Early price cuts signal battle of toy retail titans
By Jeffrey Gold
Associated Press
NORTH BRUNSWICK, N.J. — The holiday wars are well under way when it comes to the nation's two largest toy sellers. 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 usual. By selling some items below cost, the discounter is using toys as a loss leader to entice shoppers into a store and then to its other aisles, 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 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 playset to $29.74, from its original $49.88. Most retailers were selling it for around $50.
The struggle for holiday sales matters because about 40 percent of all toys are sold in the last two months of the year.
Wal-Mart's fierce price-cutting has bedeviled toy operator FAO Inc., which owns FAO Schwarz, The Right Start and Zany Brainy. The chain, which emerged from bankruptcy 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 time all the parts of its turnaround are 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 selling season.
In 1998 Wal-Mart, the world's largest retailer, supplanted Toys "R" Us as No. 1 in U.S. toy sales, and observers suspect the gap will widen this season.
McGowan estimated that Wal-Mart's 3,000 U.S. stores account for 21 percent of U.S. toy sales and that Toys "R" Us, with 681 U.S. stores, has a 17 percent share. Target Corp. is next with about 9 percent, while Kmart and privately held KB Toys each have 4 percent to 5 percent, he said.
The head-to-head competition between Wal-Mart and Toys "R" Us is 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 she's buying gifts for her 1- 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 CEO John Eyler said the company has "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 investment banks generally support Eyler's assertion that Toys "R" Us has similar prices on hot toys, now that it responded with the price cuts. There's also no disputing his company's advantage on selection.
Eyler said his typical store has 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 percent of its selection, up from 5 percent 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."
"We think Wal-Mart is a one-stop shopping destination," Burk said. "Not only can they shop for their toys, they can get their prescriptions filled, they can get footwear and apparel."
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 added. "Toys "R" Us needs a very compelling reason to get people to make another trip.
"I think the big challenge that Toys "R" Us faces is that despite having better service, which is debatable, the consumer has a lot more need to go to Wal-Mart," he said. "It's a hit-driven business, and both companies have them."
