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A New Competitor Pops Up in the Toy War

Wednesday, 28 Oct 2009 | 1:27 PM ET

Toys 'R Us isn't the only toy store taking advantage of the void that KB Toys' bankruptcy left at shopping centers and malls.

Spirit Halloween, known for its chain of pop-up Halloween stores, will open 25 temporary toy stores at shopping centers in the Eastern United States, in an effort to grab its slice of the toy market.

This will give Toys 'R Us a competitor, as it recently announced it would expand its reach into malls with 80 pop-up Holiday Express stores.

Though Spirit's ToyZam! will sell many of the same products as Toys 'R Us, including Transformers action figures and Hasbro games, it's modeled more similarly to KB Toys, where Vice President Jerry Pierce previously served as vice president of merchandising.

ToyZam! stores will leave open space for customers to play with the toys, including the chance to ride on a battery-operated train at the entrance. They will also carry slightly more expensive boutique lines such as Melissa & Doug, which is known for its wooden toys.

Although the store's prices won't match those of discounters Wal-Mart or Target — who are offering 100 toys for less than $10 — Pierce said the store will still emphasize value.

"We're very fair priced, and I don't think we'll be any different than in a Toys 'R Us," Pierce said. "It's really going to be the convenience factor."

But because consumer confidence fell unexpectedly in October, and with the National Retail Federation predicting spending will drop 3.2 percent this holiday, analysts doubt that convenience will outweigh cost.

Still, ToyZam! holds several key advantages over other entrepreneurs looking to scoop up market share in a down economy, said Michael Burden, a principal with industry adviser Excess Space Retail Services.

The store's parent is Spencer Gifts, which operates the Spencer's novelty gift stores that have long been a fixture in many malls. This gives it the cash and credit backing to start its operation, Burden said. It also helps seal its reputation with landlords, making it easier to persuade them to lease their property for a temporary period, he added.

Plus, the majority of the stores are taking over Spirit Halloween locations — adding an additional two months to the short-term leases so they can switch out masks and costumes for puzzles and bouncy balls. The longer leases provide the company with more room to negotiate deals, Burden said.

"To me, it seems they already have the system down," he said.

But unlike Halloween shoppers — who rarely need to return a purchase — ToyZam! will likely suffer from consumers' fear that if they buy from a temporary store, they won't be able to return an unpopular gift, said Sean McGowan, an analyst at Needham & Co.

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Although Pierce said the store will post signs and print receipts that notify customers they will be able to redeem cash refunds even after the stores close in January, McGowan said many customers won't realize that it's just the location that is disappearing, not the company.

"They may suffer from that lack of knowledge," McGowan said. "They've got to persuade the consumer that it's not that risky a purchase to buy it there."

Another drawback to a temporary store is that it's implausible to distribute gift cards, which have generally risen in popularity over the years, McGowan said. And with Toys 'R Us increasing its presence with the Holiday Express stores, it holds a huge advantage.

"It's hard to figure out what the store would offer that the other locations don't have," McGowan said.

Still, the fact that toys are typically more recession-proof than other discretionary items will help the retailer, McGowan said. And since the majority of toy sales occur in the last three months of the year — a tendency that led to the failure of year-round store KB Toys last winter — ToyZam's temporary model will also help it thrive.

If it, or Toys 'R Us for that matter, were to become permanent a mall-based store down the line, that's when it would run into trouble, McGowan said. But for the time being, Pierce said ToyZam! is planning to stick to pop-ups when it does its full launch in 2010. It also won't restrict its presence to malls, or avoid locations near Toys 'R Us stores.

"They've got a name, and that's terrific," Pierce said. "But I think that we have built a different concept that will compete against a Toys 'R Us Holiday Express."

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