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KB TOYS FIGHTS DISCOUNTERS BY MAKING STORES FUN AGAIN

By Molly Knight

Like other toy sellers, KB Toys has taken a pummeling in recent years. It filed for Chapter 11 in January 2004 and, citing poor sales, closed 550 of 1,200 stores.

And yet, far from hoisting the white flag, KB is fighting back. The Pittsfield, Mass.-based company has redrawn its battle plans and recruited some fresh field commanders. “We needed to sort of go on lockdown for a while and stop spending money until we figured out how to proceed,” said Ernest V. Speranza, the company’s chief marketing officer. “We knew we wanted to resurrect the company, but we also knew we had to do it the right way, with the right plan.”

One of the first things the company did was to bring in Greg Staley, former head of the U.S. and international divisions of Toys ‘R’ Us, as CEO last summer. Then in October Speranza followed Staley over from Toys ‘R’ Us, and other Toys ‘R’ Us executives have done likewise. “A few of us made the jump,” said Speranza. “Really, they [KB] were trying to completely restructure the company with an entirely new management team.”

Sources say those new managers indicate that the company is getting downright serious about toys. “They’ve finally got a managing team with real toy people who understand toys and children,” said Christopher Byrne, president of Byrne Communications, a New York City-based toy consulting firm. “I think it’s a really positive step.”

Perhaps he’s putting that mildly, given the colorful way he describes KB’s problematic past. “KB used to be where old toys went to die,” said Byrne. “They got into trouble because they couldn’t compete with the slashing of prices that Wal-Mart and Target are known for. So now they’re coming back with discounted toys and also the hot new promotional toys, which is very smart.”

Byrne calls the shift to organizing by brand a good move. “It’s the way people shop,” said Byrne. “Mom’s aren’t looking to browse the doll aisle. They’re looking to fill a child’s specific request. If a child want a Bratz doll, she’s not going to be satisfied with Barbie.”

After reviewing feedback from customers, KB launched a massive remodeling effort upon emerging from bankruptcy last August that calls for major changes in store appearance, product selection and customer service. So far 17 stores have been remodeled, and an additional 45 are slated for completion by year-end. Speranza says KB plans to have all the units in the portfolio fixed up by the end of 2008.

“We identified the stores that were worth saving, which were typically the stores in strong markets and reputable shopping centers,” said Speranza. “And once we figured out where we stood, we set out to do what we could to breathe life back into them.” Part of the plan was to get back to the fundamental principles the chain was founded on, he says.

“A toy store should be the most fun store in the mall,” said Speranza. “For a long time, we got away from that. Our stores had deteriorated in look and feel. Toys were stacked haphazardly all over the place. You almost needed a guide to get around them. There was too much signage. It was ugly, and it was all wrong.”

Poor product placement and awkward signs were not solely to blame for KB’s troubles, though. In the past five years, toy retailers have suffered at the hands of Wal-Mart and similar discounters. FAO Inc., owner of the venerable FAO Schwarz, filed for bankruptcy twice in 2003. Toys ‘R’ Us has struggled long too, being in the process of closing 75 stores this year. P oaching by the discount chains is not entirely to blame for this industrywide decline, according to NPD Group, a New York City-based market research firm. NPD attributes the slump to what it calls the “kids getting older younger phenomenon.” With the rising popularity of computers, digital cameras, iPods and video games, U.S. sales of children’s electronics rose to $694 million in 2004 — up 40 percent over the previous year. Sales of traditional toys have suffered as a result.

“The toy business has changed dramatically over the last few years,” said Speranza. “Toys are not dead, but to be competitive, we now have a different philosophy about what stores should look like and what our offerings should be. We decided specific designs would achieve those objectives best. Now we’re dedicated to making it an energetic, colorful place where kids want to be.”

Speranza says KB has “cleaned up” its offerings with more-focused, timely merchandise. “We decided that our toys should be more about quality and less about quantity,” he said.

Each of the new remodeled stores has what the retailer calls strike points: 8-to-12-foot displays for specific brands such as Barbie, Dora the Explorer, Pirates of the Caribbean and Power Rangers. “We used to organize our stores based on product, but now the brand is the focal point,” Speranza said. “Star Wars is still strong. Barbie is as good a license as any. You could pretty much put Dora on anything and it would sell.” KB is placing TVs at kids’-eye levels, instructing them on how to play with toys, and it’s stationing customer-service representatives near strike points to do the same. “Toys are very experiential,” Speranza said. “It’s not like buying a shirt for a child. When a child walks up to a toy, he wants to know what it does and how it plays. Near the Dora section, we play her TV show. Sometimes kids will just sit down and watch, and we think that’s great. We like to get the child involved any way we can.”

Speranza says the company spent considerable time surveying mothers. “Women said our stores were too hard to navigate,” he said. “Most moms don’t have the luxury of being able to shop alone. A lot of them come in with small children in strollers. They simply needed more space to shop.” KB responded by widening the aisles in the remodeled stores to five feet.

There’s one time of year, though, when those widened aisles will be given over to toys rather than customers, whatever the latter’s complaints about clutter.

“The toy sector has two seasons: Christmas and the rest of the year,” said Speranza. “We do 50 percent of our business in the last two weeks of the year. At that point in time, customers will forgive us for having stacks and stacks of inventory, because they need that toy they’re after. But we’ve learned that during the rest of the year, we’ve got to leave some room for kids to play.”

Speranza declined to give specifics on how the remodeled stores are performing, beyond saying that they are “full speed ahead.” The company says it plans to open 20 new stores by year-end, in addition to the 62 remodelings.

And though kids’ affinity for electronics shows no signs of waning, Speranza says he is optimistic that the market for traditional toys is as lucrative as ever, especially with the help of summer blockbusters. “We’ve got Superman on our side,” said Speranza. “And he’s absolutely driving sales right now.”

But he’s not all that appears to be on the company’s side. “They’re going to be a strong competitor,” said Byrne. “They’ve got such an advantage being the go-to toy store in the mall, because the mall is a weekly trip for some people. If someone needs a toy, they can just get it at KB instead of having to make an extra trip to Toys ‘R’ Us or Target. And the high gas prices will definitely help them.”