Mass-market retail spaces are getting smaller. But that might not be the worst thing for the US toy industry.
The dire straits faced by US retailers over the past three years may be on the way to becoming a distant memory. With the dawning of 2011, sales numbers coming back from the all-important holiday shopping season have started to roll in, and they’re not bad at all.
According to New York-based industry org The International Council of Shopping Centers, sales were up by 3.8% in November and December of 2010 over 2009 figures, marking the strongest growth in retail revenue since 2006. Moreover, the council reports that online sales experienced a double-digit increase of roughly 12% to total US$32.6 billion—a number also confirmed by internet research and tracking firm comScore.
MasterCard Advisor SpendingPulse, meanwhile, indicates general growth in US retail sales of 5.5% over 2009 year-end results, with the apparel category scoring the biggest gains. Clothing sales across all demos were up by 11% over last year, while MasterCard reported e-commerce transactions increased by 15% year over year.
“When you combine in-store and online numbers it really does represent a nice uptick,” says noted retail analyst Ted Vaughan, a partner at Dallas, Texas-based BDO Seidman Retail and Consumer. “You can certainly state that it was a successful season.”
That’s the good news. However, the US retail analysts we surveyed say the game is changing. Static is out and fluidity in terms of planning and strategy is in as the second decade of the century begins. What’s on the way? Analysts forecast a host of pressures and conditions that just might give rise to new major players in the space, while mass-market stalwarts scramble to innovate. And ironically, one of the biggest trends to watch is the looming spread of the small-format mass-market urban store. Facing price pressure from the super-discount tier and consumers conditioned by specialty to seek out unique products, the big boys are carving out a space in between with outlets one-fifth the size of their suburban counterparts. So where does this leave manufacturers of children’s consumer products?
The 2008 economic crash proved to be a boon for discount retailers—read dollar store chains. The last two years have told a tale of nothing but solid sales growth and accelerated expansion for this retail channel.
“They have really cleaned up their act,” says Robin Lewis, a long-time retail industry consultant and co-author of 2010′s The New Rules of Retail. “The stores are bright and crisp, and they have elevated the shopping experience.”
Already in 2011, discount chain Dollar General has announced plans to hire 6,000 employees and open as many as 625 stores throughout the US. Similar expansions can be seen throughout the category with Dollar Tree, tween-targeted Five Below and Family Dollar all posting positive growth numbers.
“Discount is growing by about 10% every year,” says Dave Marcotte, a SVP at Cambridge, Massachusetts-based market research firm Kantar Retail. “The discount channel has taken a pretty big chunk of the market, especially in the seasonal areas. It’s showing very serious growth numbers.”
And according to the number-crunchers at New York-based SmarTrend, discount chains occupy the topfive spots when it comes to retail operating margins across the US, indicating a very healthy cash flow. At the top is Dollar Tree, which reported an operating margin of 9.9% in Q4 2010 on sales of US$1.4 billion. Goodlettsville, Tennessee-based Dollar General’s Q4 margin sat at 8.5% on US$3.2 billion in sales, while 99 Cents Only’s 275 locations had an operating margin of 6.2% on sales of US$333.6 million last quarter, and Family Dollar took the fifth spot with a 5.9% margin on sales of US$2 billion. What it all adds up to is a robust and cash-rich sector that’s starting to exert influence on the market. Experts believe that the emergence of the tier will have a real effect on the sale of children’s products, including licensed merchandise and toys, in the next two years.
“Dollar General does a national brand business with Mattel and Hasbro, but you are more likely to see generic no-name stuff in the tier, like from Family Dollar,” says Marcotte. However, he points out that the generic toys have taken a leap in terms of quality in the past 12 to 24 months.
“It used to be bottom-feeding stuff,” Marcotte says. “But it’s not anymore. It’s high- quality toys, maybe not on trend, but they are definitely selling.” The leap forward in quality for generic toys will likely put pressure on the bigger names to either amp up their products’ bells and whistles or tamp down their prices.
