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Toy makers watch Toys `R’ Us appeal

Toy manufacturers have a lot at stake in Toys `R' Us' recent appeal of a Federal Trade Commission (FTC) ruling, even though they have publicly expressed little interest in its outcome, industry analysts say....
April 1, 1998

Toy manufacturers have a lot at stake in Toys `R’ Us’ recent appeal of a Federal Trade Commission (FTC) ruling, even though they have publicly expressed little interest in its outcome, industry analysts say.

‘It is expedient for [toy manufacturers] to distance themselves from this issue today, but the fact is they need the likes of Toys `R’ US . . . and other companies that can maintain some price integrity and some margins for their profits,’ says George Whalin, president of Retail Management Consultants, a San Marcos, California-based firm that advises a number of specialty toy chains.

In the original ruling in September 1997, the FTC-the U.S. government agency responsible for regulating trade in the U.S.-found Toys `R’ Us guilty of coercing toy manufacturers into agreements that would limit the sale of some of their most popular lines to warehouse clubs. An FTC release issued at the time said Toys `R’ Us had established the arrangements because it was concerned ‘that warehouse clubs with [their] two-thirds lower margins would erode its reputation for low prices.’

What manufacturers are avoiding now through their silence, says one source, is the risk of incurring further FTC investigations and, in the process, of alienating at least one of their most important customers. If manufacturers have an interest in seeing higher margins on their products at retail, that means the party most likely to be offended would be the warehouse clubs.

‘I think the vendors understand that when Costco and Sam’s Club take a product that wholesales for $10 and they sell it for $11.25, they ruin the business for everyone else, not just Toys `R’ Us, but Wal-Mart and Kmart and the neighborhood toy store. Those stores can’t compete with [warehouse clubs] that are only in the business for two months of the year and cherry pick all of the best [stock from the manufacturers],’ says Ron Tuchman, CEO of Imaginarium Toy Centers and a former executive at Toys `R’ Us from the early `60s to 1989.

The problem with some warehouse clubs, says Whalin, is that they don’t care about the needs of the manufacturer. Generally, they will buy whatever they can, for as cheap as they can, and sell it for as cheap as they can. ‘When you are a manufacturer, you are trying to protect the integrity of your line and the price of your line, so you really don’t want to sell into that kind of environment.’

According to Michelle Muth, an FTC spokeswoman, the FTC will rule on Toys `R’ Us’ appeal within the next seven months.

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