Customers walking into Karen Scarvie’s store for the first time may be forgiven if they think they’ve stumbled upon some kind of New Age coffee klatch. The braided rugs, the old oak furniture, the sound of aboriginal drums in the background and the smell of coffee wafting through from the cafe next door are enough to lead them to such a conclusion. But that thought is quickly dispelled by the sight of kids playing with LEGO and Brio train sets in one of the store’s many rooms.

The Wooden Horse, located in Los Gatos, California, is a specialty toy store, one of many located across the U.S. that is enjoying a steady increase in profits and the attention of the toy buying public. Scarvie, president of the board of the American Specialty Toy Retail Association (ASTRA), an organization based in Des Moines, Iowa, whose mandate is to distribute information about the industry to its 700-plus members, attributes the specialties’ success to a unique approach to retailing.

The specialties are in the business of selling values to parents and kids through toys, Scarvie says, in particular, encouraging the value of a healthy imagination.

Everything in The Wooden Horse, from the rustic feel of the store’s interior to the toys themselves, is designed to stimulate the minds of the children who visit. Toys are taken out of boxes and placed behind a glass casing to provide easy access for kids who want to handle them. A coterie of seasoned staff is on hand to help kids and parents, but they usually hang back. ‘It’s important that the children are given a chance to explore, to experience,’ says Scarvie, a 27-year veteran of the toy business.

The Wooden Horse’s biggest sellers are what Scarvie terms ‘open-ended’ toys-such as LEGO and Brio-products in which ’90 percent of the play is in the child.’ Generally, Scarvie says, specialty stores will not stock ‘close-ended’ toys-primarily products that have been spun off from a television show or film. To her, the fact that these toys come attached with a storyline reduces the chance that children will have to use their imaginations.

It is a view of toys that runs counter to the approach of the large mass-market retailers, but it is resonating with some consumers.

Although there are no hard statistics to support what share of the toy market the specialties are capturing, Janet Koerner, an administrator at ASTRA, estimates the figure to be about three to five percent, based on increases in product requests of member manufacturers. This, combined with the establishment of chains such as Noodle Kidoodle, Zany Brainy and The Learning Express, all of which have successfully duplicated the specialty toy store formula, lead Koerner and Scarvie to surmise that their niche in the toy market is growing.

One reason the specialties are thriving is that stores like The Wooden Horse often serve as an excellent environment for manufacturers to test their new products. Many toys that have enjoyed mainstream success, like the Koosh Balls line and, to a lesser extent, Toobers & Zots construction sets, began their retail lives in the specialty stores and were later picked up by the large retailers after they had generated a respectable amount of a sales buzz.

‘In the specialty toy store market, if you can convince the store owner that you have a good product, they will market the product for you to your customer. They will position it, they will demonstrate it, they will recommend it,’says Andy Farrar, president of HandsOnToys, which makes Toobers & Zots.

Large mass-market retailers are less sanguine about the positive role the specialties may play in the toy business. Michael Tabakin, director of trend merchandising at Toys `R’ Us, concedes that the specialties can act as a launching pad for products, but adds that the exclusivity with which they sell some toys is more reflective of a licensor or manufacturer’s preference than of savvy retailing on the part of the specialty store owners.

‘There are a lot of properties that start in specialties markets, and it’s not that we look at them and decide that we want to take them. We wanted to take them from the beginning, but weren’t allowed. The brand managers or the people who run those particular properties only want to go into specific areas,’ says Tabakin, who cites Beanie Babies as such an example. Tabakin views the specialties as serious competition, even though their share of the market is negligible when compared to that of Toys `R’ Us.

‘Any dollars spent outside of Toys `R’ Us is a concern. When kids or parents think of buying toys, we want them to think of buying toys at Toys `R’ Us,’ he says.