The toy wars begin: Wal-Mart vs. Toys 'R' Us

Toy discounts are coming early this year.
NORTH BRUNSWICK, N.J. (AP) -- The annual holiday wars 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 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 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 playset to $29.74, from its original $49.88. Most retailers were selling the toy for about $50.
Prime time for toys
The struggle for holiday sales matters because about 40 percent of all toys are sold in the last two months of the year.
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 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 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. is next with about 9 percent, while Kmart and privately held KB Toys each have 4 percent to 5 percent, he said.
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."
"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," Eyler said.
Holiday offerings
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.
Eyler said his typical store has 9,000 different items, which he said was more than twice Wal-Mart's expanded holiday offering. Wal-Mart declined to give a figure.
Meanwhile, Toys "R" Us has increased the number of exclusive toys, which now account for about 20 percent of its selection, up from 5 percent four years ago. Half the exclusives are part of well-known brands, such as Barbie or Bratz, and the rest are house brands, such as Animal Alley, he said.
Wal-Mart also has exclusives, including $99 radio-controlled models of the Hummer and H2 vehicles.
"The Hummer's been a big seller," McGowan said.
Wal-Mart has several private labels, as well, including the Kid K'Nex line. Wal-Mart's strategy is simple, said spokeswoman Karen Burk: "We strive to be the low-price leader."