Business Driven Technology 6th Edition by Paige Baltzan

Exercise 65

Battle of the Toys-FAO Schwarz Is Back!
German immigrant Frederick Schwarz established FAO Schwarz, a premier seller of fine toys, in 1862. After moving between several store locations in Manhattan, the growing company settled at 745 Fifth Avenue in 1931. FAO Schwarz soon became a toy institution, despite the impending Depression.
Unfortunately, the New York institution closed its doors in 2004 after its owner, FAO Inc., filed for bankruptcy twice in 2003. The company ran into trouble because it could not compete with the deep discounts offered on toys at chain stores like Walmart and Target. All the stores in the FAO chain were closed.
Some people believe that FAO Schwarz was its own worst enemy. The company sold Sesame Street figures for $9 while the same figure at a discount store went for less than $3.
In 2004, the New York investment firm D. E. Shaw Co. bought the rights to the FAO Schwarz name and reopened the Manhattan and Las Vegas stores. The grand reopening of the New York store occurred on November 25, 2004, during the Macy's Thanksgiving Day parade. It appears that the company has learned from its previous mistakes and is moving forward with a new business strategy of offering high-end, hard-to-find toys and products along with outstanding customer service.
Jerry Welch, FAO chief executive officer, states the company based its new business strategy on offering customers-local, visitors, and Internet-a unique shopping experience in which they can spend thousands of dollars or just twenty, but still purchase an exclusive item. The store no longer carries any items from top toymakers Hasbro Inc. or Lego. The only toys it carries from Mattel Inc. are Hot Wheels and limited-edition Barbie dolls, starting at $130 for the Bridal Barbie dressed in a Badgley Mischka designer wedding gown and chandelier earrings. A few of the items the store is offering include:
$20 made-to-order Hot Wheels car that a child can custom design via a computer.
$50,000 miniature Ferrari with a full leather interior, fiberglass body, three-speed transmission, and working sound system that travels up to 24 kilometers an hour and is not recommended for children six and under.
$15,000 stuffed elephant.
$150,000 6.7-meter-long piano keyboard, which premiered in the Tom Hanks movie Big.
Baby dolls that are arranged in incubators and sold by staff wearing nurses' uniforms.
Welch said, "FAO is a 142-year-old brand that, because of our location on Fifth Avenue, people all over the world know. So we start out with great recognition and what we've done here is pull together something that you just can't find anywhere else in the world. Everything here is made by small, unique manufacturers from all over the world." Welch is confident the stores will be richly profitable for its new owners because they have stopped offering mainstream products found in rival stores to generate sales volume. The new owners have returned to a business strategy focusing on quality and exclusivity that were the hallmark of the original store.
The Future of the Toy Store Playing Field
Toys 'R' Us began slashing prices during the 2004 holiday season in a last-ditch effort to fight off intense price competition from big discounters like Walmart and Target. Toys 'R' Us CEO John Eyler stated the company would not be outdone on pricing, during the holiday sales rush, though he cautioned he was not planning to engage in a price war. There have been several reports that the company might leave the toy business to focus on its more profitable Babies 'R' Us unit. Toys 'R' Us lost $25 million for the three months ended in October 2004. The company lost $46 million in the same period the year earlier. The decrease in losses can be attributed to a big cost-cutting effort.
Kurt Barnard of Barnard's Retail Trend Report stated that Toys 'R' Us is destined for oblivion-it cannot stand up to the discounters. Toymakers like Mattel and Hasbro, whose profits have also suffered from Walmart's market power, have given Toys 'R' Us a hand by offering it 21 exclusive items not available at other stores.
Toy manufacturers fear that greater monopoly power from Walmart will force them to slash their profit margins. Walmart carries fewer items than toy stores like Toys 'R' Us, which could lead to fewer choices for consumers.
FAO's new owners believe that Walmart cannot compare with the atmosphere now offered at FAO Schwarz, a true toy heaven. The company is hoping that its new business strategy will allow it to move beyond the battle of the toy stores. Toys 'R' Us will need to find new ways to compete with discounters like Walmart and Target.
Describe the issues with FAO's original business model.