Wal-Mart Sparks War Among Big Toy Sellers

By MIGUEL BUSTILLO and ANN ZIMMERMAN

Retail price wars are starting early this year, and the latest weapon is the $10 toy -- a signal that retailers are bracing for a rough-and-tumble Christmas shopping season.

Wal-Mart Stores, Inc., which accounts for more than a fourth of U.S. toy sales, last week sent a clear message that it didn't plan to be undersold when it announced 10 well-known toys, including some Barbie dolls and Hot Wheels car sets, for $10.

Associated Press

Wal-Mart has set up displays of discounted toys around its stores as it seeks to lure shoppers and pressure rivals.

KB Toys Inc., the nation's largest mall-based toy seller by stores, told Wal-Mart to bring it on. It cut prices to $10 or less on more than 200 toys, including other Hot Wheels sets, Matchbox cars and classic games such as Yahtzee.

Following Wal-Mart's cuts, which were 25% to 40% below the prices of Toys "R" Us Inc. and Amazon.com Inc., Target Corp. began matching prices on three of the four toys it shares with Wal-Mart's $10 list.

Amazon and the individual toy sellers it promotes on its sites also matched prices, but their discounts were offset by shipping charges. A Barbie Mariposa doll cost $10, for example, but had a $6 shipping fee.

The lower prices highlight an emphasis on high-volume staples as retailers gird for a Christmas season in which cash-strapped consumers may favor no-frills basics over flashier merchandise.

M. Eric Johnson, a Dartmouth College professor who follows the toy business, said Wal-Mart is using cheaper toys to "get people into the stores, but not necessarily giving away the store." Supplies of the $10 toys are ample but scattered across store aisles, he said.

"It feels more laser-focused, strategic kinds of moves to drive behavior, but not the good, old Wal-Mart that cuts prices everywhere," said Prof. Johnson. Still, any rival that follows Wal-Mart's cuts on those toys "will definitely be losing money," he added.

Wal-Mart's pinpoint cuts this year contrast with 2003 and 2004, when it slashed toy prices across the board in an aggressive bid to gain a larger share of toy sales. The brash move showcased the enormous pressures the retailer can apply to prices -- and devastated some of its competitors.

Toys "R" Us lost its status as the nation's largest toy seller by revenue to Wal-Mart in 1998. After a bruising 2004 Christmas, it was bought by investors including Bain Capital Partners LLC and Kohlberg Kravis, Roberts & Co. for $6.6 billion.

The Wayne, N.J.-based company now believes it can succeed this year by selling a wider selection. Parents can find Star Wars toys that fit a variety of budgets. It also believes it has a better handle on the season's trendy toys, such as Elmo Live, an animated version of the Sesame Street character that will sell for $59.99 beginning Oct. 14.

Wal-Mart is betting big on Elmo Live, too, and will sell it for $59.88.

Gerald L. Storch, the company's chief executive officer who joined Toys "R" Us in 2006, downplayed the emphasis on lower-priced toys, predicting that parents will continue spending more on toys, despite the economy.

"Christmas will come, and parents will buy toys for their children, just like they have in all the 60 years Toys "R" Us has been in business," he said. "We know some customers will be stretched these holidays, and we plan to meet them. But value is not just about cheapness."

KB Toys declared bankruptcy in 2004 after a cutthroat price war with Wal-Mart. A unit of Prentice Capital Management LP took majority ownership in 2005, and began closing about 150 underperforming stores last November amid continuing problems.

But the Pittsfield, Mass.-based retailer, which now operates about 430 stores, down from more than 1,200, believes it has a winning formula in discount toys. The company sells videogames or two DVDs for as low as $9.98. The items are generally older and less fashionable, but still in demand among cost-conscious parents. "This is going to be a very competitive season, yes, but our sales are robust," said Geoffrey Webb, the company's director of advertising and sales promotion. "Our traffic counts and comp sales are up, and not many retailers can say that," he added.

Write to Miguel Bustillo at miguel.bustillo@wsj.com and Ann Zimmerman at ann.zimmerman@wsj.com

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