Last Christmas was anything but merry in the world of toys, when a devastating price war unfolded that would soon alter the competitive landscape of the entire industry. First, Wal-Mart (NYSE: WMT) slashed prices on hot toys as early as October. By January, there were two casualties: Mall retailer KB Toys filed for bankruptcy and announced plans to shutter several hundred stores, and the venerable FAO Schwarz was forced into bankruptcy for the second time in less than a year.
The fallout lasted well into the new year, as inventory liquidations at those two chains took a toll on first-quarter results at Toys "R" Us (NYSE: TOY). Once the king of the toy hill, Toys "R" Us relinquished that title to Wal-Mart five years ago and has been in a tailspin ever since. Earnings have tumbled, the Kids "R" Us and Imaginarium concepts have been scrapped, and even the once-promising online partnership with Amazon.com (Nasdaq: AMZN) has dissolved into a series of lawsuits and countersuits.
Times have been so bleak lately that Toys "R" Us has revealed possible plans to do the unthinkable -- auction off its core toy business to focus on the more profitable Babies "R" Us chain. Nevertheless, while market share has slipped at the hands of Wal-Mart, Target (NYSE: TGT), and others, Toys "R" Us is not withering under the fierce competition, and is in fact beginning to fight back.
The company's staunchest allies just might be the toy manufacturers themselves, and several months ago it approached many of them seeking help. Obviously, toy suppliers have a vested interest in helping Toys "R" Us succeed. Not only does the company control a second-best 17% share of the domestic market, but also it has traditionally been more favorable than discounters, in terms of pricing and selection. Without Toys "R" Us, manufacturers would be more reliant on Wal-Mart, and none want to be solely subjected to the demands of a behemoth well-known for driving down suppliers' prices.
So the suppliers have answered the call, with companies such as Mattel (NYSE: MAT), LeapFrog (NYSE: LF), and Hasbro (NYSE: HAS) agreeing to send in reinforcements to help in the upcoming holiday season. Each has agreed to provide products that will be available exclusively at Toys "R" Us -- such as the ever-popular Hokey Pokey Elmo -- and will also lend advertising support. According to The Wall Street Journal, the company is slated to run 21 commercials (versus two last year), with manufacturers paying for 17 of the spots. Though Wal-Mart will also carry exclusive items, one-quarter of the merchandise at Toys "R" Us will be unavailable elsewhere this holiday season.
Toys "R" Us is like a marquee baseball player in his last season before free agency -- anxious to showcase his talents to impress whomever will be writing his next paycheck. Personally, I would rather see the company redouble efforts to turn around its toy business rather than surrender. However, if selling proves to be the best course of action, a successful holiday season will ensure that a larger number is ultimately written on the price tag.
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Fool contributor Nathan Slaughter owns none of the companies mentioned.
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