Toys R US Scrambling To Remain No. 1 Toy Store

Toys R Us remains the No. 1 toy retailer, and the fourth quarter remains its biggest season, but it is losing market share to discount chains such as Wal-Mart and Kmart.

The discounters are fighting it on price, convenience and service, while small chains such as Zany Brainy and Noodle Kidoodle, with friendlier stores stocked with merchandise that Toys R Us doesn't carry, nibble at its market share.

Adding to the competition, Disney and Warner Bros. stores have become bigger players in the toy market in the last five years. And shoppers can buy from Internet sites offering popular stock with no lines at the cash register. While Toys R Us has a site, competing sites are faster.

The chain announced its third-quarter profit Monday, which was down 57 percent from a year ago.

"Once upon a time - 20, 30 years ago - Toys R Us was unique," said Kurt Barnard, president of Barnard's Retail Trend Report, a New Jersey forecasting company.

No longer.

"They are surrounded by hungry wolves of competition," Barnard said.

Toys R Us officials said they think the company has a handle on things. They are revamping some of their stores in what may become a new model for the whole chain, revving up the company's Web site and working on a three-year plan to improve customer service. Susan Boche, director of customer relations, calls the customer-service plan an "investment in the future."

Toy sales at Wal-Mart, Kmart and Target have increased in the last three years while Toys R Us sales have decreased. In 1997, Toys R Us had 18.4 percent of the market, down from 19.2 percent two years ago. Wal-Mart, its closest competitor, had 16.4 percent of the market last year, up from 14.6 percent in 1995, according to The NPD Group, a market research company based in Port Washington, N.Y.

Part of what kept Toys R Us on top was its status as the largest purchaser of toys in the country, a position that allowed it to demand extraordinary treatment from its suppliers.

The company's pressure on its suppliers when it came to warehouse competitors, such as Issaquah-based Costco, was so strong that the Federal Trade Commission ruled in 1997 that its attempts to keep hot toys out of warehouse stores violated antitrust laws. Toys R Us was not fined or penalized as a result of the decision.

As the company loses leverage, pressuring its suppliers for exclusive toys and preferred status for shipments of the season's hottest toys is becoming less effective, said Margaret Whitfield, an analyst at Tucker Anthony in New York.

"This year, their bargaining position is weaker than ever," she said. "Perhaps, when the year is done, we'll find out that they've been dethroned and Wal-Mart is the No. 1 toy retailer."

The chain is battling the discount stores with a larger selection and the promise to match any competitor's prices, said Rebecca Caruso, company spokeswoman. It also has launched a mail-order catalog and Web site it hopes will expand its customer base.

Goldman Sachs estimates the chain will sell $11.7 billion worth of merchandise this year, a 6 percent increase over last year's sales of $11 billion. The hit will come from its profit margin, which continues to shrink. This year's is expected to be 6.5 percent, down from 10 percent to 13 percent in the 1980s.

Toys R Us responded to the competition from all fronts in September by taking a $495 million charge to mark down inventory and try the new store concept - its second new concept in two years.

Sales in the third quarter were up, from $2.1 billion last year to $2.2 billion this year, but profit before charges was $20 million, or 8 cents a share, down 56 percent from $46 million, or 16 cents a share, for the same period a year earlier.

The small chains have a tiny market share, but their appealing stores and knowledgeable sales help represent a threat. The new discounters also are customer-friendly.

Toys R Us, by contrast, is tackling its customer-service problem with a three-year plan that includes "many, many thousands of dollars worth of training," Boche said.

"Overall, we are trying over the course of three years to significantly change our corporate culture to one that is really more customer-focused," Boche said.

The chain also is testing a new concept, called C3 stores, in nine stores. New stores have three areas aimed at making them more like kiddie department stores and less like supermarkets.

One area, called Media World, will be an electronics department in an enclosed area. Another, Kids Apparel, will feature clothing. A third, Deal World, will feature promotional buys.

"I think the only hope in terms of a long-term plan is how well the C3 stores work out," said Jack Balos, an investment analyst at Fourteen Research, an institutional brokerage firm in New York. "They have to come up with a store that is a destination for shoppers. Otherwise, shoppers could very easily go to the discount chains."

The chain is lagging on the Internet, as well. "The fact is, we were getting more hits and more traffic to the Internet site than we were prepared to handle," said Rebecca Caruso, a company spokeswoman.

To solve the problem, the company will use more Internet servers and dedicate staff "around the clock" to getting the service up to speed.

The company's biggest move to turn things around is cutting back its inventory, which hasn't been turning over as quickly as competitors'. The chain has cut its inventory by $340 million this year, according to its recent earnings report.

The move, Caruso said, should reduce distribution costs, free up selling space for new products and improve cash flow.