ANALYSIS: Client Profile - FAO Schwarz toys with a new PR play forthe holidays

It's Christmas. People shop for gifts. Retailers shop for ways to

outshine the competition. And, as Eric Arnold learns, no store offers

quite as much variety - in product or marketing strategy - as FAO

Schwarz.



This holiday season, like any other, parents and children are queuing up

outside FAO Schwarz's Fifth Avenue store in New York, the line circling

the block. They hope to snap up some of this year's hot new products,

and get a peek at a $3,400 stuffed gorilla, a $7,500

Bentley pedal car, and a host of other goodies few parents have the

mindset - or bank account - to actually buy.



Of course, all toy retailers are concerned about sales being soured by

the slumping economy and public mood. But they're not veering from the

age-old approach of distinguishing themselves from their

competitors.



And, as one would expect, FAO Schwarz is no exception.



Exclusively FAO



For this shopping season, FAO's 140th, the store chose to place a

heavier emphasis on its exclusive products not available at other

retailers. "It's always been a top priority," says Alan Marcus, VP of PR

and special events at FAO. "Between 60% and 70% of our goods are

exclusives." But this year, FAO is focusing more on rebranding itself,

washing away the image of upper-crust toy store, and instead making

itself known as the as the ultimate "children's lifestyle"

destination.



James LaForce, partner of agency LaForce & Stevens (on a six-month

retainer to push FAO's 140th anniversary), explains, "There hasn't

really been a brand out there that owns a luxury kids market. The luxury

corner of the universe is Fifth Avenue and 59th Street. The parents are

shopping in the nearby stores - it made sense that the retailer

anchoring that corner would be a place parents could bring their

kids."



With that in mind, the flagship store in New York has a new look and

feel. Of course, the giant clock is still present, and the "Welcome to

our World of Toys" song still echoes through the store. But the familiar

tune is squelched by the new FAO look. The front area, still devoted to

stuffed animals of nearly every species on the food chain above

bacteria, now has more open space to encourage shoppers to look around,

and pick up and play with what appeals to them.



The back section of the store, with an entrance facing Madison Avenue,

was redesigned for what's now called FAO Baby (and is marked as such

over the Madison Avenue entrance). The aisles are wider to accommodate

stroller traffic, and from Madison Avenue to the main entrance, the

products are arranged to escalate by age and brand, with one side for

boys and the other for girls. The color scheme even darkens the further

one walks into FAO Baby, where the focus steers toward

non-gender-specific educational toys.



The upstairs sections have been redesigned as well, with a new special

section for collectors' dolls (complete with doll adoption agency), a

Barbie special-edition section (Marcus claims that two custom-made

Barbies recently sold for $8,000 each), a modern Barbie section,

an area devoted entirely to the Star Wars franchise, a Lego area, and

FAO Schweetz, the in-store candy shop. But the store's upstairs is also

where the focus on children's lifestyle becomes most apparent.



Near the personal shoppers' offices, one sees the new FAO Schwarz

signature luggage collection. Similar to Fendi accessories, the leather

pieces (from CD case to doll case to diaper bag) have pebble-grain print

F's, A's, and O's. The backpack ($295) even comes with a leather

mobile phone case dangling from its side. The philosophy behind the line

- and the products sure to follow it - is that kids need these things

anyway: Creating a luxury line was the next step, and FAO was the

obvious choice to deliver it.



Changing strategy



Along with the shift in product offerings, FAO has changed its PR

tactics.



"We identify story opportunities by looking at trends," Marcus says. "We

reach out to travel, food, and gourmet publications, as well as teen

girl magazines. First and foremost is understanding broader trend

stories that identify the direction we're going in now."



Marcus does concede that some of FAO's marketing prowess is due to plain

luck. As it happens, CBS' The Early Show has office space in the same

building as FAO's corporate offices. Together, they developed the

"Countdown to Christmas," which consists of 20 live segments that began

on November 27, and will run through December 24. "They're four-minute

spotlights highlighting a new toy. We sit down with the producers and

map it out, crafting what the segments will be and who the spokespeople

will be. Having a partnership like that is incredible," Marcus says.



Marcus also considers himself lucky that the FAO name attracts the media

every holiday season. "I can't pick up the phone fast enough to answer

questions over what the hot new toy is," he claims. Marcus won't,

however, disclose FAO's PR budget, as it's considered a privately held

company.



That's the first sign that the toy industry isn't all fun and games.



On November 19, educational product retailer Right Start, which only a

few months prior bought bankrupt competitor Zany Brainy, paid Dutch

holding company Vendex International $55 million for most of FAO

Schwarz's assets (Vendex will become a major shareholder in Right Start

as part of the deal). The news sent Right Start's stock up 12.7% (from

$5.25 to $5.92), but left one major analyst cold.



John Taylor of Arcadia Investment Group in Portland, OR, believes that

adopting a narrow focus in a business that changes so quickly can be

very dangerous. Specifically, he cites the age-compression phenomenon:

The age at which kids actually want to play with toys continues to get

lower and lower. All the while, the retailers scramble for answers; most

have responded by going for exclusives, just as FAO Schwarz claims to

have been doing all along in its 40 stores.



Competition



But Taylor thinks that other retailers are better positioned when it

comes to exclusives, particularly Toys 'R' Us, which has reduced its

product count by 40% over the past two years in order to broaden

exclusive product lines. However, that doesn't mean that Taylor thinks

Toys 'R' Us will be left standing when the dust settles. "The retailers

who are naturally positioned well are Target and Wal-Mart," Taylor says.

"Both are destinations for families, who are there to shop for a variety

of needs, and those folks can merchandize in a way that they can target

specific age groups once the traffic is already there."



Jim Silver, publisher of The Toy Book, a trade magazine for the toy

industry, agrees, and is skeptical of FAO's new approach. "They're

looking to spread into just about anything a kid would like - that's why

they have FAO Schweetz and FAO Baby. But at the end of the day, it's

still all about toys," says Silver. And he, too, cites age compression

("when you have a three-year-old on a computer") as the primary

problem.



That's not to say that FAO isn't well aware of the challenges it faces,

though LaForce indicates that FAO's naysayers have difficulty

understanding the company's new tack. "Toy retailers are just battling

each other on price, up against companies like Wal-Mart. That's totally

different positioning," he says. "But we still have to recognize that

elephant in the room." (Incidentally, a stuffed one costs $650 at

FAO.)



For now, however, Marcus contends that FAO is on the right track.

Weekend store traffic, he claims, is only slightly off from previous

years (typically, the holiday season draws 20,000-70,000 shoppers to the

Fifth Avenue store every day), and he's positive about Right Start's

acquisition. "It's a great move for our business," Marcus says. "When

they bought FAO, they bought everything we do. They fully support the

direction we're going in."



Apparently, FAO is headed there in its own $65,000 backyard

bumper cars - appropriate for the ride ahead facing toy retailers.



FAO SCHWARZ

VP of PR and special events: Alan Marcus

Agencies: Edelman (launched FAO Baby); LaForce & Stevens (promoting

FAO's 140th holiday shopping season)

PR budget: undisclosed



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