It is difficult to pin down toy sales growth, as most discount tier chains report their revenues in terms of super-categories including consumables, apparel, general and seasonal merchandise. And in the coming quarters, many of the experts surveyed believe that retailers in this tier will put a greater emphasis on selling their own private-label products, particularly in toys and kids apparel, the goal being to create robust multi-SKU lifestyle brands—much like their “upstairs” competitors at Walmart and Target have already done.
“Retail tiers you don’t normally associate with doing that are now very much in the business,” says retail expert Carol Spieckerman, president of Bentonville, Arkansas-based retail strategy firm NewMarketBuilders. “Retailers like Family Dollar are revisiting their kids brands. They are continuing to expand, tweak and refine their private brands.” She adds that while licensed goods will still be prominently featured in the tier, she expects in-house labels, like Family Dollar’s Kidgets, to play a bigger role in their sales strategies.
Big-box retailers are watching discounter developments, make no mistake. What’s really piqued their interest, in fact, is that much of the discount channel’s growth has been driven by its expansion into urban centers with small stores that would be swallowed whole several times over by the 100,000-square-foot-plus outlets dominating the suburbs. Not ones to leave money lying on the table, both Walmart and Target are intending to open small urban stores in areas they previously ignored.
“Walmart is now looking at 20,000-square-foot stores,” says Spieckermen, pointing to a recent outlet opening in downtown Chicago as proof of the chain’s intentions. “It has not really cranked up yet, but I think we are going to see a lot more in 2011.”
Spieckerman adds that Target, with suburban locations that often exceed 180,000 square feet, has also started looking for spaces in urban areas that could accommodate the modest 20,000-square-foot store. Additionally, she expects urban openings to be carried out as soft launches, with Target relying on social media marketing and direct mailings to get the word out, consciously avoiding media tactics that smack of mass-market like national TV, newspaper and radio advertising.
“There is certainly a lot of conversation about Target and Walmart looking for smaller stores,” agrees Kantar’s Marcotte. “It’s a strategy to get into urban markets, and it’s also a function of real estate zoning laws and changing demographics.”
On the last point, BDO’s Vaughan says a changing US culture is driving the demo shift. “The population is returning to downtown areas,” he says. “Folks are becoming more conscious of driving and spending time in the car. It might be an outgrowth from the downturn of the economy, but there is an urban revitalization going on and these retailers want to be a part of it.”
Taking a slightly larger view of the big picture, Lewis says the move to the downtown markets is a rational extension of the current retail environment that is beyond cluttered. “It’s pre-emptive distribution,” he contends. “[Big-box retailers] have basically reached saturation with 100% distribution, so they have to develop smaller formats. To really win you have to figure out how to get in front of consumers first, fast and often.”
As for what the product assortment and selection will look like in these new pint- sized stores, Walmart and Target continue to be notoriously tight-lipped about revealing any planograms. But the analysts surveyed believe toys and licensed products will continue to play a major role in the smaller outlets, even though SKU numbers will be a fraction of those carried by suburban stores.
“I don’t know which areas will be sacrificed,” says Vaughn. “I think you can assume that outdoor lawn and garden sections will be gone, and that grocery will be much more of a priority.” Marcotte, for his part, isn’t sure that’s a foregone conclusion.
“It’s difficult to say one way or another,” Marcotte counters. “Everything is very fluid, but smaller stores tend to be oriented more towards consumables, so there is more pressure for general merchandise—like toys and licensed apparel—to give up space to consumables.”
Others believe the urban stores will actually improve sales of certain kids products because of the impulse-purchase factor that spurs buying behavior in smaller stores. “A smaller neighbourhood environment creates more impulse buys,” says Judith Russell, editor and COO of retail newsletter The Robin Report. “Rather than being a destination where parents go solo, they will usually have the kids in tow at smaller urban stores.”
