Essay Instructions: After reading the article below, answer the following question: Should toy manufacturers support retailers other than Wal-mart by offering those retailers products they do not sell to Wal-mart? The bulk of the paper is your defense of your position. Some of the points of the paper should include a:
(1) Description of the situation with which the toy industry is confronted.
(2) Discussion of three distinct areas that may represent challenges for toy manufacturers as they relate to the distribution issues discussed in the article.
(3) Discussion of alternative channel choices are there to replace the potential loss of ?category killer? stores such as Toys-R-Us? Can these alternatives provide the same access to consumers that the toy giants have been offering?
(4) Discussion of the advantages for consumers in new means of
Brown, Eryn (2004, Sep. 12) ?Imagining Toyland Without One of Its Giants," New York Times, pg. 3, 5.
LABOR DAY weekend at the Wal-Mart here was a great shopping scene for children. As they pushed carts brimming with new notebooks, clothes and shoes through the aisles, they got a small preview of what might be in store for them this Christmas season -- when their parents return to Wal-Mart to rifle through the low-priced Barbie dolls, Beyblade tops, Cabbage Patch Kids and Hot Wheels cars that are already beginning to show up.
For the children, seeing those toys may have seemed a glimpse of heaven. But the toy industry may have to spend a few months or years wandering in the wilderness before reaching the promised land. Unthinkable as it seems, Wal-Mart's success in selling toys may drive the No.2 player, Toys ''R'' Us -- the last toy superstore where a child can be surrounded by toys without tripping over a Windex display at the end of the aisle -- out of business. Wal-Mart is expected to have 22 percent of the retail toy market this year, versus 16 percent for Toys ''R'' Us and 10 percent for Target, according to Harris Nesbitt, an investment bank.
Unable to battle Wal-Mart's low prices -- industry analysts say the discounter often uses popular toys like Barbie as loss leaders -- Toys ''R'' Us has racked up huge market losses. Its stock is down 61 percent from its high in 1993. Toy sales and profitability, meanwhile, have fallen. Net earnings fell to $88 million in 2003 from $229 million in 2002.
Last month, John H. Eyler Jr., the chief executive, outlined a possible strategy to address the company's difficulties by spinning off its growing Babies ''R'' Us division and -- perhaps -- selling or shutting down some or all of the 683 Toys ''R'' Us stores in the United States after the holiday season.
Although the idea was presented as a possibility, not as a done deal, it has led to rampant industry rumors about potential closures of stores, including the flagship in Times Square. C.Bradley Mendelson, executive vice president of CB Richard Ellis, which represents Charles Moss, the owner of the Toys ''R'' Us flagship space, dismissed that particular rumor but added that retail and real estate people all over the country were looking at Toys ''R'' Us sites. ''Anything is possible,'' he said.
Moreover, toy industry watchers have been speculating about the effects that closures would have on the $20 billion toy industry, including leading manufacturers like Mattel, Hasbro and LeapFrog.
The impact could be severe, they conclude. ''It puts a pall over the whole group, having lost so many distribution channels, and being unsure what will happen,'' said Margaret B. Whitfield, an analyst at Ryan Beck & Company, who recently reduced her earnings estimate for Mattel.
Gauging potential damage to manufacturers is not easy. In 2003, according to filings with the Securities and Exchange Commission, the two largest, Mattel and Hasbro, each derived 16 percent of net sales from business with Toys ''R'' Us -- Mattel about $800 million, Hasbro $496 million.
No one suggests that Mattel or Hasbro would lose these sales outright if Toys ''R'' Us closed some or all of its stores. Other sales channels would pick up most of the slack. But Sean McGowan, who follows the toy industry for Harris Nesbitt, predicted that around 25 percent of the lost toy sales would not be picked up.
Such losses could prove especially harsh for a company like LeapFrog, the educational toy maker, which sells 26 percent of its merchandise through Toys ''R'' Us, according to S.E.C. filings. At LeapFrog, no one responded to phone or e-mail messages seeking comment, and executives at Mattel and Hasbro declined requests for interviews.
All told, Mr. McGowan says losses resulting from Toys ''R'' Us closures would amount to ''mere pennies'' a share for the manufacturers. The more nagging problem for them in a post-Toys ''R'' Us world would be losing shelf space in stores, and the resulting impact on marketing.
Toys ''R'' Us is the last remaining toy supermarket -- one of just a few stores large enough to give toy makers enough shelf space to show off their entire product lines, and to do meaningful year-round test marketing, sometimes with wacky products.
If Toys ''R'' Us ultimately does not make it, said John Walter Lee II, founder of Learning Curve International, which makes Thomas the Tank Engine sets and which last year became part of the larger RC2 Corporation, ''I think you lose the most important showcase for a wide variety of toys, a much wider mix of business than a Target or a Wal-Mart would ever get into.''
Losing their prized testing ground would make the companies ''look harder at what licenses they take on,'' said Michael Redmond, senior analyst at the NPD Group, a market research company in Port Washington, N.Y. ''It makes them ask, do they want to take a risk on an unproven entity? Manufacturers might not take the risk of looking at a Pokemon or a Yu-Gi-Oh! or a Beyblade, which were anomalies that really took off.''
''It's going to be harder and harder for new toys to come out if they don't fit into an established brand,'' said Chris Byrne, a toy industry consultant based in New York. ''Mattel might look at a concept and ask: 'Does this fit into Hot Wheels? Or does it fit into Barbie? Where does this fit within our established brands?'''
DESPITE the difficulties, Mr. Byrne predicted that children would still be able to find ''bold new concept'' toys.
Indeed, while a few people in the industry seem to fear that Toys ''R'' Us is on its deathbed, most say they think the chain will ultimately close fewer than 200 stores. ''What's that old Mark Twain expression?'' said Mr. Lee of RC2. ''The rumors of my demise are greatly exaggerated?''
For manufacturers, there is another promising safety valve: the emergence of nontraditional toy sales channels, like electronics stores, bookstores and online merchants. It's an avenue that Mr. Lee knows well. ''I think we do as much business with John Deere as we do with Wal-Mart,'' Mr. Lee said, referring to the tractor company's sales of his company's models.
And industry experts say consumers will always shop for new, interesting products. ''When one format for whatever reason becomes obsolete, something else comes along to fill the void,'' Mr. Lee said. ''I think as long as there's a consumer demand for playthings, you need the new things, and someone will reinvent the idea.''
Mr. Byrne agreed. ''The bold new toys,'' he said, ''generally find their market.''
[Illustration]
Photo (Illustration by Tony Cenicola/The New York Times)
[Chart]
''Tough Game''
As the retailing giants Wal-Mart and Target have expanded, Toys ''R'' Us has lost sales share and become less profitable.
Graph tracks toy retail sales share of the top three (Toys ''R'' Us, Wal-Mart and Target) from 1995 through projected 2004.
Toys ''R'' Us profitability
Graph tracks net income/loss as a percentage of net sales for Toys ''R'' Us, in fiscal years ended in January, since 1995.
(Sources by Harris Nesbitt; NPD Group; company reports)
