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

(www.faoschwarz.com) to reach areas where the company doesn't have

stores.

    Ditto for small stores.

    La Toys Etcetera (www.LAtoys.com) 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."

    eToys.com, 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 Amazon.com, its cousin in book retailing, eToys now faces

industry giants: Toys "R" Us (www.toyrus.com) and KB Toys

(www.kbtoys.com). 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 (www.noodlekidoodle.com).

    "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 (www.stevestoys.com). "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.