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Fred Clements: Toy industry vs. Internet discounting

Published June 24, 2013

Editor's note: This is the first BRAIN blog post by Fred Clements, Executive Director of the National Bicycle Dealers Association. Clements' previous blogs can be read on bikedealerblog.wordpress.com


Low-price Internet retailers are the scourge of many specialty industries these days, including toys.

A recent white paper from the American Specialty Toy Retailers Association (ASTRA) describes how the specialty toy industry, similar in some ways to the specialty bicycle industry, is helping brick-and-mortar stores effectively compete with Internet retailers.

Though mass merchants sell the largest volume of toys overall, there is also a network of several thousand specialty stores that focus on the higher end (“toys which generally are designed with a focus on what the child can do, rather than what the toy can do”).

These stores are important to the industry, and many specialty toy manufacturers have come to realize that without healthy and independent brick-and-mortar stores, their companies are doomed. They are supporting retailers to ultimately save themselves.

The situation facing specialty toy retailers, as outlined in the report, includes:

  • Dramatic growth in Internet sales;
  • Growth of Amazon.com as a low-price competitor;
  • Consumer use of smartphones to check prices and features while in the store
  • Discriminatory tax policies that require retailers with physical stores to collect sales tax while many on-line retailers avoid them.

The report dives into the significant risks to manufacturers and distributors if they do not manage distribution thoughtfully. Among the risks to vendors:

Loss of perceived brand value and image. “The value of that brand can be eroded on the web by deep discounting, poor brand presentation and a shopping environment that often lacks a high level of customer service.” Also, “what a toy is worth in the minds of consumers is the price it is selling for online … not only does discounting change the perceived value of a toy, price discrepancy across channels can also negatively affect brand perception by creating a sense that a brand’s prices are arbitrary and at times inflated.”

Short-term sales growth that leads to long-term revenue declines. “Independent toy stores  … are beginning to reduce shelf space for brands that are heavily discounted on the web and to shift their focus to toys that carry margins capable of supporting brick-and-mortar stores.”

Permanent reduction of showroom space for specialty brands. “A greater concern … is the potential for large numbers of brick-and-mortar stores to close, eliminating much of the highly valuable showroom space in which specialty brands are now showcased and presented to consumers. More than most products, toys need and benefit from customers being able to interact with them and learn how they work from a sales person.” And: “We sell a higher-end product that is really durable and reliable and full of all kinds of value that you can’t see online. We do best when a consumer can look at our product and feel it, and say, Hey, this is really well made … that can’t happen without brick-and-mortar stores.” And: “We recently did research … and found that 70 percent of consumers who have purchased (our product) found it in a store. It’s not from Internet surfing. They come across it in a store.”

Dependence on a few large customers. “Large retailers have the lion’s share of the negotiating power and they can be unreliable partners.” And: “I don’t think most toy manufacturers realize how dangerous Amazon can be as it starts to push its weight around.”

The ASTRA report then moves to a series of recommendations, many similar to those being adopted by bike and cycling accessories brands today:

A balanced distribution strategy. “Toy companies should make it a priority to develop an Internet strategy that balances the opportunities presented by the web and the need to protect their brand image and the viability of their brick-and-mortar customers which deliver unique value for their brands.” Also: “As manufacturers we are not going to give up the Internet. As consumers we are not going to give up the Internet. But how do we make sure all of these things stay vital?”

Work with friends. The report urges manufacturers to work with retailers that are committed to compatible brand strategies and want the brand to survive long-term. They consider pricing policies that are pro-competitive and recognize the value of promoting consumer awareness. Price policies such as MAP encourage retailers “to invest in tangible and intangible services or promotional efforts such as showrooms, product demonstrations and knowledgeable employees. Absent pricing policies such investments may not be worthwhile because discounting retailers can free ride on retailers who furnish services and then capture some of the increased demand those services generate.”

Price enforcement. Manufacturers that have adopted MAP policies say their primary motivation is the long-term sustainability of their brand and retail partners. “If someone was just going to buy and sell, we could do that ourselves. We could set up an on-line store and undersell anyone. But we are interested in keeping this brand up and running and selling it for along time.”

Drop violators. “Ultimately the effectiveness of both MAP policies and distribution agreements hinge on the willingness of manufacturers to drop violators.”

Tax laws. Passage of laws to level the playing field on sales taxes is an important step to helping both retailers and manufacturers remain viable. The government should not be favoring on form of retailing over another.

Learn more about ASTRA: www.astratoy.org. The white paper was researched and written by Stacy Mitchell, Institute ofLocal Self Reliance: www.ilsr.org.

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