Toy manufacturer distribution strategy after Toys 'R Us closure

Wal-Mart and the Toy Industry

The Toyland Dilemma

Toy manufacturers face a conundrum that stems from the potential closure of traditional distribution channels. Stores such as Wal-Mart and Toys 'R Us represent a major percentage of distribution channels for manufacturers such as Hasbro, Mattel, and LeapFrog. Manufacturers have traditionally depended on stores such as Toys 'R Us not only a "category killer" where they could showcase their traditional lines, but also as a testing ground for new products (Brown, 2004). Recently, Wal-Mart has outpaced Toys 'R Us in toy sales and has become the number one toy seller. The following will support the thesis that although Wal-Mart is the number one toy distribution channel, manufacturers should support other retailers by offering products that they do not sell to Wal-Mart.

Situation Analysis

Toy manufacturers face a difficult problem in that they must decide whether to risk jeopardizing the relationship with their number one distribution channel by seeking other outlets, or to cater to their demands. Wal-Mart now represents a major market share for toy manufacturers. It is estimated that the closure of Toys 'R Us only accounts for 16% of total toy sales (Brown, 2004). Wal-Mart accounts for approximately 22% (Brown, 2004). Together these channels only represent 38% of the total toy sales. This means that there must be other channels that account for a larger percentage of the sales.

The decision of whether to offer these other distribution rights to certain products depends on several factors. One of the key elements of the decision is how stable these alternative channels are and what the impact of closing Toys 'R Us will have on these other channels. Another factor is how this will harm their relationship with their number one distributor, Wal-Mart. There are many variables to consider in this important decision.

Challenges

The most obvious challenge facing the industry is how to re-distribute the sales lost by the Toys 'R Us closing. There are two sides to marketing, obtaining demand and servicing demand (Tamilia, 1999). In order to under the challenges that manufacturers face we must examine both sides of marketing. Obtaining demand has to do with sales and increasing customer need for one's products. The key question regarding this issue is if demand would decrease with the closure of Toys 'R Us or whether the demand would remain the same and the distribution channels would simply change.

For established brands such as Barbie or Hot Wheels one could reasonably expect that the loss of Toys 'R Us would have little effect on demand. These brands have been long established and customers are used to seeing them in various distribution channels. The brands themselves have equity and customer recognition. The problem will be brands that are only available through Toys 'R Us (Brown, 2004). This is especially true for brands that are experimental and still in the development stage. Customers do not already have an established recognition of these brands and distributors may rely on the impulse buy for these sales. This portion of the business would be lost without considerable marketing efforts.

The second challenge for toy manufacturers will be additional marketing expenses that will be the result of a need to inform customers of the new distribution channels. It will be easier to establish recognized brands through new distribution channels because customers will be looking for them. However, they will have to establish brand recognition with the customers on any new products that they develop that are not associated with established brands (Brown, 2004). This will require additional advertising and place an additional strain on manufacturer's budgets.

The third challenge that toy manufacturers face is the need to re-design distribution channels in response to new distribution channels. This will require new transportation contracts and potentially changes in structure such as the change from a push to a pull system. The distribution system may have to be decentralized or concentrated according to needs (Pride and Ferrell, 2003).

Customer Advantages

Many analysts assume that customers will automatically switch to Wal-Mart with the dissolution of Toys 'R Us. This would increase Wal-Mart's marketshare of the toy industry even further. However, there is also the possibility that customers will migrate to distribution channels other than Wal-Mart. This would mean greater competition and could result in price wars among distributors. This would theoretically increase demand for the products. This is good for the distributors, but bad for the retailer. Increased competition would mean the need to lower prices, which would have the aggregate effect of decreasing profit margins for distributors.

One must remember that we are talking about the same products, only the distribution channel would change. The manufacturer still gets the same wholesale price, the retailer is the one who takes the hit in this case. The customers are the ones that have the most to gain. They would benefit from lower prices and a wider array of purchase points. They would be more likely to pick up items other than toys. More distribution channels mean greater convenience and lower prices for the customer.

This would be just cure for Wal-Mart's price-busting strategy. Wal-Mart gained its position through the ability to under price the competition (Freeman, 2003). The toy market is only one of the most recent victims of the Wal-Mart phenomenon. Wal-Mart has already used similar moves to undercut the food industry, clothing industry, with many more on its slate for slaughter (Freeman, 2003).

In conclusion, from the standpoint of the toy manufacturer they have already seen what Wal-Mart has done to other industries (Salter, 2004). Instead of catering to the destructor and be forced to vacate to third world countries in order to maintain profitability, perhaps toy manufacturers should break stride and develop other markets. Toy manufacturers need to consider the overall picture and not risk 66% of their marketshare for the sake of their biggest distributor. This strategy is consistent with the old adage, "Don't put your eggs in one basket." Utilizing other distribution channels makes good risk management sense.