Even with shiny new formats in the offing, differentiating their retail experience—by product, price or customer service— has become the raison d’être for mass-market players. And many of the traditional methods employed to stand apart from the crowd have fallen by the wayside in the never-ending campaign to court consumers.
“Price transparency is the ‘new normal,’” explains Spieckerman. “You walk into a store now with your mobile device and you can check in real-time for the best prices at any number of bricks-and-mortar and online retailers. There are no longer shell games—it’s a real game-changer.”
So it follows that without price advantage (something many US retailers were founded on), stores are looking at myriad strategies that will set them apart from their competition. Rewards programs and frequent-buyer discounts are two relatively new additions to the arsenal, but the most pervasive differentiation tack making an impact on children’s products right now is the growth of private labels.
“Branding is going to be a huge differentiator,” says Spieckerman. “The bottom line is that retailers aren’t standing still and letting their private brands bask in whatever dim light is being thrown off by national brands. They are really turning their brands into meaningful product statements that have a lot of marketing support.”
Spieckerman points to the success of Kmart’s Smart Sense and Target’s Up and Up brands as prime examples, and even predicts that co-branding may be in their future. “Retailers are very invested in private brands,” she says. “Instead of thinking of it as an either/or proposition, I think we are going to start to see a hybrid branding model, where national brands team up with their private counterparts.”
Another outgrowth of the quest for differentiation that dovetails with the proliferation of social media and handheld internet devices is the prevalence of short-term exclusives. This is where licensed products will potentially play a bigger role. “Retailers realize they won’t get a full exclusive on a big license,” says Spieckerman, “so they are settling for temporary ones.” She adds that for properties with active social media followers, like a celebrity-driven apparel line, a short-term exclusive can drive one-day sales and, more importantly, traffic directly to a specific retailer.
“One-day exclusives can be very compelling,” Spieckerman says. “When a guy has a million Twitter followers and can tell them to go to this store on this date and buy something, it’s quite powerful.”
The quest for differentiation, in fact, has had quite an effect on the distribution of toys and licensed products in the last year or so. It turns out stores are gestating mini-outlets within their own walls, building on the in-store boutique concept that rose to prominence over the last decade. And in some cases, it’s bringing retailers back into the toy fold.
“We started with 20 pilot stores in 2009 and it worked so well that we rolled out another 79 this past year,” says Julia Fitzgerald, CMO for toys and seasonal at national mid-tier retailer Sears. The 1,700- to 1,800-square-foot areas within the chain’s locations, branded as Sears Toy Shops, carry mainstream toys like Barbie, Nerf and Lego alongside what Fitzgerald calls “harder to find products” from specialty toycos like Shilling and Madame Alexander.
The shops are, when possible, placed adjacent to kids apparel sections and also emphasize Sears private labels My First Kenmore, My First Craftsman and newcomer Just Kids. “Our customers were telling us that they wanted toys back at Sears,” says Fitzgerald. “We are trying to be the small good-for-you toy store.”
“[A store-in-store] is a way of creating synergies in differentiation,” notes BDO’s Vaughan. “It is a successful concept and retailers turned to it during the downturn.”
Market-leading toy specialist Toys ‘R’ Us put its own twist on the concept and took advantage of a soft commercial real estate market by introducing a whack of temporary locations throughout 2010. The Wayne, New Jersey-based retailer opened upwards of 600 pop-up stores that occupied between 5,000 and 6,000 square feet apiece.
“Toys are an opportunistic purchase,” says Marcotte. “The niche of wanting a small toy store has really been replaced by the Toys ‘R’ Us pop-ups. They sign a three-month lease and just wait to see if the location will work or not. It’s a no-lose situation for them.”
Notably, TRU reported a 5.4% increase in sales in December, attributing the growth largely to activity at new stores including the TRU Express locations. The jury is still out, however, on how many of the locations will become permanent and how they will be merchandised and marketed.
“It’s become a business strategy rather than an opportunistic move,” says Lewis. “We will wait and see how well they do.”