The following article appeared in the Newsday business section on November 30, 1998.

No Fun & Games / Business off for big toy chains and independents

heading into make-or-break season. SIDEBAR: Where the Toys Are  -

  Online (see end of text)

By James T. Madore. STAFF WRITER

AMID THE BUSTLE of his small toy store, Jerry Bloomberg took his wife aside on a recent Sunday afternoon to report that he had just saved a sale by lowering the price of wooden blocks by 20 percent after a shopper balked at paying $90 for them. Nancy Bloomberg nodded her approval, and then began suggesting alternative gifts to a mother and daughter seeking a sold-out toy. Fifteen minutes later, they walked out of La Toys Etcetera in Cedarhurst with a $35 Gund stuffed bear. It was wrapped in brightly colored paper with the recipient's name in calligraphy, at no extra charge. "We will do what it takes to complete the sale," said Nancy Bloomberg, who handles marketing and advertising for the family business and also works the floor when it's busy. "Our customers know they are paying a little more because we cannot compete pricewise" with larger toy stores and discounters nearby. "But we have customer service," she said, noting store clerks routinely quiz shoppers in an attempt to make a perfect match between child and toy. Started 15 years ago, La Toys is among several dozen small, independent stores on Long Island and in Queens that have managed to survive, and in some cases, thrive in a marketplace dominated by the Toys "R" Us and KB Toys chains and discounters like Caldor Corp. and K mart Corp. But now even the giants are struggling: Toys "R" Us especially is reeling as its customers defect to discounters that sell the same popular toys at lower prices. The toy industry has been in a slump all year, and now experts are warning this holiday shopping season, which officially kicked off on Friday, may be the toughest in a decade for retailers. Toy sales, which topped $22.6 billion in 1997, could remain flat or even decline this year because there's no Tickle Me Elmo or Sing 'n Snore Ernie, which in years past drove people into the stores. Many Hollywood kids' flicks - from Godzilla to Antz - also have bombed, meaning there is little demand for action figures, playsets and stuffed toys tied to the movies. "There does not appear to be an obvious toy or product line hitting the shelves this holiday season that could pull the toy industry out of its current sales doldrums," said Ed Roth, who tracks toy purchases for the NPD Group, a research firm based in Port Washington. He forecast only a 2-percent increase in toy receipts but said, "The trend could change in the fourth quarter as we head into the holidays, which typically account for more than half of the year's toy sales." Some of the magic also has worn off the industry's largest retailer, Toys "R" Us Inc., which annually sells $11 billion in toys and children's merchandise. The Paramus, N.J.-based chain, which has been blamed for decimating mom-and-pop stores by offering vast assortments of toys at deep discounts, is in trouble. Earlier this month, Toys "R" Us reported its fourth straight drop in profits as Wal-Mart, Target Stores and others grabbed market share with aggressive sales. Receipts from Toys "R" Us stores open more than a year - considered the best indicator of a retailer's financial health - declined the last two quarters, and its stock has lost about 40 percent of its value this year. In a bid to recover, the beleaguered company announced a restructuring plan in September aimed at helping it better compete with discounters that showed little interest in toys until a few years ago. The Toys "R" Us initiative calls for closing 90 stores and firing 3,000 employees, primarily in Europe, and adding more space to the remaining 1,379 stores for electronics, children's apparel and other non-toy items, as well as a wall of merchandise that sells for around $1. A mail-order catalog debuted last month. Toys "R" Us officials, citing the company's traditional "no comment" policy during the Christmas season, declined repeated requests to comment. But after a Nov. 16 earnings release, chief executive Robert Nakasone said Toys "R" Us is on the road to recovery, with dramatically fewer toys in its warehouses and a new store format being tested at nine southern locations. "Customer reactions are positive, but it is early, and we still have many additions and refinements to add before an aggressive rollout," he said of the new selling format. But some stock analysts doubt these steps will stem the flow of red ink or prevent Wal-Mart Stores Inc. from becoming the top U.S. toy retailer, a prospect that would have been hard to believe even a couple of years ago. "Many of the initiatives are still in very early stages, and there is still little evidence to date to have confidence that the changes will indeed produce the improvements that Toys "R" Us anticipates," said Amy Ryan, a Prudential Securities analyst. "Toys "R" Us' longer-term competitive position remains in question," added Maureen McGrath of Salomon Smith Barney. KB sees opportunity for itself as Toys "R" Us regroups. Shoppers are "disturbed by the negative news and that helps us," said Craig Elrich, district sales manager for a dozen KB stores on Long Island. He also said the No. 5 toy retailer is counting on its mall locations nationwide and deep discounts on some toys to win customers. Sixty percent of the company's receipts stem from sale items in the front of the store. Other retailers, including some department stores that have resumed selling stuffed animals and other playthings, also are vying for a piece of the toy market. Electronics chains, such as Circuit City Stores, have expanded their selection of educational products. Warehouse clubs are a player as well. But news of the