Sunday, February 15, 2004

Toy makers to take aim at Wal-Mart over prices

By Anne D'Innocenzio
The Associated Press

NEW YORK - Led by Wal-Mart Stores Inc., discount retailers won a war with other toy stores this past holiday season. Now toy makers, a casualty in that bitter fight, have decided to make their own stand.

To protect themselves and the toy retailers they see as key to their profits, some manufacturers plan to deliver fewer hot toys to Wal-Mart and to have more exclusive launches at chains such as Toys 'R' Us Inc. It's a rare instance of manufacturers challenging the biggest U.S. retail juggernaut and its low-price approach to business.

Wild Planet Toys' Aquapets, an interactive critter, will be at Toys 'R' Us exclusively for three months this spring before it reaches the mass merchants.

"The success of Toys 'R' Us is important for the health of the toy industry," said Danny Grossman, founder and CEO of Wild Planet.

Said Jim Silver, publisher of the Toy Book, an industry magazine: "Wal-Mart is a very important part of the toy business, but toy makers don't want its low-pricing strategies to devalue their brands and their business - and put more toy retailers out of business."

The price wars contributed to the bankruptcies last holiday season of FAO Inc., owner of the famed FAO Schwarz, and KB Toys Inc., which plans to close almost a third of its stores.

"Whether it is exclusive launches or controlled product shipments, they are going to do whatever they can to keep other retailers healthy," Silver said.

Given the clout of Wal-Mart, which has a 21 percent share of the toy market, it remains to be seen whether these strategies will be effective. Many manufacturers - who spoke anonymously for fear of losing the discounter's business - said there is only so much they can do. Setting prices with retailers is illegal under antitrust laws.

And Karen Burk, a Wal-Mart spokeswoman, said: "Our focus will continue to be what it has always been, and that is delivering value to our customers, and that will not change."

The pricing issue is expected to be a key concern of manufacturers and retailers at the American International Toy Fair, the industry product expo that begins today.

Toy price wars have always been part of the holiday season, but 2003 was even more brutal than expected. In September, Wal-Mart started by dramatically reducing prices on more than a dozen hot toys, six weeks earlier than usual.

The retailer sold Mattel's Hot Wheels T-Wrecks play set for $29.74 instead of the original $49.88, while the price of Play Along's Sing-Along Care Bears fell to $14.99 from $24.99.

Wal-Mart used the toys as "loss leaders" to woo shoppers to other aisles elsewhere in the store.

Discount rivals including Target Corp. followed, but other stores that could not compete ended up canceling orders and advertisements.

Manufacturers see several concerns about Wal-Mart's pricing on the toy business: Its deep discounting makes toys unprofitable for other retailers, who are likely to order fewer products. They also fret Wal-Mart's strategy forces more traditional toy stores to close. Plus, toys may become a devalued product - permanently lowering margins and making toys that are never discounted seem far more expensive to shoppers.

That's why manufacturers are worried about 2004. "This sets the bar this year," said Jay Foreman, CEO of Play Along.

The $20 billion traditional toy industry suffered a 3 percent decline in sales last year, according to analyst estimates. Meanwhile, prices fell 4.3 percent on top of a 9.3 percent decline in 2002, according to the Labor Department.

Those who want to have a good relationship with Wal-Mart will still need to be diplomatic; the company has unprecedented power and offers a chance for big sales that manufacturers cannot ignore.

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