Wal-Mart, Toys 'R' Us rivalry 'a little more cutthroat'

Friday, November 28, 2003

By JEFFREY GOLD
THE ASSOCIATED PRESS

NORTH BRUNSWICK, N.J. -- The annual holiday wars between the nation's two largest toy sellers are 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 observed.

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 a little more cutthroat earlier this holiday season," says Sean McGowan, toy analyst at Harris Nesbitt Gerard.

For example, Wal-Mart slashed the price of Mattel's Hot Wheels T-Wrecks play set from $49.88 to $29.74. 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 where all the parts of its turnaround have been in place, including store remodelings, tighter inventory management and a better-trained staff.

In the past 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 observers 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, McGowan estimated. Target Corp. has about 9 percent, and Kmart and privately held KB Toys each have 4 percent to 5 percent, he said.

The head-to-head competition between Wal-Mart and Toys "R" Us is only good news for consumers.

Toys "R" Us Chairman and CEO John Eyler said the company has "made it our biz to make sure that price is not the reason to go shop at a competitor."

Independent surveys from various investment banks generally support Eyler's assertion that Toys "R" Us has similar prices on hot toys, now that it responded with the price cuts. There's also no disputing his company's advantage on selection.

Wal-Mart's strategy is simple, spokeswoman Karen Burk said: "We strive to be the low-price leader."

McGowan, the toy analyst, said "Toys "R" Us will have an uphill battle getting people to make a special trip for toy purchases.

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