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TinotopiaLog → Toy Stores, Business, and Shoddy Journalism ( 2 Jun 2004)
Wednesday 02 June 2004

Toy Stores, Business, and Shoddy Journalism

This story in the Washington Post is purportedly about the trouble small, independent toystores are having competing with Wal-Mart, but it seems to say a lot more about declining standards at the Post than anything else.

The independent toy sellers profiled in the story all seem to be incredibly incompetent when it comes to business, but this never really pointed out as possibly contributing to their woes.

In 1997, Tree Top Toys Inc., an independent retailer with stores in the District and McLean, began carrying a nifty children’s toy called Chunky Farm. At $32, the collection of large plastic farm items, including a barn, a rig and a cow, sold briskly and earned Tree Top a nice profit because each cost Tree Top only $16. About 18 months ago, however, the store dropped Chunky Farm from its lineup, not because it sold poorly but because it had suddenly begun flying off the shelves at a nearby Wal-Mart. Tree Top’s toy buyer spotted it there for about $14. “I can’t compete with that,” said the buyer, Susan Hancuff-Sellers.

So the Little Guy here, the downtrodden, is the store that was selling a toy at a 100% retail markup for at least six years. Tsk, tsk. And then Wal-Mart just bullies its way in and cuts into the business of theose proud community servants.

[In the independent toy store] There is no Barbie, Hokey Pokey Elmo or Monopoly, three of the industry’s best-selling toys. There are no realistic-looking guns, no blood-spattering video games or weapon-wielding military action figures. “We want toys that spark the imagination,” Waterstreet said.

They — the people running the small toy stores — want toys that spark the imagination. The public, as indicated by what they buy in the free market, appear to want Barbie, Elmo, and Monopoly. The independent toy stores don’t sell these in-demand items; Wal-Mart does. Certainly that can’t be part of the problem?

When Tree Top employees believe the stores must keep a more expensive product on the shelves, they often cut back on quantity, leaving just enough inventory to satisfy demand.

Because their normal practice would be to stock way more of the item than is needed. But this isn’t why these people are struggling — it’s clearly that evil Wal-Mart!

Because of its size, Wal-Mart has the flexibility to break even or even lose money on toys, making up the revenue with sales in other departments. The tactic builds customer loyalty and helps steals market share from competitors, said Jim Silver, publisher of ToyBook, a trade publication.

This is actually the only bit of sense in the article; almost all of the year’s toy sales come between Thanksgiving and Christmas anyway, so selling just toys — even if you’re just trying to make money from this, and not on some Quixotic social-engineering experiment — is in the end a losing proposition as you have to pay rent, salaries, etc. all year.

While it slashes costs on some toys, Wal-Mart earns a substantial profit on others, according to a toy executive who has sold products to the chain for 10 years. To save money, Wal-Mart contracts with manufacturers to make several private label toys, which are sold under names such as Wal-Mart’s Kid Connection. Profit margins on these products, many of which are manufactured outside the United States, are often twice those of brand-name toys, said the executive, who spoke on condition of anonymity because he continues to do business with the retailer.

Gasp! Greater profit margins! Doesn’t Wal-Mart know it’s about sparking the imagination? Apparently not, which is why you don’t see any stories in the Washington Post about how tough things are for Wal-Mart.

That’s an interesting non-sequitur, the mention that Wal-Mart’s house-brand toys are manufactured outside the United States. Nearly all toys are manufactured outside the United States, something that isn’t touched upon anywhere else in the article.

For example, a Kid Connection light and sound robot with matching action figures and helicopter cost $3.11 to manufacture in China, said the toy executive, who has visited the factory in Shenzhen where it was made. Last week, it cost $9.88 at an Oklahoma City Wal-Mart Supercenter, giving the chain a profit of $6.77 per toy.

And they get that ‘profit’ of $6.77 because, of course, Wal-Mart has the ability to teleport goods around without cost, their buildings and land are given to them by anonymous benefactors, their employees work for nothing, and electricity is free.

