- The Washington Times - Friday, November 28, 2003

NORTH BRUNSWICK, N.J. — The annual holiday war between the nation’s two largest toy sellers is well under way. Wal-Mart Stores Inc. and Toys “R” Us Inc. are cutting prices and deploying brigades of Barbie and Elmo dolls as they joust for market share.

In a move that took Toys “R” Us — and the rest of the industry — by surprise, Wal-Mart cut prices on more than a dozen hot toys in mid-October, a month earlier than normal. By selling some items below cost, the discounter is using toys as a loss leader to woo shoppers to other aisles elsewhere in the store, analysts said.

Toys “R” Us countered with its coupon book, cutting the price gap and hoping its wider selection will make its stores the destination for holiday buyers, especially as inventories dwindle elsewhere. Still, it acknowledged in a recent conference call that Wal-Mart’s discounting hurt third-quarter results.

“Things got little more cutthroat earlier this holiday season,” said Sean McGowan, toy analyst at Harris Nesbitt Gerard.

For example, Wal-Mart slashed the price of Mattel’s Hot Wheels T-Wrecks playset to $29.74, from its original $49.88. Most retailers were selling the toy for around $50.

The struggle for holiday sales matters because about 40 percent of all toys are sold in the last two months of the year. Fierce price cuts by Wal-Mart have already bedeviled toy operator FAO Inc., which owns FAO Schwarz, the Right Start and Zany Brainy. The chain, which emerged from bankruptcy in April, said it might not continue normal operations through the end of the month.

Analysts are closely watching how Toys “R” Us will do this holiday season, the first in which all the parts of its turnaround have been in place, including store remodelings, tighter inventory management and a better-trained staff.

In the last three years, Toys “R” Us lost money in its first three quarters, then made a big profit during the holiday selling season.

Wal-Mart, the world’s largest retailer, supplanted Toys “R” Us as the nation’s biggest toy seller in 1998, and industry experts suspect the gap will widen this season.

Wal-Mart’s 3,000 U.S. stores account for about 21 percent of U.S. toy sales, while Toys “R” Us, with 681 U.S. stores, has about a 17 percent share, Mr. McGowan estimated. Target Corp. is next with about 9 percent, while Kmart and KB Toys each has 4 percent to 5 percent.

Toys “R” Us Chairman and Chief Executive John Eyler said, “We’re in the business 365 days a year. The big discount competitors start to run out of the big sellers at the beginning of December.”

Independent surveys from investment banks generally support his assertion that Toys “R” Us has similar prices on hot toys. There is also no disputing his company’s advantage on selection.

Mr. Eyler said his typical store has 9,000 items, which he said was more than twice Wal-Mart’s expanded holiday offering. Wal-Mart declined to give a figure.

Wal-Mart’s strategy is simple, said spokeswoman Karen Burk: “We strive to be the low-price leader. We think Wal-Mart is a one-stop shopping destination.”

The season will be an ordeal for Toys “R” Us, despite having better prices, its freshest inventory and better displays, Mr. McGowan said.

“That’s kind of the tragic frustration,” he added. “Toys ‘R’ Us needs a very compelling reason to get people to make another trip.”

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