from 5% four years ago. Half the exclusives are part of well-known brands, such as Barbie or Bratz, and the rest are house brands, such as Animal Alley, he said.

Wal-Mart also has exclusives, including $99 radio-controlled models of the Hummer and H2 vehicles. "The Hummer's been a big seller," McGowan said. Wal-Mart has several private labels as well, including the Kid K'Nex line.

Wal-Mart's strategy is simple, said spokeswoman Karen Burk: "We strive to be the low-price leader."

The season will be an ordeal for Toys R Us, despite having sharper prices, its freshest inventory and better displays, McGowan said. "That's kind of the tragic frustration," he said. "Toys R Us needs a very compelling reason to get people to make another trip."

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