It is worth noting that Wal-Mart’s retail profit on this toy is almost certainly less than 100%; compare this with the first paragraph I quoted, about the Chunky Farm at Tree Top Toys.

But the real idiocy of the ‘independent’ toy industry is yet to come:

But manufacturers who take their toys from specialty stores into Wal-Mart face some risks. In 1994, Hands on Toys Inc., a small toymaker in Wilmington, Mass., launched Toobers & Zots, a foam construction kit, in the specialty store market. It was an overnight success, earning the company $4 million in its first year, the company’s president, Andy Farrar, said. Hands on Toys declined an offer from Sam’s Club, a unit of Wal-Mart, to stock its products. Soon after, Farrar said, Sam’s Club introduced a line of toys strikingly similar to Toobers & Zots, which began eating into his sales. To regain ground, Farrar licensed the toy to Hasbro, one of the nation’s biggest toymakers, which in turn sold it to Wal-Mart and Target Inc. In response, hundreds of independent toy stores across the country canceled their orders. “People felt that we had betrayed them,” Farrar said. “They were screaming at me at toy conferences.” To this day, he said, some independent toy stores will not carry his products.

Independent toy stores will not stock his products because he sold another product to Wal-Mart, who, had he not sold his idea, would have simply imitated him out of that business anyway. Wal-Mart is famous for cracking the whip on their suppliers, but I don’t recall ever reading anything about them wanting you to not sell to anyone else. Imagine the uproar there would be if Wal-Mart told one of their suppliers that they had to sell exclusively to Wal-Mart or do without Wal-Mart’s business entirely. It would be front-page news. In this story in the Washington Post business section, it’s not even pointed out that the same behavior is still illegal — not to mention mind-bogglingly stupid — when the ‘little guy’ does it.

Independent stores are finding other ways to compete. Earlier this year, Jeff Franklin, the owner of Be Beep A Toy in Annapolis, hired a therapist to teach his staff of 10 about the developmental benefits of play, hoping to give them an edge over their big-box counterparts. “You cannot find that kind of training at Wal-Mart,” he said.

You certainly can’t find that kind of training at Wal-Mart. And, as I pointed out above, you also can’t find stories about Wal-Mart’s financial woes in the Washington Post. Maybe there’s a connection.

The toy store people are clearly off their collective rocker. Running a toy store might be interesting work, and, I imagine, it would be great for people who like children and who are themselves still kids at heart. Like children, though, these people — at least the ones quoted in this article — don’t seem to have the first clue about how the world of business works. They are poor businesspeople, to put it very lightly.

Does the Washington Post business section point this out at any point? No. It instead talks about how Wal-Mart has their own-brand toys made in China, and how they sell them at a profit. Business, ladies and gentlemen! Step right up and see the business writing!

Posted by tino at 14:20 2.06.04
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Clearly, these independent toy stores suffer the same problems as a cutting edge fashion boutique. They make their money when they are carrying something new and unavailable elsewhere. Eventually, the product becomes so popular that Old Navy knocks it off and you’re out of business on that particular item.

I can’t say I feel a bit of sympathy for them. If they want to be activists, they should just do that and be a tax-free entity. If they want to be in the fancy high-end toy business, they need to go to the toy shows and risk it on the new stuff that Wal-Mart hasn’t noticed yet or can’t produce economically. The next year, they need to move on. Well, either that, or they need to suck it up and start carrying Barbies.

Also, how does Barbie not spark the imagination? Girls make up whole scenarios for their dolls. This is what dolls are all about. Yes, you can buy clothes and accessories for them, but changing their clothes takes, like, two minutes. The other hours are spent making stuff up.

