The specialty market: Values for your money

In 1992, John Lee launched his educational toy company, Chicago-based Learning Curve, with a line of 29 products. At the time, Zany Brainy had one store, and Noodle Kidoodle had yet to open its first. Fast-forward seven years. In the interim,...
February 1, 1999

In 1992, John Lee launched his educational toy company, Chicago-based Learning Curve, with a line of 29 products. At the time, Zany Brainy had one store, and Noodle Kidoodle had yet to open its first. Fast-forward seven years. In the interim, the doors to 560 specialty toy stores have swung open. Zany Brainy has 75 store locations; Noodle Kidoodle, 42. And Lee’s start-up, famous for its blocky wooden toys, now produces more than 2,400 SKUs and has enjoyed 50% sales growth every year since its inception.

To varying degrees, the specialty market is populated with success stories of this kind. And while it’s not about to challenge the sales might of mass-according to the American Specialty Retailing Association (ASTRA), specialty toys accounted for 5% of the US$22.6 billion worth of toys sold in the U.S. in 1997-it has become an important and, in some cases, lucrative alternative for manufacturers, retailers and licensors.

A survey of how the specialty toy market operates quickly reveals an industry that is putting its own gloss on the hallmarks of successful consumer products, with an emphasis on quality and service. To really understand the demand, however, it’s necessary to examine the properties of the toys themselves.

What makes a specialty toy

a specialty toy?

In the language of specialty toy retailers, it is a product that has inherent value, either educational or developmental. That definition can suggest a wide range of product, from the latest plush animal-the tactile element of which can meet the developmental needs of preschoolers-to Lego, which demands from kids a certain level of creativity and problem-solving ability.

‘It’s not easy to define,’ says Sally Lesser, president of ASTRA and owner of two specialty toy stores called Henry Bear’s Park, located in Cambridge and Newton, Massachusetts. ‘It’s a toy that invites the child to make a relationship with it, [unlike] a lot of the toys you’ll find at mass [for which] the play pattern is already written out.’

While they may struggle over the semantics of the term, invariably those in the specialty market best define their product in relation to toys typically found at mass. For some, specialty toys are nonviolent and less likely to be based on a licensed property. It’s these qualities, says Lesser, coupled with today’s parents, who are more attune to the importance of play for children, that are driving sales. Others, like Learning Curve’s Lee, look beyond the toys’ characteristics for further clarification.

‘When most marketers use the term `specialty,’ it’s in reference to a certain class of doors,’ says Lee. ‘We try to keep our products in outlets that will merchandise and sell them in an appropriate way. By definition, that precludes the big-box warehouse stores, [which] don’t do a very good job of merchandising product.’

The retailers and the vendors

Because the majority of specialty toys aren’t presold through extensive TV advertising, the service specialty toy retailers provide plays a crucial role in the sale of the product.

‘A good specialty toy retailer educates the public, through display [and] well-trained staff, that play is critical to the lives of their children,’ says Peter F. Reynolds, president of Brio, a toy manufacturer, based in Germantown, Wisconsin, that makes wooden toy and train sets for kids preschool-age and up. Generally, specialty retailers will show an eagerness to work with vendors by attending workshops that explain how their toys function and how they can help a customer’s child, says Reynolds. Lesser says she’s seen a noticeable spike in sales of Brio product at her stores, after her staff started participating in Brio workshops in the past two years.

The service component, however, encompasses more than just getting the message out to shoppers-presentation is also a major determiner of sales. In the specialty toy store, a lot more of what Lee calls ‘merchandising or romancing of the product goes on than at mass.’ Specialty toy retailers are more likely to feature displays of toys with product out of the box, which allows parents and children to try a toy before they buy it. Additionally, specialty retailers regularly hold play or activity days, which involve staff showcasing a line of toys and educating store patrons about their attributes. Vendors long ago picked up on the marketing potential of the activity days, and now, most have developed their own kits that they provide to retailers as a way of, ostensibly, sponsoring the events.

‘For the [specialty manufacturer-retailer] equation to work, you can’t see the product as just product,’ says Tom Vellios, president of Zany Brainy. ‘A lot of specialty product requires presentation, hype in store, but it also requires an environment that the customer is coming to for more than just the product.’ Zany Brainy has taken an aggressive approach to organizing activity days, holding a free concert, toy demo or story reading every day of the year in each of its 79 locations. Zany Brainy maintains an events team, which sits down with the chain’s merchandising department to map out the focus of the events for the year. That emphasis on events has paid off for both Zany Brainy and specialty toy vendors, says Vellios, who cites Go-Go’s Crazy Bones as an example of a toy that benefited from its in-store promotional efforts. According to Scott Harris, president of Toy Craze, the U.S. manufacturer of Go-Go’s Crazy Bones, on a per-store basis, Zany Brainy has sold three times as many of the collectible plastic skulls than any other retailer.

