Wal-Mart primarily.
June 16, 1998
'Big Three' Toy Companies Suffer
As Parents Opt for Convenience
By JOSEPH PEREIRA and WILLIAM M. BULKELEY
Staff Reporters of THE WALL STREET JOURNAL
Kathy Klatman used to be a Toys "R" Us mom, buying Barbie dolls and
other playthings from the big retailing chain. Now, when the Boulder,
Colo., mother of three wants to buy a special birthday gift for her two
daughters, ages six and nine, she orders American Girl clothes and
furniture, relatively expensive goods available only by catalog.
"The kids already have so many things to play with that I have a tendency
to look for quality and whether they'll play with it for a long time," she
says. And when her four-year-old son, Kevin, is acting up during weekly
shopping trips to the Target discount store, she pacifies him with
Matchbox cars that are cheaper than they are at Toys "R" Us.
'Big Three' Under Pressure
Such changes in buying patterns pose a growing problem for the toy
industry's "Big Three" players -- Toys "R" Us Inc. and the manufacturers
Mattel Inc. and Hasbro Inc. All three have had a rocky first half, with
Mattel and Hasbro blaming inventory reductions at Toys "R" Us. But that
explanation may mask more fundamental problems.
Mattel's perennial hit and 1990s growth engine, Barbie, suffered a 17%
wholesale-sales decline in the first quarter, due largely to Toys "R" Us
cutbacks. G.I. Joe, one of Hasbro's mainstays, has also gone flat.
Monday, in a sign that it sees a need to change, Mattel said it will spend
$700 million to buy Pleasant Co., of Middleton, Wis., and acquire its
American Girl line that is sold by mail order and favored by many parents
as Barbie's antithesis.
For much of the past 15 years, the Big Three
grew together. Toys "R" Us pioneered the
category -- killer retailing philosophy of
building big stores with huge selections and
great prices that wiped out traditional smaller
toy stores. The two big manufacturers acquired smaller ones, cut new-toy
development, boosted spending on movie- and TV-licensed products and
relied on Toys "R" Us to move the goods while spurning smaller stores.
Children Outgrow Toys Sooner
But over the past three years, a number of trends have started to chip
away at these strategies. Lots of time-strapped parents no longer make
Toys "R" Us a destination for routine toy buying, opting instead to use the
increasingly well-stocked toy aisles at Wal-Mart Stores Inc. and other
discounters. Many upper-income parents are turning to specialty-toy
retailers for more service or for toys that are marketed for education and
enrichment value rather than for instant appeal. And buying surveys show
that children are outgrowing toys earlier, moving on to computers and
electronic games.
And while the toy industry's overall sales are rising amid the booming U.S.
economy, much of the growth is coming through aggressive marketing to
younger age groups, on whom an unprecedented amount is being spent.
Toy spending in the U.S. now peaks with three-year-olds, according to
industry statistics. Earlier this decade, the peak was for four-year-olds.
Three-year-olds got $1.3 billion worth of toys last year. Toy spending
steadily drops after that for each age category, with 12-year-olds receiving
about half as much, according to NPD Group, which tracks sales in the
U.S. for the Toy Manufacturers of America.
Toys "R" Us remains the nation's largest toy retailer and the most
sought-after outlet during the holiday season. Still, it is trying to cope with
stalled growth rates and earnings that have never regained the 1995 record
levels by cutting costs and cutting inventories except at Christmas time.
Last week, for the first time, it started selling toys over the Internet rather
than only through stores. For the fiscal fourth quarter, ended Jan. 31,
earnings declined 1% from a year earlier to $378.3 million, or $1.33 a
share, on a 6% sales rise to $4.98 billion. In the first quarter, ended May
2, earnings fell 35% on a 6.2% sales gain.
Robert Nakasone, chief executive of Toys "R" Us, says that the retailer is
planning changes in its operations to deal with market changes. "There are
a number of product categories to extend the age groups" to older
children, he says, declining to be specific. He says the company also plans
"merchandising initiatives" to respond to customers' desire for convenience
and more educational products.
Hailed as a Triumph
It's a greatly altered landscape from just five years ago. Then, unable to
compete with Toys "R" Us, two superstore imitators, Child World Inc.
and Lionel Corp., went out of business. Shortly after, Toys "R" Us
swooped in to pick up the two chains' best locations. It stood to gain most
of the $1 billion in combined retail sales of the two chains. Analysts termed
the liquidations of the two chains as Toys "R" Us's greatest triumphs.
But Toys "R" Us's market share has since fallen, to 20.3% from 25% in
1994, according to Tactical Retail Monitor, a research company. Most of
the gains went to Wal-Mart, which increased its share to 15.6% from
9.5%. Still, Mattel and Hasbro depend on Toys "R" Us for 18% and 22%
of their overall sales, respectively.
Renee Farkes, a Boston nutritionist and mother of four boys, says her
older children disdain Toys "R" Us for the sporting goods and computer
games that they like, and "Alex is six now, and he's using a metal bat, so
we're pretty much at the point where we don't need Toys 'R' Us
anymore."
Parents who work longer hours have less time, and so do the kids.
Between tutoring, after-school activities, organized sports programs and
homework at lower grade levels, children have less time to do what they
want. They are even watching less television than they were five years ago,
according to Nielsen Media Research, with kids under 11 down to three
hours and 13 minutes a day from three hours and 30 minutes in 1993.
"Toys are playing a smaller role in the total time budget of kids," says
Richard Chase, a Johns Hopkins University professor who consults with
toy manufacturers. "Parents who can afford it are buying time in
after-school programs; they're buying computer tutoring."
