Turmoil and exits in toy retailing bring special challenges to licensing community.
The recent bankruptcy sale of FAO Inc. to investment group D.E. Shaw Laminar Portfolios LLC is only the latest chapter in a story that has seen specialty toy retailing turned on its head in the past several months:
* FAO sold off The Right Start baby products stores and liquidated Zany Brainy.
* KB Toys filed for bankruptcy protection January 14. It plans to close 400-500 of its 1,300 stores as it hopes to emerge from bankruptcy by the 2004 holiday season.
* Toys R Us, meanwhile, cites an "intense promotional environment"--a euphemism for devastating price cutting, mostly by Wal-Mart and Target--in cutting its earnings forecasts.
The new landscape of the toy sector is perhaps the most stark example of the kind of retail consolidation that licensing professionals cite as the biggest issue in the business today. And it promises to have its greatest impact not on the top tier of blockbuster licensing properties, which can find a welcoming home at mass, but rather on the secondary and tertiary properties that need a little TLC.
"Many properties are never going to get the kind of toy support they deserve. It really becomes a shelf space issue," says Neal Friedman of Fisher-Price (and Chairman of LIMA). "As the retail market shrinks, and the [remaining] retailers tend to be more mass market with less space allotted to toys, it means they're going to be more selective of those properties they support."
Jay Foreman of Play Along Toys says that "what's going to suffer are the smaller brands that need smaller companies that can help them germinate for one or two years in specialty, and then translate into the Targets and Wal-Marts."
If the new landscape isn't already affecting the prices licensors can get for their properties, it would seem to be only a matter of time. Meanwhile, there is ever more pressure on licensors to pour more time, effort and money into retail development just to get their properties onto a shelf.
Many in the licensing business hasten to point out that the volume done in the stores that are closing isn't going away. Wal-Mart and Target are both expanding, and some see opportunities for other retailers to try to grab small parts of the business.
Some see department stores, who for the most part have abandoned the toy business, edging their way back in, particularly in the infant and baby areas. "We as licensors and manufacturers get more aggressive on upstairs and mid-tier channels," says Tim Rothwell of Marvel.
An executive with Saks Department Store Group, which put its foot back in the toy waters for holiday 2003 via FAO-signed and -operated departments in its 240 stores, says the company is "waiting to see what happens" with FAO. She also says, however, that Saks has no interest in operating its own full-scale toy operation.
Others point to dollar stores, a distribution channel that's expanding, but one which comes with some heavy image and margin baggage. Toy companies are going to have to "find ways to deliver product that meets the needs of dollar stores but [also] meets the manufacturers' needs," says one licensor.
Drug chains and supermarkets have become increasingly active over the past few years, whether directly or through alliances with KB (which supplies CVS) or Toys R Us (which supplies toys to Albertson's). But it's difficult to foresee those channels radically increasing the space they give to the category on an everyday basis.
Also, catalog and online businesses are expected to pick up some of what the shrinking specialists are leaving behind. It's noteworthy that FAO's new owners picked up those operations, in addition to the two retail locations. FAO Schwarz executives say that for the retail end of the business, they envision "a return to its earlier focus on distinctive, high-end specialty toys offered in a limited number of stores, each so captivating as to serve as a destination in its own right." The company is closing the New York and Las Vegas stores for 4-6 months for a complete overhaul. If it can successfully operate those two destinations, it may open a limited number of other stores down the road.
Perhaps, says Debra Joester of The Joester Loria Group, the new FAO strategy can serve as a sort of model for specialty toy retailing. Maybe, she suggests, in the current business environment it's not possible to run a large specialty chain with broadly dispersed stores. Maybe it's time for toy merchants to go back to the future, with more attention paid to independents and smaller local and regional chains.
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|Comment:||Turmoil and exits in toy retailing bring special challenges to licensing community.|
|Article Type:||Industry Overview|
|Date:||Feb 2, 2004|
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