ELIZABETH BRACKETT: It's been a busy morning for Santa in Marshall Fields' flagship Chicago department store.
SANTA CLAUS: Now tell me what you want for Christmas.
ELIZABETH BRACKETT: Toy manufacturers and retailers are very interested in what kids are whispering to Santa Claus this year. That's because the toy business has changed dramatically over the last ten years. Traditional department stores like Marshall Fields are no longer in the game.
RALPH HUGHES, Marshall Fields: We've been out of the toy business for a long, long time. And when I say "out of the toy business," out of the traditional toy business and having toys that you see on television every year that kids beg their mothers for.
ELIZABETH BRACKETT: Fields now sells only its own brand of toys, Creative Kids Stuff. Fields and other department stores cut back or got out of the toy business in the late 1980s, when specialty retailers like Toys-R-Us began to dominate. Now, ironically, Toys-R-Us itself is in trouble. It recently had to close almost 200 of its Kids-R-Us and Imaginarium stores. The problem for Toys-R-Us? The competition from toy goliath Wal-Mart.
BARBARA BIANCALANA: When you have a family like mine, you need to watch the prices. I have 20 grandchildren. So... ( laughs )
ELIZABETH BRACKETT: So that brings you into Wal-Mart.
BARBARA BIANCALANA: Right. Right. It makes a difference.
ELIZABETH BRACKETT: It is price that brings shoppers to Wal-Mart. Wal-Mart lowered prices, some to below wholesale levels, on Christmas products in October this year to bring customers in early and get the jump on the competition.
On the day after Thanksgiving, Wal-Mart reported the largest single-day sales totals ever, $1.52 billion. The retail giant's strategy makes it tough for others to compete, says marketing Professor Christie Nordhielm.
CHRISTIE NORDHIELM: Wal-Mart is driving this bus right now, and where they're driving it is to price. So, to the extent that the other retailers say, "price? All right, let's compete on price -- that's what's winning," they're all going to lose because they can't dominate Wal-Mart on price. They cannot beat Wal-Mart at their own game.
ELIZABETH BRACKETT: Wal-Mart now accounts for about one-third of many toy manufacturers' annual sales. Other stores can't match that clout. Steven Cleere, a marketing consultant for Trade Marketing Inc., says there are other reasons nobody can beat Wal-Mart's price.
STEVEN CLEERE, Trade Marketing, Inc.: There are several ways that Wal-Mart helps to keep prices low. First of all, in their own cost structure: They don't put stores in high-rent areas; they keep their labor costs low; they keep unions out; and they develop efficiencies in their systems that allow them to keep all of their costs across the board low, whether it's transportation or warehousing, all the things we don't see when we go into a store. Then, because of their size, they're able to negotiate with manufacturers to keep those prices low as well.
ELIZABETH BRACKETT: Wal-Mart's success has attracted criticism.
STEVEN CLEERE: The irony of that is that, in fact, by keeping those prices low and forcing manufacturers to cut costs in manufacturing and moving it offshore into other countries, they have put Americans out of work. Those Americans are Wal-Mart shoppers, and that's the irony of price-cutting and keeping prices low.
MOTHER: You push the button...
ELIZABETH BRACKETT: For Toys-R-Us, which stocks a much wider variety of toys, and which often has stores in high-rent districts, competition is tough. About all store director Brian Chandler can do is match advertised prices.
BRIAN CHANDLER, Toys-R-Us: In regards to price, what we do is for advertised prices and sales papers, we do a price match to those. So as far as price goes, we can offer truly -- be an equal to or better, be equal to or the best price that's available. And how we differentiate ourselves from our competitors is we offer that through service.
ELIZABETH BRACKETT: But many consumers don't see the service at Toys-R-Us as enough of an added value to stave off Wal-Mart, according to Nordhielm.
CHRISTIE NORDHIELM: It looks bad for Toys-R-Us right now, or for any retailer who is simply obtaining toys from a manufacturer that can be also found at Wal-Mart and not really adding any value to the shopping experience, and also not necessarily providing those toys at a lower price than Wal-Mart.
ELIZABETH BRACKETT: Cleere says that the tradeoff for lower prices may be fewer toys.
STEVEN CLEERE: Wal-Mart is so large that, for a typical toy manufacturer, if they have an item that Wal-Mart does not want to stock, they may stop producing that item. What happens then is that overall choice for the consumer goes down. Granted, what the consumer is buying at Wal-Mart, they're buying at a very low price, but they will not find the selection of items at a Wal-Mart that they would find at a Toys-R-Us, for instance.
ELIZABETH BRACKETT: One fabled name in the toy business, FAO Schwarz, has already lost badly in the toy wars. After emerging from bankruptcy earlier this year, the toy company tried to reenter the market with boutiques in major department stores. In Chicago, Carson Pirie Scott provided a home for the FAO Schwarz boutique, but in early December the company again filed for bankruptcy, though it still hopes to find a buyer for FAO Schwarz and its Right Start Brand.
Nordhielm says FAO Schwarz got into trouble when it stopped promoting the store.
CHRISTIE NORDHIELM: The added value of FAO Schwarz was the exclusivity, was the fact that you could only get it at FAO Schwarz. So you imagine the consumer decision process, and they either say, "I want a leapfrog leap pad, and where should I go find it?" Or they say, "I want a toy; I'm going to go to FAO Schwarz to buy a toy." That's the difference, it's what they choose first, the brand or the retailer, and right now, consumers are choosing the brand and then the retailer as opposed to the retailer and then the brand.
ELIZABETH BRACKETT: But there are specialty toy retailers that are doing very well. Sales at American Girl, an upscale doll retailer, have soared in the past few years. Bought out by Mattel in 1998, the 18-year-old company now has a $350 million net worth. As little girls and their dolls dine with their moms and grandmoms, it is clear that what is being sold here is the entire shopping experience.
EDNA STIRSMAN: I thought this was a nice way to bond with her and to do something special that she'll remember for the rest of her life.
ELIZABETH BRACKETT: And why did her granddaughter pick her doll?
STEPHANIE STIRSMAN: Well, because she's beautiful. She has my hair. She has my eyes, some of it. And she's just really beautiful.
ELIZABETH BRACKETT: With small specialty stores like American Girl and giant retailers like Wal-Mart thriving, the question is whether there will be room for toy marketers in the middle range to survive.