Newspaper article THE JOURNAL RECORD

Toys `R' Us vs. Wal-Mart

Newspaper article THE JOURNAL RECORD

Toys `R' Us vs. Wal-Mart

Article excerpt

BENTONVILLE, Ark. (Bloomberg) -- Wal-Mart Stores is doing to Toys `R' Us what the United State's largest toy retailer did to the corner toy shop: Cutting prices so much that rivals see their profits shrivel.

Wal-Mart sells Bandai's Tamagotchi virtual pets for $10 these days -- $8.50 on its Web site and down from $15 during the fourth quarter. At Toys `R' Us, the electronic toys go for $14.99, a price unchanged since Christmas.

It's those kind of prices that led Toys `R' Us to warn last week that its fiscal fourth quarter and year-end earnings will fall short of analysts' expectations. "If Wal-Mart decides it wants a piece of your action, watch out," said William Maffie, fund manager John Hancock Funds, which owned 1.65 million Wal-Mart shares as of December. Wal-Mart is the second-largest toy seller with 15.2 percent of the $25 billion retail toy market in 1996, up from 14.6 percent in 1995. Toys `R' Us accounted for 19.1 percent, little changed from 1996, according to NPD Group, a market research firm. Wal-Mart wants a piece of the toy action these days. To get that, it offers toys at bargain prices, supported by larger stores, broader selections and its much vaunted inventory controls, analysts said. In its fiscal fourth quarter, ended Jan. 31, "toys and apparel in all markets were very, very strong and we had consistent sales in all of our store formats," said Wal-Mart Chief Financial Officer John Menzer. The Bentonville company can charge less for toys because as a general-merchandise retailer, it isn't dependent on playthings alone to generate revenue and profit, analysts said. Instead, Wal-Mart uses toys as a promotional tool to lure customers into stores where they are tempted by other goods at higher prices, analysts said. Discounters' gross margins on toys are generally about 20 percent to 22 percent of sales. For toy retailers, gross margins are about 25 percent, according to NPD Group. Gross margin is the percentage of revenue left after subtracting the cost of goods sold. "Wal-Mart is able to use toys much more effectively as a promotional tool than Toys `R' Us," said Joseph Ronning, an analyst with Brown Brothers Harriman & Co. …

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