possible overthrow of Toys "R" Us doesn't delight owners of small toy stores - because they know it only will be replaced by another Goliath that also has a reputation of knocking them off. "It's tough to stay in business . . . I've heard about several independent stores closing this year," said Kevin M. Josephson, vice president of a company that operates five toy stores, including Jayson's Toy Center Inc. on Jamaica Avenue in Woodlawn. He worries about the pricing practices of Caldor and other discounters that mark down toys as a means of attracting customers. They can afford to lose money in the toy aisle, he said, because they are selling other commodities. To succeed in such a climate, Jayson's Toy Center and its sister stores in the Bronx and Westchester County try to hire knowledgeable staff who can explain how a toy works and whether it's appropriate for certain ages. They also have frequent sales and even offer layaways. "We have tremendous sales that are competitive with Toys "R" Us, and we will have the product when you come in, where others won't," Josephson said. Like most small companies, he relies on distributors to supply about half of his toys, which adds a few dollars onto the pricetag. But there's no choice if you aren't Toys "R" Us, KB and the major discounters, whose clout entitles them to negotiate prices with manufacturers, and in some cases, even send ships to Asia to pick up the orders. Said Josephson, "We aren't trying to rip people off. I cannot sell Furby for $30 because I have to pay more to get him than the big retailers." He's sold out of Furby, the popular talking stuffed animal that responds to motion and noise, but it sold for about $50. At La Toys in Cedarhurst, owner Bloomberg tries to compete with the KB outlet that's 300 feet from his store, and the warehouse clubs and discounters in nearby towns, by limiting to 25 percent the amount of TV-promoted, name-brand products on his shelves. Customers expect to see these hot items, he said, but they sometimes end up buying Brio wooden toys, Playmobil figures and playsets, Lamaze baby toys and other lesser-known products from small toy companies that sell exclusively through independent retailers. Bloomberg, who works for Avis Rent A Car Inc. in Garden City, began hawking toys part-time in the early 1980s on the Long Beach boardwalk. His first wife, Helen, soon suggested they open a 755-square-foot store on Columbia Avenue adjacent to a Cedarhurst fixture, Mother Kelly's Pizza and Restaurant. By 1990, La Toys had moved up the block to a former bakery, which over time was converted by Bloomberg and his son, Seth, into 2,800 square feet of toys and games. Four years later, tragedy struck the family when Helen died of ovarian cancer. Her daughter-in-law, Meredith, is credited with helping to keep the business running, and now serves as principal toy buyer. Today, La Toys has a staff of five and yearly sales of $300,000 to $500,000. Small stores account for only 5 percent of total toy sales, according to the American Specialty Toy Retailing Association, a Des Moines, Iowa-based trade group. But these independents have greatly influenced the industry in recent years because of Beanie Babies. The collectible bean-bag toys that spawned a nationwide craze akin to Cabbage Patch dolls in the 1980s only are sold at specialty stores. While their popularity has waned somewhat, experts say, Beanie Babies gave small chains and sole proprietorships a needed jumpstart by bringing in consumers who normally would have bypassed Main Street for the regional mall. Specialty retailers have made a comeback. "Increasingly, people want to go to someone who knows them and their child and can offer advice on what's best to buy," said Chris Byrne, editor of Playthings Market Watch, an industry newsletter. "They are looking for that warm Geppetto experience," he said, referring to Pinocchio's father. But consumers also are seeking convenience, a wider toy assortment and bargain prices, according to interviews with a dozen people outside small stores and national chains. At the Wal-Mart in Uniondale, Phyllis Jackson said she doesn't have time to shop and prefers the discount chain because she can buy everything, from towels and jeans to cosmetics and toys, under one roof. "It's just easier, and I think the prices are better here," said the Hempstead mother of three. Amanda Weissman acknowledges it probably costs her a little more to shop at La Toys in Cedarhurst. But she loves the attention she receives. Weissman, a single mother from Lawrence, recalled a few years ago phoning in an order to La Toys. Fifteen minutes later, a clerk was waiting with the wrapped gift as Weissman drove up late for a child's birthday party. The shoppers interviewed said price was the key factor in determining whether they purchased a toy. Charles Lazarus understood that 50 years ago when he began selling children's furniture from his father's bicycle repair shop in Washington, D.C. Lazarus built his Toys "R" Us into a retailing colossus by undercutting rivals' prices. This intense competition led department stores to abandon toy selling, while thousands of mom-and-pops closed. "Today, the real challenge for Toys "R" Us is how to remain a destination for customers," said Byrne, the newsletter editor. "Traditionally, they did it on price, but now the discounters are beating them up on the prices of most popular toys." He worries that the variety of available toys will dwindle as Toys "R" Us adopts the discounters' strategy of selecting a few items from a product line instead of carrying them all. This could mean 50 new Barbies a year instead of the usual 100. "Toys are playing a more significant role in our stores these past few years," said Shawn Kahle, a K mart spokeswoman. "And the manufacturers understand that discount retailers like us