It might be the season for giving toys, but not necessarily selling them.
The company that owns legendary toy retailer FAO Schwarz said Tuesday that it would file for Chapter 11 bankruptcy protection this week, a victim of the fierce toy wars pitting specialty stores against mass-merchandise discounters. It would be the second bankruptcy filing this year for the company, which emerged from Chapter 11 in the spring.
FAO Inc. said it might be forced out of business if it couldn't find a buyer for its FAO Schwarz and Right Start chains by Dec. 15, a deadline imposed by the company's lenders. FAO, based in King of Prussia, Pa., said it would liquidate Zany Brainy, a chain of 89 stores selling education-themed toys.
"It doesn't look good," said toy industry analyst Sean McGowan of Harris Nesbitt Gerard in New York. "The broader picture is that this is a brutal industry and you have giants like Wal-Mart and Target who don't need to make money in this category."
The price wars have also taken a toll on Toys R Us Inc., which five years ago lost its position as the nation's top toy seller to Wal-Mart Stores Inc. Toys R Us said last month that third-quarter losses prompted it to reduce annual earnings estimates and close its money-losing Kids R Us and Imaginarium stores.
Toys R Us has tried to distinguish itself from the giant discounters by building up its inventory of exclusive and private-label products. As for FAO, it has billed itself as a premier seller of fine toys. In the face of this year's discounting trends, neither strategy worked as well as the companies had hoped.
"Wal-Mart is selling things below cost," said Jim Silver, publisher of Toy Wishes magazine. "It's hurting everybody."
Toy manufacturers are feeling the pain too.
With fewer toy-only stores, power is concentrated among the biggest megastores. They are aggressively pushing vendors to reduce costs. And by cutting retail prices, the discounters devalue the manufacturers' brands, the toy makers complain.
"It's not good, but this is the way it's been for the last 20 years, and it's only going to be more so in the coming years," said Charlie Woo, chief executive of MegaToys, a downtown Los Angeles-based toy manufacturer. "Suppliers have to adjust to that environment."
What's more of a concern, Woo said, is that shoppers are increasingly heading to the discounters for their toys.
"People are really looking for bargains," he said.
