Toy retailers had that sinking feeling this year. A toxic mix of rising oil prices, a slightly decelerating economy, and no hit toys snapped consumers out of the buying binge they were on for most of 1999, says Ursala Moran, a senior retail analyst at New York-based Sanford C. Bernstein and Co. The number-two toy retailer, Toys `R’ Us, saw its revenues slide by 1% in the first half of this year. Specialty toy retailer Zany Brainy, which recorded a revenue increase of 5.3% for the first two quarters (achieved largely through new store openings), saw its comparable store sales plunge an average of 14% over the same period. Only market leader Wal-Mart, which accounted for 17.4% of all toy retail sales in 1999, managed to meet investors’ expectations, says Moran.

Part of the problem is that 1999 was such a strong year for retailers that most couldn’t duplicate that success in 2000. Last year, overall toy retail sales for the first three quarters rose 9%-much higher than the industry’s average annual growth of 3% to 4%-setting a threshold that stores are not likely to meet this year, says Reyne Rice, director of toy services at market research firm The NPD Group.

Retailers had to contend with other extenuating circumstances as well. For instance, heading into the holiday season, neither Mattel nor Hasbro has been able to hook into a hit franchise on the scale of a Pokémon, Star Wars or Furby. As a result, both key suppliers have had off years to date. Mattel’s net sales rose by less than 1% over the first three quarters of the year, due mainly to slumping worldwide demand for its infant, preschool, boys entertainment and wheels brands. After a stellar first quarter in which its net sales increased 16%, Hasbro’s revenues dipped in the second and third quarters, and are now down 0.6% overall for the first nine months of the year.

To make matters worse, a host of electronic toys that were expected to kick-start retail toy sales during the holidays have seen their prospects dim because of a worldwide shortage in computer chips.

The biggest bummer of the year had to be the near complete implosion of the on-line toy retailing sector. Toy e-tailing, with its New Economy promises of low prices, unlimited selection and no check-out lines, eventually ceded to the Old Economy’s rules governing profitability. Though eToys began the year with its stock price nestled at a lofty US$86, by summer it was languishing at the US$8 mark as investors grew frustrated with dot.coms showing no signs of turning a profit.

Before the days of reckoning were over, three e-tailers had closed their virtual doors for good (Toysmart.com, Toytime and RedRocket.com), the number-two and three toy e-tailers had merged their sites (Amazon and toysrus.com), and eToys was heavily rumored to be a takeover target.

The dot.com fallout would eventually impact the off-line world too. Following a failed attempt to take its on-line toy e-tailing unit public, Consolidated Stores announced it was putting KB Toys up for sale last June. ‘Consolidated clearly wanted to realize some value for its toy division through an IPO of KBkids.com,’ says Sanford’s Moran. ‘When that tap was turned off, it was left empty-handed with a problematic retail business to boot, and not a lot of attractive options.’

Although they didn’t endure the same kind of convulsions as the toy e-tailers, Disney’s theme stores underwent a rethink this year as well. After its consumer products division suffered a 5% sales drop in 1999, followed by flat sales for the first three quarters of this year, Disney decided to take action. In October, it introduced a new merch mix and store layout designed to appeal to older shoppers at some locations. It also reportedly announced that it would close down 140 of its 740 stores.

In October, Warner Bros. also indicated that it was taking a closer look at retail operations, shutting down its 11-story flagship Fifth Avenue store and announcing that it would build a Studio Store space at its new Columbus Circle AOL/Time Warner headquarters. A company spokesperson says that Warner is currently evaluating the productivity of each of its 175 stores across the U.S.

Despite the revenue slide, Toys `R’ Us was actually a flickering light in a dark year, thanks to a stock price increase of 15%. The continuing rollout of the chain’s new C-3 format stores and the addition of more proprietary products have proven to be successful initiatives for the retailer, says Sanford’s Moran. But part of TRU’s turnaround is likely due to the market lowering its expectations of the chain, she admits, after it came off a poor fourth quarter in 1999. Further, at press time, Moran expected TRU to take a third-quarter financial hit from costs associated with the toysrus.com-Amazon partnership.

Best action figure line

Bandai’s Gundam Wing Action Figure Model Kits

‘It’s a new concept for boys that combines model-making with action figures,’ says The NPD Group’s director of toy services, Reyne Rice. ‘It’s similar to the play pattern of the Transformers in that the toy gives kids mastery over something adults know nothing about. Whenever you can add that to a brand or a license-like with Pokémon, for example-it adds tremendously to the popularity of the item.’

Biggest surprise hit

Scooters

‘The fact that a music retailer like ourselves could sell through 1,200 units of the Razor Scooter in two months was incredible for a US$100 item,’ says Kevin Winnik, director of trends and special projects at Tower Records. ‘The mass appeal of the scooters and their high ticket price was especially surprising compared with last year’s hit, Wizards’ Pokémon cards.’

Biggest surprise miss

Hasbro’s Titan A.E. toys

‘With all the hype surrounding the movie, and the fact that it was an animated sci-fi flick, consumer response was very low,’ says Kevin Winnik from Tower Records.

Best merger

Toysrus.com and Amazon.com

Though not strictly a merger, the 10-year pact the companies signed is significant for all of the subplots it involves. ‘It happened against the backdrop of a major sell-off in the stock-market valuations of e-tailers,’ says Sean McGowan, director of research at Gerard Klauer Mattison. ‘It was not just two relatively small companies getting together. It was each one acknowledging that it can’t do without the other. In e-tailing, execution is really key-which is why Toys `R’ Us needed to partner with Amazon-but product selection is also important. And as the year went on, it became apparent just how poorly Amazon had done buying its inventory.’

Worst merger

Zany Brainy’s acquisition of Noodle Kidoodle

‘Whenever you have a company like Noodle Kidoodle that’s doing 22% of its business in one category [Beanie Babies], and then that volume dries up, you absorb the loss that goes with it,’ says Rich Brady, CEO of San Marcos, California-based Play Co. Toys. ‘I know we’ve had problems trying to replace our Beanie business.’