offer 7 percent to 8 percent sales growth each year. They cannot ignore us if they want to grow," she said. As the big discounters and toy chains increasingly carry the same merchandise, specialty stores like FAO Schwarz and Noodle Kidoodle Inc. see an opportunity to distinguish themselves with private-label products. FAO, with 40 stores nationwide, including its Fifth Avenue flagship and a Roosevelt Field location, has nearly tripled its exclusive merchandise in the past decade and increased the selection of European playthings. The upscale toy emporium wants customers to focus on the fun and excitement of a talking stuffed animal rather than its price, said Bill Miller, executive vice president. He also said FAO is capitalizing on its reputation with parents and grandparents as a toy authority to get them to open their wallets more often. Store officials for the first time have selected toys they consider to be outstanding gifts and are selling them under the "Best of FAO" banner. Said Miller, "Clearly, there will be a major shake-up in the toy industry. Our strategy has to be to work around Toys "R" Us and the big-box discounters." That's a strategy that seems to be working for Noodle Kidoodle. Founded in 1993, the Syosset-based chain stands out because it mainly sells nonviolent, educational toys and holds numerous in-store events for children. After a brief retrenchment in 1997, Noodle Kidoodle opened 10 new stores this year and plans a repeat in 1999. For the first nine months of the year, sales at stores open a year rose 22 percent despite the industry's lack of a hit toy. Chief executive Stanley Greenman, who sold his family's discount toy business after battling Toys "R" Us for years and used the proceeds to start Noodle Kidoodle, admits to being surprised by his rival's problems with Wal-Mart and with federal regulators who found Toys "R" Us violated the law by coercing toymakers to stop supplying Costco, BJ's Wholesale and other warehouse clubs. (The company is appealing the ruling.) "I guess with about 25 percent of the market, they thought they could be arrogant and run sloppy stores," he said. "The market changed, and they didn't change with it." Toys "R" Us spokeswoman Rebecca Caruso responded: "You can't be in business for 50 years and in 28 countries around the world without doing something right . . . While we recognize we need to change, we have to make changes that make sense to our customers." At La Toys, Jerry Bloomberg expects Toys "R" Us to bounce back from its troubles. He also sees a lesson for himself and other retailers: "Don't get complacent, and don't let your guard down." Where the Toys Are - Online MORE WORKING PARENTS and wired grandparents are going to the Internet instead of the toy store this season. International Data Corp. predicts online toy sales this year will exceed the $13 million rung up in 1997 and soar to $71 million by 2001. That's tiny compared to total U.S. toys sales of $22.5 billion, but the growth potential is huge, experts say. "Toys appear to be well-suited for distribution on the Internet since many are relatively small and easy to ship," said Sally Wallick, an analyst with the Baltimore-based Legg Mason brokerage. FAO Schwarz began selling on the Web nearly two years ago, well ahead of other stores. Executive vice president Bill Miller said FAO has seen "geometric growth" in online receipts and uses the site ( to reach areas where the company doesn't have stores. Ditto for small stores. La Toys Etcetera ( fills orders from as far away as Japan, France and New Zealand. Online sales account for 10 percent of annual sales for La Toys, in Cedarhurst. "Having a Web site is a great way to expand our business. It costs about $100 a month to maintain, whereas to open a second store would cost $100,000," said owner Jerry Bloomberg, who created the Web site in 1996. Poor customer service is the biggest stumbling block to the growth of online retailing. Adam Schoenfeld, senior analyst at Jupiter Communications, said many traditional retailers haven't recognized that "price is important, but it's not the sole customer consideration online.", an Internet-only company in Santa Monica, Calif., understands the Web's power and draw. It has become the largest retailer of its kind by having a shopper-friendly Web site and a head start on traditional stores. But like, its cousin in book retailing, eToys now faces industry giants: Toys "R" Us ( and KB Toys ( Earlier this month, Amazon also announced plans to sell toys during the holidays. No wonder smaller retailers are using Web sites as a defense against rivals. Noodle Kidoodle's Internet sales are "insignificant," but chief executive Stanley Greenman said that to remain competitive, he must offer customers the option ( "I don't do a huge business from it," Kevin Josephson, an independent toy retailer in New York City and Westchester, said of his Web site ( "But it keeps your name out there at no cost." **** Toy Trends The top 10 toy retailers in 1997 and how their market share has changed since 1995. Figures are the percentage of total traditional toy sales.

. 1997 1996 1995. Toys R Us 18.4% 18.9% 19.2%. Wal-Mart 16.4 15.3 14.6. KMart 8.2 8.3 8.5. Target 7.1 6.4 6.1. KB Toys 6.1 6.2 4.3. JC Penney 1.5 1.7 1.5. Hills 1.2 1.3 1.6. Service . Merchandise 1.1 1.6 1.8. Ames . Department. Stores 1.1 1.2 1.2. Meijer 1.1 1.0 1.2. . . Annual Retail Toy Sales. (in billions of dollars). . 1987 $12.28. 1988 12.97. 1989 13.10. 1990 13.13. 1991 15.15. 1992 17.00. 1993 17.50. 1994 18.70. 1995 20.00. 1996 21.10. 1997 22.58. . SOURCE: NPD Group; Toy Manufacturers of America.

Copyright 1998, Newsday Inc.

James T. Madore, No Fun & Games / Business off for big toy chains and independents heading into make-or-break season. SIDEBAR: Where the Toys Are - Online (see end of text)., 11-30-1998, pp C10.