Can Toys R Us afford FAO Schwarz?

On Thursday, Toys R Us announced that it has purchased boutique toy store FAO Schwarz. Schwarz, the iconic Manhattan wonderland featured in the movie Big, has declared bankruptcy twice amid competition from discount stores. Toys R Us has had its own financial difficulties: in 2006, a group of investors bought it for the relatively bargain-basement price of $6.6 billion.

On the surface, FAO Schwarz and Toys R Us seem to have wildly divergent personalities, at least in New York. The Schwarz store on Central Park South and Fifth Avenue is what might emerge if Jane Austen went into toy marketing. It is calm and relaxed (for a toy store, at least), with a bright, helpful staff and beautifully arranged displays. Many of the toy stations are interactive, so visitors can design and construct their own muppets, dolls or matchbox cars. Moreover, the most hideously expensive toys are seamlessly integrated with more reasonable offerings, making it possible for parents to bait-and-switch their children away from the thousand-dollar stuffed dragons and Barbie condominiums. In short, it is the kind of store that parents don't mind going to and kids adore, with prices that are good for the occasional splurge, but a little too high for any sort of regular visiting.



The Toys R Us flagship in Times Square, on the other hand, is more like the island of lost toys as imagined by Hunter S. Thompson with a head full of acid. Filled with exciting displays, bright primary colors and a full-size Ferris wheel, a visit there is completely overwhelming, the kind of experience that inspires seizures and mental collapse. Added to this, the prices are high, and everything is designed to extort the maximum dollars from parents' pockets. Amid the swirling lights, echoing rooms and excited squeals that sometimes sound like screams, it's the kind of retail experience that could turn anyone into a Scrooge.

Admittedly, individual Toys R Us outlets lack the excess of the Manhattan version; however, with their emphasis on selling over enjoying, they retain much of the hard-edged sugar rush feeling that makes Times Square so unpleasant. In these stores, the focus is on toys, toys, toys, with high shelves displaying a stunning array of merchandise.

While the genteel relaxation of FAO Schwarz and the garish commercialism of Toys R Us may seem worlds apart, they suffer from a similar flaw in their business plan. Unlike their biggest competitors -- Target (TGT), Wal-Mart (WMT) and the internet -- both stores are badly overspecialized. When one is looking for that final Disney Princess doll or the last action figure to complete a set, Toys R Us or FAO Schwarz is the perfect place to go. However, in the current economic climate, most shoppers are trying to carefully control their spending, which means that they are more likely to go to discount stores or search the web for the bulk of their shopping.

To Toys R Us' credit, they are also accounting for the trend toward online shopping. They recently acquired eToys.com, babyuniverse.com, Toys.com and ePregnancy.com, expanding their online presence. Further, their "$1-$2-$3 Fun" areas, included in many stores, offer customers a place to buy inexpensive toys, costume jewelry and kazoos with minimal financial hardship. My fear is that in the coming months, Toys R Us will find its forays into bargain sales far more lucrative than its purchase of a high-end prestige property that it really can't afford.

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