NEW YORK (Reuters) - U.S. children just started school, but it already looks a lot like Christmas for toy sellers.
Facing reluctant consumers with no must-have toys and fewer discretionary dollars, retailers from Wal-Mart Stores Inc (WMT.N) to Toys R Us are not waiting until the traditional Thanksgiving Day sales to woo holiday shoppers.
Wal-Mart, the world’s largest retailer, started cutting prices on toys this week, and promised to cut more if necessary. To compete, Toys R Us has promised to match rivals’ online prices and unveiled a cash-back offer of up to $100 for its loyalty program members who buy certain toys by October 31. Meanwhile, Kmart aired its first holiday ad this week.
The incentives come at a time when U.S. consumers are spending more on their homes, cars and other durable items to take advantage of still-low interest rates, but are holding back on clothes, shoes and other discretionary items.
The pain is bigger for toy sellers, which are fighting for a share of a shrinking market amid a drop in U.S. birthrates and as kids gravitate toward smartphones and tablets rather than traditional toys. Euromonitor sees North American toy sales falling this year to $16.73 billion from $17.04 billion in 2012. The industry hit $17.06 billion in 2001 and has struggled to grow in the past decade.
Early comments from retail executives, analysts and bankers point to unusually high price promotion in toys, a trend that does not bode well for retailers’ margins heading into the biggest selling season of the year unless inventory is better managed.
“The customer in general, not just in toys, has been really conscious about their spending patterns,” said Scott McCall, senior vice president of toys at Walmart U.S.
At the Reuters Global Consumer and Retail Summit this week, Walmart U.S. CEO Bill Simon predicted that the toughest price competition this holiday season will be in the toy segment.
Needham analyst Sean McGowan expects holiday toy sales to be worse than last year and price competition to be “intense” as stores have six fewer shopping days between Thanksgiving and Christmas, and because many are saddled with inventory from earlier in the year.
Data from Panjiva showed overall toys shipments to be on pace with 2012, but down from 2011.
“There doesn’t seem to be a ‘must have’ toy for this year to help drive people into stores,” said Keith Vercauteren, head of retail finance at Wells Fargo Capital Finance. Wells Fargo has many retail clients and a good read on working capital lines of credit that stores tap to buy inventory.
In a year when price might be king, some analysts expect Amazon.com (AMZN.O) and Wal-Mart to be the best performers.
“Amazon has been a formidable competitor and has really strengthened its position,” said Morningstar analyst Jaime Katz, who expects that trend to continue in the upcoming holiday season.
John Alteio, director of toys at Amazon, said, “Things are already busy around here and we expect it to continue throughout the fourth quarter.”
Needham’s McGowan predicts Amazon will see the highest percentage growth, and Wal-Mart will see the biggest dollar gains.
Retailers are looking beyond just offering discounts to compete.
Toys R Us is carrying more educational products, setting up special boutiques within 300 of its stores to highlight construction brands like Lego, and carrying more exclusive toys. It launched a new version its tablet for kids. And it is promising shorter wait times for items bought online and picked up in store. It is also offering free layaway through December 15.
Sears SHLD.O unit Kmart is focusing on courting its loyalty program members. For instance, its “Shop Your Way” members will get a sneak peak of the catalog online five days early.
Meanwhile, Walmart brought in 1,000 children — from 18 months to 10 years — to test toys and rank their favorites rather than arrive at its top 20 toy list by itself. The list ranges from Hasbro’s animated plush toy Big Hugs Elmo to Sofia the First Talking Doll, which is based on a Disney television series.
“One thing, I think, that will jump out at you is just the amount of interaction and technology that is in these toys,” said WalMart’s McCall.
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Reporting By Dhanya Skariachan; Editing by Leslie Adler