Wal-Mart and the Toy Industry

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).

Alternatives

The loss of Toys 'R Us leaves manufacturers with several choices. The first is to expand existing channels of distribution other than Wal-Mart. Currently, these channels include electronics stores, online stores and bookstores (Brown, 2004). One must remember that these other distribution channels account for nearly 60% of sales currently, and that Wal-Mart still only accounts for 22%. The combined sales from Wal-Mart and Toys 'R Us account for a smaller percentage than these other distribution channels.

Another alternative may be to establish their own category killer store to replace Toys 'R Us. However, this is a risky move and is capital intensive. They would have to make certain that the market would be willing to accept this alternative. This alternative would require a heavy capital outlay and carries the greatest amount of risk. However, it may be a more cost effective alternative in the continuation of marketing research and product development. The costs and benefits of this alternative would have to be weighed against the risk.

In addition to expanding existing distribution channels other than Wal-Mart, toy manufacturers may wish to develop other distribution channels as well. For instance, they may wish to attempt to entice other retail establishments such as K-Mart, increase holdings in Target, Meijers or other similar mass merchandisers. This move is likely to receive a poor reception from Wal-Mart, as it will decrease their hold on the marketshare. However, it also represents better risk management as it distributes the losses over a greater number of players.

Of these alternatives, the best seems to be to increase current alternative distribution channels other than Wal-Mart, particularly with new products. This will entice customers to try out these new venues. Wal-Mart represents a major marketshare, but they are still small compared to other distribution channels. Diversity spreads the risk over a large area so that if a loss does occur, it is minimized in scope. It would cost little to establish other smaller distribution channels as compared to the cost of building and establishing their own retail establishment. New channels often cost more than increasing the use of established ones.

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.