Posted by: Nicole at June 2, 2004 04:41 PM

You make some good critiques of the article, and effectively point out the biases that the reporter brings to the writing. But, why on earth would you want to be an apologist for Wal-Mart? It’s interesting what you leave out of your critique, like the fact that WM was selling the Elmo doll for under KB Toy’s cost. Was it under WM’s cost? That is not revealed. Certainly under the cost that an independent could pay for the product wholesale. The fact is that WM actually sells certain toys at a loss to bring in customers who will buy other things. Is that fair? I dunno, but it certainly is biased of you to ignore that entire aspect of the article.

Also, you obviously have no idea what it takes to run a small independent store like that. Expenses are higher, and margins must also be higher. Just because a toy is being marked up 100% doesn’t mean that the retailer is pocketing that full amount. I’m sure their rents are proportionally higher, and I would also suspect they pay their employees a bit more than WM does. Also, haven’t you ever heard of getting a discount for buying more inventory.

You don’t see any stories in the Washington Post about how tough things are at Wal-Mart, because things are not tough there. What financial woes? The gross margins went down by 1%. They missed their number by $.01 … Gimme a break. You’re even more biased than the reporters of the original story, and more comical too … “stories about Wal-Mart’s financial woes” my ass.

Posted by: jjr at June 18, 2004 05:36 AM

JJR, meet irony. Irony, this is JJR. I don’t believe that you two are acquainted.

My point was that the reason you don’t see stories about Wal-Mart’s financial woes is that they don’t have financial woes. They don’t have financial woes because they sell what people want to buy, and they keep their costs way down. Amazing, that.

I’m aware that the costs of running a small store are significantly higher than the costs (per square foot, or per item sold, or per customer) of running a giant store like a Wal-Mart. This is why Wal-Mart operates big stores. There are certainly drawbacks to the giant stores, and particularly to Wal-Mart. But people seem to be willing to deal with the harsh lighting and funny smells that seem to define the place in return for lower prices.

The independent toy store owners are doing something that’s fundamentally unprofitable (exclusively selling toys). Then they want to sell only the toys they think people should want — ones that ‘spark the imagination’ — rather than the ones that people actually do want. They then do this on a small scale, which means that their costs are relatively high.

They then proceed to not make money doing this unprofitable, unbusinesslike, high-cost thing. The owners blame Wal-Mart, and the Washington Post uncritically report this.

And is it ‘fair’ that Wal-Mart can buy Elmo dolls for less than KB toys can? Of course it’s fair; if the people making the Elmos didn’t think it was fair, they wouldn’t sell them to Wal-Mart, or they’d stop making Elmo dolls entirely and go into some other business.

Is it ‘fair’ that Wal-Mart might sell some toys for less than they pay for the things? It’s certainly ‘fair’ if you’re buying one of those toys from them, isn’t it? Because they sell nearly everything, Wal-Mart is in a unique position to sell some of those things for far lower prices than anyone else. That the independent toy stores are not in a position to do likewise is not Wal-Mart’s fault.

Posted by: Tino at June 18, 2004 11:52 AM

man this is old, but I just lucked into it. the critique of the article is good if you ignore the purpose of the article, which is to discuss the difference between small toy stores and large scale discounters. Instead of putting a freeloader libertarian spin on it, you should identify the fact that these are different stores fundamentally; Wal Mart stocks mass market toys, and the independents stock quirky “boutique” toys. Both of these items are “wanted” — just in different quantities. Where they overlap in stock, the small retailer must drop the item or stock a limited amount for those who will make a “convenience” purchase. Reading in some kind of “social engineering” to what is a basic economic fact is hilarious and so Cato Institute-like. And off the immediate point, as strange as it sounds to someone who knows exactly what he or she wants, some people come into these little shops (be they book stores, toy stores, or cheese shops) because they believe, rightly or wrongly, they’ll get expertise and guidance on purchases (e.g. a person wanting to get her friend’s 4 yr old an appropriate gift — anyone with kids knows that the stupid age guidelines on the toys themselves are not always accurate).

Posted by: at March 26, 2005 02:06 AM