‘We got behind it, [and] kids started forming clubs. We’d bring a Crazy Bones van into the store, our staff would talk it up, and the rest is history. Conversely, the same product went into Toys `R’ Us, and they gave it one facing in the store.

It’s never going to sell that way,’ says Vellios.

Vellios envisages specialty toy retailers as being more than just the distribution point in the specialty market matrix; instead, he sees them as a platform in which manufacturers, big and small, can test their toys before they officially release them. In the spring of 1997, Spin Master Toys tested a prototype for Air Hogs-one of this holiday season’s hottest-selling toys-in front of customers in the parking lots of Zany Brainy stores. The demos allowed Spin Master to quickly gauge public reaction, says Vellios, and to make the necessary adjustments. Spin Master continued working with Zany Brainy’s buyers, fine-tuning Air Hogs, before launching last June.

Another perk for vendors is the extended shelf life their products receive at specialty.

‘If an item works in the specialty market, it could live five, six or seven years longer than it would at mass,’ says Lee, who adds that Learning Curve is still producing the 29 SKUs it started with seven years ago. The continued sales strength of Learning Curve’s Thomas the Tank Engine wood line bears this out, says Lee.

For their part, vendors working in the specialty market offer retailers a host of advantages that they wouldn’t otherwise get stocking the same products that mass retailers do. Stores are able to sell most items with markups of 45% to 50%, which is much more generous than the slim to nonexistent margins discounters and mass retailers place on the TV-advertised licensed merchandise they carry. Specialty vendors also provide strong in-store marketing support, and give retailers a first crack at a range of innovative product.

Despite these perks and the high level of cooperation that exists between retailers and vendors, there are downsides to operating in the specialty market. For manufacturers, the minuscule market share the specialty toy biz represents means they move less volume per item than they might at mass. For retailers, the limited resources of some manufacturers makes fulfillment a problem if a toy takes off and every store is clamoring for orders. Then there’s the ever-present lure of the mass market for vendors. When products make the jump to mass, they effectively nullify the exclusivity of distribution that specialty retailers demand. It’s safe to assume Beanie Babies wouldn’t be the cash cow that they’ve been for specialty retailers if they were also available at mass.

Testing the licensing waters

All of these problems may be of trifling concern, however, when seen against the backdrop of a more significant trend in the specialty market: the introduction of edutainment licensing.

‘Four or five years ago, you hardly saw any licensed product in the specialty market. Retailers used to say, `I don’t sell licensed product.’ Now, it’s gotten to the point where as a retailer, if you don’t carry licensed product, you’re moving one step away [from survival],’ says Brio’s Reynolds.

Learning Curve’s Lee says the key to growth has been ‘properties like Blue’s Clues, Teletubbies and Thomas the Tank Engine and Friends that have, in a wholesome way, captured the hearts and minds of children and have made product available on an exclusive basis to the specialty market.’ (Currently, 70% of Learning Curve’s products and two-thirds of the 150 SKUs it will unveil at this year’s Toy Fair, including new items in the Thomas the Tank Engine and Friends and Little Bear lines, are based on licensed properties.)

David Jacobs, VP/group head of licensing at The Britt Allcroft Company, licensor of the Thomas the Tank Engine and Friends property, believes licensing has been a win-win proposition for the specialty market. The consumer’s willingness to pay more for a quality licensed product from a specialty retailer, says Jacobs, has allowed licensees to move more items at higher wholesale prices through specialty distribution routes than they could through mass, where low prices are more of an imperative for customers. And for retailers, adds Jacobs, stocking licensed product based on high-profile kid properties helps to drive traffic into their stores.

But Reynolds cautions that the very force that’s causing the market to grow could also spell its downfall. The sheer volume of licensed product making its way onto the shelves of specialty retailers, especially products based on a property for which there’s a separate merchandising program for mass, confuses consumers and detracts from the distinctiveness of the specialty retailer.

‘When you buy licensed product from a specialty retailer, the specialty retailer is stocking that product because it engenders positive values. Right now, there’s product for mass and specialty that’s based on the same property. There’s less definition, and, therefore, there’s the danger of there being less reason to go to a specialty retailer.’

Further complicating matters, says Reynolds, is the fact that more mass retailers like Target and Penny’s are looking for kids toys and products that aren’t available at Toys `R’ Us or Wal-Mart.

‘You have a situation [in which] the mass market and the specialty market are moving closer to each other. If that line gets blurred, it will hurt the specialty market more than it will the mass market. I believe the specialty market can double in size without blurring the line, but the danger is we’re at 5% and we’re already blurring the line. We’re in the values business-we need to focus on the values business.’

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