Never has a room full of toys seemed so sad.

There they were, on display at The Toy Industry Association's annual American International Toy Fair in New York, while subdued buyers discussed the fate of the $20 billion industry.

Globally, toy sales dropped 2 percent to 3 percent last year, causing chains to rethink overall market strategy. The balance of power has swung away from such traditional toy retailers as Toys ‘R’ Us and KB Toys in favor of discount giants, such as Wal-Mart Stores Inc. and Target Corp. Already the competition has seen FAO Schwarz and Zany Brainy crash and burn. Toys ‘R’ Us is reportedly considering getting out of the toy business and focusing on baby and children's apparel.

The toy troubles mirror problems faced by grocers: Wal-Mart has come in, offering loss leaders, and stealing customers. Niche retailing is necessary to survive. Build-a-Bear, for example (see story on page 16) is doing well. Maria Weiskott, editor of the toy industry's Playthings magazine, notes specialty stores did well last year across the board. Weiskott expects Toys ‘R’ US and KB to follow that lead and try to reshape their offerings to focus more on providing experiences or filling target niches.

“It's likely that Toys ‘R’ Us and KB will reinvent themselves,” says James Downey, Cushman & Wakefield Inc.'s senior managing director for national retail accounts. The future probably lies in interactive formats that require children's participation: Build-a-Bear and American Girl, for example.

JCPenney Spotted at Fair

The slack left in the mass toy market may be picked up by departments stores, as well as drugstores and grocery chains, suggests Weiskott, noting that the buyers from J.C. Penney Co. were conspicuously active this year's Toy Fair.

The impact on retail real estate? It's likely that specialty toy stores will move out of malls and into community or lifestyle centers to get storefronts with easy access.

Meanwhile, kids tastes are changing. Industry consultant Chris Byrne, of Byrne Communications, a cell phone and an iPod are the most requested gifts, according to a recent survey. “Kids aren't playing with toys as much,” he says, a phenomenon the industry has tagged “kagoy” — short for kids are getting older younger. Most experts agree that the majority of children 8 years and up are more interested in video games, cable TV and the Internet, than action hero figures and Barbie dolls.

All things considered, Weiskott says the mood at the Toy Fair in February was not as apocalyptic as sometimes reported, but one of guarded optimism. She notes that while kids are growing up faster, adults are staying young longer and many are buying toys and collectibles, such as action figures and dolls, as well as board games.

Chains will have to go through a trial and error procedure to find the right niche, and that could be painful, says Gwen Mackenzie, Sperry Van Ness vice president for retail investments.”The chains will have to become something new to survive,” she says.

Department or Discount Store Rating 4th Qtr. 2004* Year-to-Year Change
Federated Department Stores Inc. 74 4.2 %
Dillard's Inc. 77 2.7
Sears, Roebuck and Co. 74 1.4
The May Department Stores Co. 76 1.3
J.C. Penney Co. 76 -1.3
Target Corp. 75 -2.6
Wal-Mart Stores Inc. 73 -2.7
Kmart Corp. 67 -4.3
Total -74 -2.6
*On a scale of 100 points
Source: University of Michigan