Click here to see the February 2005 TDmonthly Magazine coverage on the battle with Wal-Mart.

For specialty retailers, chains such as Wal-Mart and Target have become the dragon at the gates. These big-box behemoths aren’t looking to feast on fair maidens—just their wallets. And feast they have… stuffing themselves on dollars once loyal to the likes of FAO Schwartz (now bankrupt for the second time), Zany Brainy, KB Toys, Toys R Us, and many more who once flourished in the safety of the mall kingdom.

“Beginning four to five years ago, Wal-Mart began using toys as ‘traffic drivers,’” stated Todd Kuhrt, industry analyst for FTN Midwest Research. Meaning that big discounters have been pricing toys at or, as FAO Schwartz CEO Jerry Welch recently claimed, below cost, making up the difference with increased sales in other areas. The effect is deflation in toy prices overall, wiping out profit margins for specialty retailers.

“I don’t think Wal-Mart is selling below cost,” said Britt Beemer, founder of America’s Research Group. “It may seem that way to FAO Schwartz, but it’s likely that Wal-Mart, because of its status, received special pricing from its suppliers.

”And it’s not just a matter of price, according to Beemer; being first in line for new toys can make all the difference. “For years, retailers like FAO and Toys R Us had the advantage of getting toys one to two weeks earlier than others,” Beemer said. “That advantage doesn’t exist anymore. Now, manufacturers have to go to Wal-Mart first because they’re number one.

”With the recent trend in piggy-back partnerships, such as KB toys placement of 600 (up from 77 last year) mini-stores within Sears outlets or Toys R Us outlets in 1,100 Albertsons food stores, it´s clear that toy retailers aren´t giving up without a fight.

“Specialty retailers are trying anything in an attempt to cast a wider net,” claimed Beemer. “Having toys in a grocery store creates the possibility for impulse buys. Just like a grandparent who goes to Wal-mart for clothes and ends up picking up a toy for the grandkids.”

But he adds that one hot toy can be all it takes to turn things around. “If a parent goes shopping for a specific toy and doesn’t find it, they often end up spending more on other toys.” The result of not having a Tickle-Me-Elmo this year? “We only had a so-so Christmas rather than a home-run.”

In spite of a lackluster holiday season—MasterCard Advisors report that specialty toy sales dipped 7.7 percent—Beemer doesn’t see doom on the horizon.

“I think Toys R Us will come through this year [2004] better than last,” Beemer claimed. “They may not post a huge dollar increase, but they’ve seen a significant increase in the number of shoppers thanks to heavy couponing.” He adds, “However, Wall Street may not be excited by this.”

This article was published by TDmonthly.com on 2/1/04

Click here to see the February 2005 TDmonthly Magazine coverage on the battle with Wal-Mart.

Writer's Bio: Tim Connolly has a degree in film production from the University of Texas at Austin and writes screenplays when he isn’t test-driving remote control speedboats in his bathtub. Read more articles by this author