Will Wal-Mart Steal Christmas?

By Daren Fonda Monday, Dec. 01, 2003
    • JASON TURNER/THE JOURNAL/AP

    Shoppers stock up on toys at Wal-mart the day after Thanksgiving

    They may not realize it, but the good folks of Fond du Lac, Wis., are participating in a high-stakes shopping experiment courtesy of Toys "R" Us. The $11 billion toy chain selected this lakeside resort town surrounded by dairy farms to test a radical departure from its traditional Toys "R" Us stores, which typically feature row upon row of shelves crammed with toys and little else. The new shop, Geoffrey, named for the company's mascot giraffe, is a multihued, airy warehouse that's part playpen, part kids' mall and part toy store. Accompanied by the sound of peppy music, children carouse on the store's indoor jungle gym, do arts and crafts in a supervised area and play free video and arcade games. The store also sells toys, apparel and baby furniture, hosts parties, offers haircuts, takes kids' photos and runs summer activities like water-pistol fights.

    Geoffrey may seem like an extravagant, larky enterprise dreamed up by Willy Wonka, but Toys "R" Us badly needs it to work if the firm is to break out of its deep slump. Wal-Mart and other big discount chains like Target have eroded the company's sales in recent years, and now it looks as if Wal-Mart is circling for the kill, escalating a price war that may eat up whatever profit margin Toys "R" Us has left. Despite rising consumer confidence and blistering U.S. economic growth of 8.2% in the third quarter, analysts expect sales at Toys "R" Us to drop from $7 billion in 2000 to $6.5 billion this year. And the company dealt investors a yuletide lump of coal when it announced that it had lost $38 million in the third quarter and was closing all its 146 Kids "R" Us stores plus 36 Imaginarium smart-toy stores, both of which were bleeding cash. Toys "R" Us stock now hovers around $11.75, down from a peak of nearly $43 in 1993.


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    Should Geoffrey catch on, it would bolster the conviction of Toys "R" Us CEO John Eyler that it's still possible to combat the low-cost threat posed by Wal-Mart and Target. Geoffrey "is potentially a $1.5 billion business," he says. "The Geoffrey stores are flat-out fun — and it's not clear if going to Wal-Mart or Target is fun." So far, the concept seems to be working. Since Geoffrey opened 14 months ago, Wisconsinites appear to have embraced it, showing up in large numbers and steadily boosting sales, the firm says. Maintenance technician Lonnie Roeder, 34, goes twice a week with his daughter Savanna, 4, mainly to play, although on occasion he buys something. "We come so she can have fun," he says. The company is testing the concept in three other locales — Abilene, Texas; Jacksonville, N.C.; and Meridian, Miss.--and Eyler says he may open four to six more Geoffrey stores next year.

    Putting the fun back in toy shopping — not least as a way of enticing customers to stores all year round — is critical if Toys "R" Us is to survive the toy wars, which look particularly brutal this season. In late September, Wal-Mart lobbed an ominous warning shot by discounting a basket of popular toys several weeks earlier than in past years. "We're going to be the low-price leader, and that will include holiday toys," declares Wal-Mart spokeswoman Karen Burk. To its rivals, the depth of its price cuts has come as a shock. The company put the popular Hokey Pokey Elmo on sale at $19.46, 30% less than the list price and reportedly below even the wholesale cost. "Did it catch us by surprise? Yeah," Eyler admits. Still, he adds, since early November "we've been price competitive." That's good news for consumers, the prime beneficiaries of such skirmishing. Target last week reduced the price of its Bratz disco-doll set from $100 to $65, challenging rivals to follow suit. Wal-Mart matched the price, while Toys "R" Us sells the set for $100 in stores and $80 on Amazon.com, its online partner.

    As successful mass merchandisers, Wal-Mart and Target can more easily afford a price war than Toys "R" Us and other toy specialists. Wal-Mart's sales of high-margin items like flat-screen TVs can make up for losses on low-margin toys. It's a classic loss-leader attack. Wal-Mart figures that supercheap toys will lure customers to the store, where they might buy pricier items. That puts the squeeze on toy specialists, which must either follow suit and risk losses or try to hold their prices and bet that their superior customer service and selection will enable them to compete.

    Some analysts say because Wal-Mart started discounting so early and so deeply, it may already be experiencing shortages. A pre-Thanksgiving survey of several Wal-Mart stores, conducted by investment firm Harris Nesbitt Gerard, showed the retailer has been "chronically out of key items," including Bratz dolls, Hot Wheels TWrecks and Hulk Hands. Toys "R" Us, which has nearly matched Wal-Mart's prices on many of those hot items, has so far remained better stocked, though the crucial test will come in mid-December when last-minute shoppers scramble to find the toy their kid must have.

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