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Video Games, Early Learning Aids Power Toy Industry

2/25/2002 02:00:00 AM Eastern

Families reverting to traditional values in the wake of the Sept. 11 terror attacks gave the toy industry a much-needed boost, leading to a healthy 10 percent sales increase in 2001 with video games being responsible for most of the gain.

The Toy Industry Association's (formerly called the Toy Manufacturers Association) state of the industry report given prior to the annual Toy Fair held here, indicated that total toy sales for 2001 topped out at $34.9 billion, a 2 percent gain. The video game segment, which is tracked separately by the TIA, increased 43 percent to $9.4 billion during the year.

"Historically, toy sales remain strong during war and tough economic times. People need a diversion," said Pat Feely, TIA president.

Feely predicted consumer spending would continue to be healthy in 2002 with sales increasing about 6 percent. Another benefit of the stronger than expected holiday sales is store inventory is now low. Feely said many retailers initially curtailed their orders after September in anticipation of a huge sales fall off for the fourth quarter so stores quickly sold out. "Now with store shelves empty I would expect a burst of ordering," he said.

Outside of the video game area, technology-based toys enjoyed their best success in the early learning aid category on the backs of such products as Leap Frog's LeapPad (see story, above). Thomas Kalinske, president of Knowledge Universe, said the education toy category grew by 32 percent last year with more than 3 million LeapFrog LeapPad's being sold. Portable digital audio players, like Hit Clips, also performed well, said Feely.

Still not living up to the industry's initial hype is e-commerce, Feely said, although he hinted that this situation might be turning around, as toys were a large part of the 40 percent overall increase in e-commerce sales last year. However, Feely did not give the percent of online revenue comprised by toy sales.

Despite the general upbeat nature of the state of the industry, toy industry executives see several potential threats on the horizon. These include kids being interested in non-toy high tech items and increasing pressure from retailers like Wal-Mart and Kmart.

Norman Walker, CEO of K'Nex, said kid's cellphones, and their associated bills, are taking dollars away from the toy industry and it is hard for vendors to operate in an environment where 50 percent of all toy sales are conducted by four retailers.

John Eyler, Toys 'R Us CEO, said dedicated toy retailers must adapt to succeed in competing against mass merchants like Wal-Mart and Kmart that use toys as a loss leader product just to drag in customers. Eyler said competing simply on price is not a winning proposition. "It's our position that we must provide things a mass merchant doesn't care about, like space, support on a year-long basis and fun," he said.

He also used Target as an example of a chain that has done quite well operating in Wal-Mart's retail space even though it has higher prices. Target boasts better service and cleaner, nicer stores.

With Wal-Mart having a lock on its 20 percent market share, Eyler said Toys 'R Us must look to other places to increase its share. One such place is the share of failed retailers. Eyler anticipates that 15 percent of the existing market share will be up for grabs in the next five years as various retailers go out of business. Kmart, in particular, was seen as especially weak due to its filing for Chapter 11 protection.