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Extra10/13/2008 12:01 AM ET

Wal-Mart ignites a toy war

The discount retailer, which earlier this decade aggressively grabbed a bigger share of the toy market, prepares for the year-end holidays by slashing prices on 10 popular toys to $10.

By The Wall Street Journal

Retail price wars are starting early this year, and the latest weapon is the $10 toy -- a signal that retailers are bracing for a rough-and-tumble Christmas shopping season.

Wal-Mart Stores (WMT, news, msgs), which accounts for more than a fourth of U.S. toy sales, recently sent a clear message that it won't be undersold when it announced 10 well-known toys, including some Barbie dolls and Hot Wheels car sets, for $10.

KB Toys, the nation's largest mall-based toy seller, by stores, told Wal-Mart to bring it on. It cut prices to $10 or less on more than 200 toys, including other Hot Wheels sets, Matchbox cars and classic games like Yahtzee.

After Wal-Mart's cuts, which were 25% to 40% below the prices of Toys "R" Us and Amazon.com (AMZN, news, msgs), Target (TGT, news, msgs) began matching prices on three of the four toys it shares with Wal-Mart's $10 list.

Amazon and the individual toy sellers it promotes on its sites also matched prices, but their discounts were offset by shipping charges. A Barbie Mariposa doll cost $10, for example, but carried a $6 shipping fee.

The lower prices highlight an emphasis on high-volume staples as retailers gird for a Christmas season in which cash-strapped consumers may favor no-frills basics over flashier merchandise.

M. Eric Johnson, a Dartmouth College professor who follows the toy business, said Wal-Mart is using cheaper toys to "get people into the stores but not necessarily giving away the store."

Supplies of the $10 toys are ample but scattered across store aisles, Johnson said.

"It feels more laser-focused, strategic kinds of moves to drive behavior but not the good old Wal-Mart that cuts prices everywhere," Johnson said. Still, any rival that follows Wal-Mart's cuts on those toys "will definitely be losing money," he added.

Wal-Mart's pinpoint cuts this year contrast with those of 2003 and 2004, when it slashed toy prices across the board in an aggressive bid to gain a larger share of toy sales. The brash move showcased the enormous pressures the retailer can apply to prices, and it devastated some of its competitors.

Toys "R" Us lost its status as the nation's largest toy seller, by revenue, to Wal-Mart in 1998. After a bruising 2004 Christmas, it was bought by investors including Bain Capital Partners and Kohlberg Kravis Roberts for $6.6 billion.

The company, based in Wayne, N.J., now believes it can succeed this year by selling a wider selection. Parents can find Star Wars toys that fit a variety of budgets. It also believes it has a better handle on the season's trendy toys, such as Elmo Live, an animated version of the Sesame Street character that will sell for $59.99 beginning Oct. 14.

Wal-Mart is also betting big on Elmo Live and will sell it for $59.88.

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'Christmas will come'
Toys 'R' Us chief Gerald L. Storch says the company has "more toys under $10 than anyone on the planet" and that it's ready to compete for holiday sales with Wal-Mart.
Gerald L. Storch, the chief executive officer who joined Toys "R" Us in 2006, downplayed the emphasis on lower-priced toys, predicting that parents will continue spending more on toys despite the economy.

"Christmas will come, and parents will buy toys for their children, just like they have in all the 60 years Toys 'R' Us has been in business," he said. "We know some customers will be stretched these holidays, and we plan to meet them. But value is not just about cheapness."

KB Toys declared bankruptcy in 2004 after a cutthroat price war with Wal-Mart. A unit of Prentice Capital Management took majority ownership in 2005 and began closing about 150 underperforming stores in November 2007 amid continuing problems.

But the retailer, which now operates about 430 stores, down from more than 1,200, believes it has a winning formula in discount toys. The Pittsfield, Mass., company sells video games or a pair of DVDs for as low as $9.98. The items are generally older and less fashionable but still in demand among cost-conscious parents.

"This is going to be a very competitive season, yes, but our sales are robust," said Geoffrey Webb, the company's director of advertising and sales promotion. "Our traffic counts . . . are up, and not many retailers can say that," he added.

This article was reported and written by Miguel Bustillo and Ann Zimmerman for The Wall Street Journal.

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