bigpiano

FAO SCHWARZ WAS OUT OF TUNE

Last Wednesday, America’s oldest toy retailer, F.A.O. Schwarz, pulled down the shutters on its Fifth Avenue at 58th Street location for the last time. We take a look at how the retailer got out of tune.

They ran excitedly from department to department, ears conveniently closed to parental calls to slow down – just as they have down the generations. If the children visiting F.A.O. Schwarz last Wednesday knew that they were actors in the final chapter of the iconic toy store’s history, they showed little sign of it. Once upon a time, real actors – in the form of Tom Hanks and Robert Loggia – had danced on the store’s famous floor piano in the movie Big. But even that happy scene could not suppress the melancholy of some adults who, armed with fond memories of past visits, simply came to say goodbye. Iconic, awesome, irreplaceable, unique – all words that flowed easily as people swapped stories and recollections.

There is, of course, a certain irony that a store so famous that it is a rite of passage for any youngster visiting New York City, should need to close. Sadly, fame alone does not the change the economics of retailing in such a premier location, and it makes a poor currency for paying the bills.

Despite the poignancy, the closure is merely the latest development in what has been a very checkered history for America’s oldest toy store. Founded in 1862 in Baltimore, the company expanded to New York in 1870 with a shop on Broadway. Since then, the store has moved no fewer than five times, ending up it is last location – 767 Fifth Avenue at 58th Street – in 1986. The final move did not bring stability. In 2003 the company filed for bankruptcy – twice in the same year. The Fifth Avenue store was closed, albeit briefly, in 2004 before being reopened by new owner, investment firm D. E. Shaw & Co. In mid-2009, F.A.O. Schwarz was acquired by Toys R Us, where it has lived happily. But, unlike in the storybooks the store once sold, that happily was not to have the suffix of ‘ever after’

The unhappy ending is one brought about by the economic realities of operating in one of the most expensive retail districts in the world, where ground floor rents can reach upwards of $3,500 per square foot. At 43,000 square feet, the flagship shop was proving to be a very expensive showcase, and one that almost certainly struggled to make money. Unsurprisingly, Toys R Us made the decision to exit the lease two years before it terminated.

"Fame alone does not the change the economics of retailing in such a premier location, and it makes a poor currency for paying the bills"

That decision was, however, a shock to many who visited on the last day, with more than one person noting how crowed the store always was. Sadly, strong footfall did not translate into a sales line robust enough to justify the store’s continued existence. Especially so given the relatively low value of some of those transactions, from tourists buying small souvenirs like soft toys or stationery goods. As brisk as such trade was, it did not justify – or pay for – such an expensive outlet.

Tourist spend is only part of the story. The past decade has also seen a dramatic change in the domestic toy market with new channels, increased competition, and new technology all having a deleterious impact on the sector and on traditional toy stores.

The channel shift is not exceptional to toys, but it has fundamentally changed the economics of toy store retailing. Conlumino’s forecasts estimate that, this year, some 11.4% of all toy sales will be made online; that’s up from 6.5% five years ago. This is one of the reasons why sales of toys at many specialists, including F.A.O. Schwarz’s parent, Toys R Us, have been weak when measured on a comparable store basis. The rise of online is, to a certain extent, undermining the economics of toy shops. For larger chains, like Toys R Us, some of the shift can be offset by using stores as a place of collection and, indeed, as a place to fulfil from. F.A.O. Schwarz, operating from a single site, had no such advantage.

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"This year, some 11.4% of all toy sales will be made online; that’s up from 6.5% five years ago. Players like Amazon are providing new competition."

The rise of online has seen the emergence of new, powerful players in the toys market, including Amazon. However, competition has also come from generalists like Walmart where the offer of low prices and convenience is alluring for many parents, hard pressed for both time and money. The impact has been two fold. First, the extra competition has meant that the price of toys – many of which are branded and therefore easily comparable between stores – has risen little over the past five or so years, exerting significant pressure on margins. Second, specialists have gradually seen their share of the toy market eroded.

If competition from within the toy sector has exerted a toll on traditional retailers, the impact from competition outside of the sector has been equally, if not more, punishing. Indeed, one of the culprits was on F.A.O. Schwarz’s doorstep, inhabiting an underground space topped by a $6.7m glass cube. The Apple Store’s highly profitable Fifth Avenue flagship is one of the more visible signs of the dramatic shifts in spending priorities. Of course, children’s interest in electronics is nothing new; as far back as the early 1980s kids were buying up Nintendo’s Game & Watch devices, featuring Donkey Kong and other exciting platform style games. However, with their relatively low prices (a Game & Watch cost $48 in today’s money) such products were often complementary to spending on traditional toys and, indeed, would often be sold by toy stores themselves.

Today it’s different. For many children electronics have become a replacement or a substitute for traditional toys. Conlumino data show that some 67% of young teens personally own at least one tablet or smartphone device, and that among the cohort 59% say spending on such devices is a priority. With even the most basic iPad costing $399 there is often little left over – either from the child’s own budget or the gifting budget of parents and family – to spend on other toys.

All of these shifts have hit the sector hard; and as iconic as it was, and arguably still is, F.A.O. Schwarz has not been immune. Indeed, the combination of punishingly high rents and challenges on the sales line arguably left the company in a particularly tough spot, making the departure from its high profile location inevitable. That it has gone does not preclude the store reopening in a more reasonably priced location, with 1633 Broadway, just north of Times Square having been rumored.

In a final twist of fate that perhaps underlines the changing fortunes of different retailers, the next occupant of F.A.O. Schwarz’s old space will be Apple, which will move into the building temporarily as it refurbishes its Fifth Avenue flagship. Apple, of course, won’t have a floor piano for its shoppers to play on; but it has got plenty of apps that will teach visitors how to play the piano. For those wanting the physical thing, Amazon currently has the giant electronic floor keyboard on offer, down from $99.99 to $53.50. That’s toy price deflation for you. Big toy price deflation.

This piece is taken from our Viewpoints service, which provides subscribers with analysis and opinion of retailers’ results as and when they are released. For more a free trial of this service, click below and complete your details.

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