Will Wal-Mart Steal Christmas?

Monday, Dec. 08, 2003 Will Wal-Mart Steal Christmas? As the retail king slashes prices on toys, its rivals are dreaming up new ways to compete By DAREN FONDA 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.

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.

Longer term, there's little question that Wal-Mart has gained an edge. Its share of the $25 billion traditional toy business has grown from 10.8% in 1993 to 21% today (and some analysts estimate it's more like 25%). Toys "R" Us, KB Toys and smaller toy chains, meanwhile, have either lost share, quit the business or struggled to hold ground. Says analyst Todd Kuhrt of Midwest Research, "It's clear that consumers are voting with their wallets for Wal-Mart and Target."

One potential casualty: FAO Schwarz. The upscale chain, whose flagship Fifth Avenue store in New York City was immortalized by Tom Hanks in Big, has been losing sales to big-box retailers all year, and the chain is said to be facing a cash crunch heading into the holiday season. Parent company FAO Inc. is in default on its lending terms, creditors have signaled that they won't provide more loans, and analysts say the firm may seek bankruptcy protection before Christmas. That would mark a dismal end for FAO Inc., whose holdings include the Zany Brainy and Right Start chains. The firm emerged only in April from a previous stint under bankruptcy protection.

The trouble is FAO's high-end focus no longer appears to be paying off. "FAO's pricing is out of line," carps Ken Kasarjian, who was checking out the goods at a Toys "R" Us store in Manhattan's Times Square last week with his twin 9-year-old sons. But Kasarjian was not particularly impressed with the prices at Toys "R" Us either. For now, he's planning to place some orders online and buy some other toys at Wal-Mart. His shopping habits aren't unusual, and that's troubling for toy retailers, who must compete for business with not just Wal-Mart but also drugstores, discount Web sellers and auction sites like eBay.

Still, Eyler isn't about to admit defeat. Since the former FAO chief executive took the helm in 2000, he has aggressively restructured Toys "R" Us. He shuttered dozens of stores, consolidated support centers and freshened up the company image with a remodeling of 75% of its 680 flagship shops. The firm spent millions to improve customer service. It cut inventory from 14,000 to 9,000 items to focus on more profitable lines. And in a bid to differentiate its wares from Wal-Mart's — whose selection is limited despite expansions of toy shelf space around the holidays — it bolstered its exclusive merchandise and brands, adding lines like Animal Alley stuffed animals and Super Slicks radio-controlled cars. Selling more of its own brands should enable Toys "R" Us to cut costs because it can source the merchandise directly from contract factories in countries like China rather than buy from higher-priced manufacturers like Hasbro. Eyler says exclusive products account for 20% of the firm's merchandise mix, up from just 5% in 2000, and adds, "We will migrate it to 25% in the next few years."

Eyler also deserves credit for expanding in other areas. Revenues at Toys "R" Us shops overseas have risen 28% since 2000 and are expected to hit $2.4 billion this year. Meanwhile, the partnership with Amazon.com is on track to break even for the first time in 2004, after several years of losses. And sales at Babies "R" Us apparel stores are up 61% since 2000, to $1.8 billion.

But the real challenge for the company is to boost profitability in the face of relentless pricing pressure. Profit margins at Toys "R" Us stores fell from 5.7% in 1999 to just 3.2% this year, according to Jefferies & Co. Eyler knows he can't back down by letting the behemoths undercut his prices. "We won't allow [Wal-Mart] to distance itself," he vows. Geoffrey, he hopes, will prove that price isn't everything, that shoppers will warm to the charms of brightly colored jungle gyms and playpens. And he can take comfort in this: you can't find those services at Wal-Mart. Yet.

I think Toys R Us is a horrible place for toys. I remember going in there looking for gift for my two sons and would walk about empty-handed almost every time. Nothing but cheap, plastic junk. And the aisles were so narrow and clogged that it was not fun even being in there.

I liked getting my sons things they could build with like erector sets and Legos and those "snap-on" things like "Konnex." One year I got a roller-coaster kit from Konnex that had about 5,000 pieces you had to snap together. That kept my son occupied for weeks. Never find that stuff at Toys R Us. I also got them a Lionel model train set that I had to go to a specialty store for. Forget about finding that in Toys R Us. But if you like getting your kids dart guns with foam darts that last about 20 minutes before they snap and break, or if you like getting your kids a remote controlled car that comes with a battery that lasts about an hour and then you have to stick it in the wall for 12 hours to charge again, then Toys R Us might be the place for you.

Steal Christmas, Hell! it will destroy this country!
[source: December issue {Fast Company} magazine]

Wal-Mart leverages its enormous sales power,
and its access to products produced by slave-labor,
to make suppliers follow its pricing decisions.

If the supplier company doesn't sell its goods at the price Wal-Mart sets,
Wal-Mart denies them shelf space at its stores, which destroys that company.

However, even when a supplier meets Wal-Mart's prices,
the prices are so low, and the supplier losses so much money,
that the supplier is forced into bankruptcy.

Wal-Mart's 2002 sales of $244.5 billion
were larger than the sales of Sears, Target, J.C. Penney,
K-Mart, Safeway, and Kroger combined.