Educational Toys Gain
Amy Mlsna, an Austin, Texas, mother of two, says she tends to check out
toys at a local store called Kid Genius rather than Toys "R" Us. "I go to
small places first," she says. "I like toys where you put things together, and
those little stores have a lot more interesting things that I haven't come
across before." When her daughter Jenna turned nine recently, "I thought
of going to Toys 'R' Us; then I thought, what would I get her?" Instead,
Jenna got software from a catalog, books from a bookstore, Beanie
Babies from an independent toy store and "good swimming goggles" from
a sporting-goods store.
Stewart Katz, president of Noodle Kidoodle Inc., a Syosset, N.Y., chain
of stores promoting higher-end, specialty merchandise, says, "Today, with
both parents working, there's a desire to give the children the best they can
give them. You could define it as guilt." Noodle's sales rose 16% in this
year's first quarter on top of an 18% rise in the year-earlier quarter.
'Age Compression' Cited
Mr. Nakasone of Toys "R" Us, based in Paramus, N.J., says that one big
factor affecting the company is "age compression." Once, he explains,
"girls were interested in Barbie until they were nine years old. Now they
leave Barbie at five or six. It's compressed the life cycle of a lot of toys."
"The toy industry is in a scramble to try to hold on to the nine-, 10- and
11-year-olds these days," says George Carey, president of Just Kid Inc.,
a Stamford, Conn., a children's research group that is a consultant to
several toy companies, including Mattel, based in El Segundo, Calif., and
Hasbro, based in Pawtucket, R.I.
A survey of 5,000 households with children under 12 shows that while
46% of seven- and eight-year-olds list playing with toys as a favorite
pastime, only 24% of nine- and 10-year-olds and a mere 5% of 11- and
12-year-olds do. The older groups list reading, going to the park, playing
with video games and listening to music higher on their preference lists.
From Mattel's point of view, the $700 million purchase of Pleasant Co.
provides an opening to girls who are older and to parents who are too
time-pressed to visit Toys "R" Us. American Girl is aimed at the
seven-to-12 age group and is sold by catalog. Mattel's Barbie, with her
high heels, makeup and active social life, is very different from the
American Girl dolls from Pleasant. American Girl dolls come with
historical novels about each doll, modeled on historically accurate
depictions of girls in Colonial, Civil War and other periods. Julia Prohaska,
director of corporate communications at Pleasant Co., says "Pleasant Co.
thought mass marketing was pushing kids to grow up too fast. It was
pushing sophisticated ideas on a younger and younger age group."
Although Barbie remains by far the world's best-selling doll, its sales
growth slowed to 9% last year from 20% the year before, and Mattel is
predicting just 5% to 7% growth this year. Mattel's acquisition of the
drastically different American Girl line isn't a repudiation of Barbie. But it is
an embrace of the mail-order distribution, the closer relationship with
consumers and the higher sales prices that Pleasant Co. achieves, Mattel
executives say.
In an effort to attract older kids, Mattel and Hasbro have launched
aggressive interactive-entertainment ventures. In a mere two years, the toy
makers have quickly gained market share, ranking among the top 10 of
computer-game makers. Hasbro, for instance, has recently moved to No.
4 from 14 among game makers, behind longtime specialists Cendant
Software, GT Interactive and Electronic Arts Inc. Mattel follows close
behind.
Hasbro is also broadening its portfolio to include other non-toy products.
It recently agreed to acquire Tiger Electronics Inc., a developer of
hand-held interactive games and is developing similar games on its own as
well. This year, the toy maker has also come out with Sound Bites, "an
interactive" candy that sets off vibrations in the ears of children sucking on
it. A company spokesman says the candy is aimed at all ages, but at older
children in particular.
Concept 2000 Is Halted
Toys "R" Us is struggling to reinvent itself to deal with the possibility that
Pleasant and other toy marketers are correct and that its old formula
doesn't work. It is adding just five new U.S. stores this year to the 650 it
already runs. It is revamping its highly touted renovation plan called
Concept 2000, which failed to generate anticipated sales gains.
To cope with the age-compression problem, Toys is "looking very
seriously at electronics," Mr. Nakasone says. Toys "R" Us also seeks to
expand its demographics by emphasizing baby needs. Last year, it
acquired the largest baby-products chain, renamed it Babies "R" Us, and
is using it to "start with kids at the first trimester of pregnancy," Mr.
Nakasone says.
To deal with time pressures, Toys "R" Us" is piloting a catalog we can sell
out of," and last week, it started selling products from an Internet site for
the first time. Previously, its Web site had been limited to promoting its
stores.
Lisa Clark, a Boston real-estate investor and mother of three girls, ages
six, six and four, says "the kids have grown to like more grown-up things, I
hope. I've tried to teach them to appreciate less commercial things." For
her oldest daughter's latest birthday, she bought her a fancy music box.
What she doesn't want is the toys that flow from the mass-market toy
companies. "It's a lot of trendy plastic crap that you hope you don't get
stuck with."
A national on-line survey of 172 consumers conducted earlier this month
by Digital Research Inc., a consumer-products research firm, shows a
pronounced migration away from toy superstores. Robert M. Domine,
Digital's president, notes that 42% of 172 households responding to the
survey shop at toy superstores less often than they did four years ago.
According to the survey, 43% of respondents prefer to shop for toys at a
mass merchandiser. That compares with 17% who picked a toy
superstore.
interactive2.wsj.com |
