When specialty chain Zany Brainy announced that it was buying its archrival Noodle Kidoodle, analysts were quick to praise the acquisition. Both chains had similar product offerings, which meant integrating Noodle wouldn’t be painful. And, for the most part, both chains operated stores in complementary markets, which meant massive store closures wouldn’t be necessary.
Nonetheless, not many manufacturers that sold merch to both Noodle and Zany are quite as enthusiastic over the emergence of what is now, by far, the largest chain in the category.
‘Any time a big customer gets a whole lot bigger and they’re dealing with smaller manufacturers, it gives them more leverage,’ says John Lee, president of Chicago-based toyco Learning Curve. ‘What I’ve heard in discussions with other manufacturers has been, `Uh-oh, what are they going to ask for now?”
Big, of course, is a relative term in the specialty industry. Whereas at mass, five chains (TRU, Kmart, Wal-Mart, Target and KB Toys),which boast 700 to 2,500 stores, dominate toy retail sales, the majority of the toys in the specialty market are sold through thousands of independent mom-and-pop operations. Last year, only 30% of toyco Brio’s revenues came from sales it made to specialty chains like Zany and Noodle. The remaining 70% were made to accounts with one or two stores, says Peter Reynolds, CEO of the Germantown, Wisconsin company famous for its wooden toy train sets. With distribution spread out among several customers, specialty toycos are less vulnerable to the dictates of one retailer. Even Zany Brainy, which was the biggest single customer for both Brio and Learning Curve before the acquisition, accounts for only 10% of each company’s total sales after the acquisition.
Nevertheless, there are more tangible problems facing suppliers when one retailer swallows another-like trying to keep your products on the shelves of the remaining chain, for example. Though he says there is an 85% crossover between the product Brio sells to both chains, Reynolds isn’t confident that Waterway, one of the company’s playsets that sold well at Noodle, will get picked up by Zany because it’s already selling a similar toy at a cheaper price point.
Another potential pothole lies in the companies’ approaches to merchandising, says Learning Curve’s Lee. Although both chains stock much of the same product (Noodle Kidoodle carries some mass items, like Barbie and Fisher-Price, which Zany doesn’t), how they present that product differs.
‘For us, one of the most important things is what your product looks like once it reaches the store floor. Over the last year, Noodle Kidoodle was a lot more consistent in executing their merchandising philosophy at the store level-that’s something Zany is going to have to struggle with,’ says Lee.
To a large degree, both concerns will be contingent upon just how far Zany plans to go in incorporating Noodle’s merchandising philosophy; in other words, just how many Noodle buyers it plans to keep on. On that issue, Zany has been understandably vague. At press time, its acquisition of NK hadn’t been finalized. Zany Brainy spokesperson Lisa Orman says the company is evaluating every category to see where it can use NK buyers.
In the end, some industry onlookers argue the main threat that Zany Brainy poses is that it will begin to act like a mass retailer (by year’s end, it will have nearly doubled its store count to 200), becoming more focused on price and less on service and on promoting the specialty gospel of the importance of educational toys in a child’s development.
‘The backbone of the specialty industry are the independents, the one-store owners who are in their stores and are passionate about selling the difference of specialty toys,’ says Brio’s Reynolds. ‘How do you take that passion and spread it over 100 stores?’ he asks. ‘That’s tough. How do you spread it over 200 stores? That’s even tougher.’
Further complicating matters, Reynolds adds, is the growing encroachment of mainstream retailers, who are carrying more specialty toys, drawn no doubt by their 50% profit margins, which are double the margins, if not more, of most toys sold at mass. Currently, mid-tier retailer Target carries a wide assortment of specialty items, as does Toys R Us, which purchased specialty chain Imaginarium last August, and has since integrated Imaginarium departments into its C3 format stores.
From Reynolds’ perspective, the cumulative effect of the mainstreaming of the specialty market will force specialty retailers to compete on price with mass retailers, which in turn will force manufacturers to cut corners.
Though there’s little evidence that proves that Reynolds’ scenario is playing out, the events that have occurred in specialty in the last year, including TRU buying Imaginarium, specialty chain Learningsmith going out of business and now, Zany acquiring Noodle, suggest that the industry may have reached a crossroads.
Learning Curve’s Lee, however, takes a less pessimistic view on the growing popularity of specialty toys, which he pegs currently as a US$3-billion industry.
‘Any time you have an emerging category, you’re going to see frenetic growth, and as the category matures, you’re going to see consolidation,’ says Lee, who cites the video retail market as an example of a sector that saw major consolidation in the late `90s. Unlike Reynolds, Lee believes mainstream retailer interest can be a positive for the industry. ‘Through its C3 format stores, Toys `R’ Us is bringing in a different group of customers, who are willing to pay for the quality of specialty toys. Those stores have better service, better presentation and better merchandising. It’s proof that a mass market retailer can get it right,’ says Lee.