* Textiles and Apparel: Carolina Mills is a 75-year old
Carolina company that supplies thread, yarn, and textile
finishing to apparel-makers -- half of which supply Wal-Mart.

But since 2000,
Carolina Mills' customers have begun to face imported
clothing sold so cheaply to Wal-Mart that they could not compete
even if they paid their workers nothing.

Since 2000, Carolina Mills has shrunk
from 17 factories to 7, and from 2,600 employees
to 1,200. Steve Dobbins, the CEO of Carolina Mills told the
December issue of {Fast-Company} magazine that,

"People ask, `How
can it be bad for things to come into the U.S. cheaply? How can
it be bad to have a bargain at Wal-Mart?'

{But you can't buy anything if you're not employed.
We are shopping ourselves out of jobs}." (emphasis added)

* Lovable Garments, which was founded in 1926, had, by the
1990s, become the sixth largest producer of women's bras and
lingerie in the United States, employing 700 workers.

Wal-Mart became the biggest purchaser of Lovable's goods;
in 1995,
Wal-Mart demanded Lovable slash its prices to compete with cheap imports.

When Lovable indicated it could not do that, Wal-Mart
illegally reneged on its contract with Lovable, and outsourced
the lingerie production to Ibero-America, Asia, and China.

Without the Wal-Mart market, in 1998 Lovable had to close its
American manufacturing facilities and fire the workers. Stated
Frank Garson, who was then Lovable's president, "Their actions to
pulverize people are unnecessary. Wal-Mart chewed us up and spit us out."

* Food: Vlasic Pickles. Although it may at first glance seem humorous,
there is a serious lesson.
Wal-Mart roped Vlasic into a contract in which
Wal-Mart sold a 3 gallon jar of Vlasic whole pickles for $2.97.
Wal-Mart sold 240,000 gallons of pickles per week.

But the price
of the 3 gallon jar was so low, that it vastly undercut Vlasic's
sales of 8 ounce and 16 ounce jars of cut pickles; further,
Vlasic only made a few pennies per 3 gallon jar.

Its profits were
tumbling. Vlasic asked Wal-Mart for the right to raise the price
per 3 gallon jar to $3.49, and according to a Vlasic executive,
Wal-Mart threatened that if Vlasic tried to back out of this
feature of the contract, Wal-Mart would cease carrying any Vlasic
product. Eventually, a Wal-Mart executive said, "Well, we've done
to pickles what we did to orange juice. We've killed it," meaning
it had wiped out competitor products. Finally, it allowed Vlasic
to raise prices. But in January 2001, Vlasic filed for bankruptcy.

Wal-Mart forced the price of Huffy Bicycles, which is the
third largest bicycle maker in the U.S., so low, that today 98%
of Huffy's bicycles are imported from overseas.

[Source: Nov 20 {Observer} article, "Buffalo Moves Closer to Extinction"]

Today's London {Observer} carries an
article that focusses on the destruction of the City of Buffalo,
New York, mentioning the role of Wal-Mart.

Buffalo had been a premier U.S. city:
it was the first city to have widespread
residential lighting, and was a center of heavy industry.

But Buffalo's Bethlehem Steel plant, which once employed 22,000
workers, is virtually empty; its unemployment rate is officially
10.2% (and in reality closer to 17%-18%); its population has
shrunk in size by 40% since 1970; and the city is bankrupt and
under the direction of a control board.

The article tells the story of Buffalo Color, a
manufacturing plant where indigo dye for denim was produced. Once
employing 3,000 workers on its 63-acre site, Buffalo Color lost
business to plants established in China, which produce the indigo
dye at half the cost that Buffalo Color does.

Although the
article's author David Teather does not draw it out, the indigo
dye dyes denim, most of which is used in clothing, and Wal-Mart
has driven down the price it will pay for clothing, and thus all
its constituent ingredients must be cheaper.

Buffalo Color now
employs 12 people, and functions strictly as a resale operation.

The article concludes by reporting on the Made in the USA
group, which consists of many small- and medium-sized
manufacturers, whose chairman states that its primary enemy,
which causes destruction, is Wal-Mart.

Some gift card links:

Gift card rules
For gift cards sold in California, Massachusetts and New Hampshire expiration is prohibited by law.

California Bans Most Service Fees on Gift Certificates
Gift cards, a form of electronic gift certificates, are proliferating. The Wall Street Journal estimated in Feb. 2003 that $36 to $38 billion in gift cards were sold in 2002, and that the amount of money left unused on gift cards is $2 billion a year and growing. Some retailers now impose a monthly service fee on gift cards which are not fully spent after a specified time, such as one or two years.

A new law going into effect January 1, 2004 in California bans nearly all service fees on retailer gift cards and gift certificates. The new law bans service fees, with one limited exception. On a rechargeable card with a balance of $5 or less, the issuer may charge a dormancy fee of $1 per month after 24 months of inactivity. Even a balance inquiry counts as activity that prevents this fee. All other service fees are prohibited.

The new law applies to gift certificates sold on or after January 1, 2004. Under preexisting California law, gift certificates may not expire.

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