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What really worries manufacturers is wobbly Toys "R" Us. The retailer recently put its toy stores up for sale and plans to focus on its fast-growing and less seasonal Babies "R" Us stores. Buyout firms are circling--quite the comeuppance for a company once feared as the Darth Vader of mom-and-pop toy shops (a helmet now worn by Wal-Mart). Analysts expect dozens if not hundreds of Toys "R" Us stores to close next year--funneling more shoppers to the discounters where they can just as easily pop a Harry Potter DVD in the cart and scrap the toy altogether. To help keep Toys "R" Us afloat, manufacturers are supplying it with more exclusives this year, like a Big Air Ball Tower from K'nex, though Target, for one, is also selling more exclusive toys.
The deeper issue is that shifts in play patterns are forcing toymakers to fight for shelf space in a tightening market. Boys in particular seem to be abandoning traditional toys at earlier ages in favor of consumer electronics, trendy video games, PC software and the Internet. The notion that kids are growing more sophisticated and tech savvy, a trend called age compression, has bedeviled toy companies for at least a decade. While young children still role-play with dollhouses and Tonka trucks (and cheap plastic toys will always play their pacifying role on shopping trips), the market for action figures, for instance, used to be considered healthy for boys up to age 12. Now, the items are mainly marketed to boys 4 to 6, says Chris Byrne, an independent toy-industry consultant. And "boys 9 and up have pretty much gravitated away from traditional toys," says NDP analyst Anita Frazier. A recent study by her firm found that nearly half of U.S. children start on video games at 4 to 5 years old--and 20% at age 3 or younger.
Toy companies, of course, have long seen this coming. Mattel attempted to get into educational software in the late 1990s, spending $3.6 billion to buy the Learning Company. But "Mattel just didn't understand the software business," says analyst Gikas. The blunder led to more than $400 million in losses and cost then CEO Jill Barad, who had revived Barbie, her job. Under CEO Robert Eckert, Mattel got back to building basic brands like Barbie and Hot Wheels. But Barbie's sales slump--domestically down 21% this year through September--may also be a victim of kids growing older at younger ages. Barbie has been badly rattled by Bratz, a line of hip, trendy dolls launched in 2001 by MGA Entertainment. Mattel's turnaround plan for Barbie has entailed everything from a breakup with Ken to trendier fashions to launching a girls' line of Barbie clothing and perfume--even enlisting Hilary Duff to talk her up. For all that, Barbie still seems stuck. She is trying "to out-hooker Bratz," says analyst Sean McGowan of Harris Nesbitt.