FAO Schwarz desperate to revive its profits

For the past decade, FAO Schwarz has been facing pressures on many fronts. The revival of hand-held gaming systems (ie. PSP’s) has been revolutionizing children’s play. Video games are reaching children as young as 4 years old; as a result, traditional toys are becoming less popular. Because the entire toy industry is impacted, value retailers like Toy R Us, Target, and Wal-Mart have been cutting prices. FAO has traditionally been an upscale, quality toy retailer so the decreasing popularity of toys and price competition have caused double hits to FAO’s performance. Nonetheless, since CEO Edward Schmults’s takeover in 2005, the company has taken many steps to revive its profitability. However, I believe that it is still too early to declare success.

One of the changes CEO Schmults undertook was restructuring FAO’s RVP. Traditionally, the RVP was vast, quality selection at high prices and an enjoyable experience. Schmults decided to limit selection by reducing the inventory of key items and channeled more efforts to enhance experience through opening in-store boutiques such as the Harry Potter Shop and Styled By Me Barbie Boutique.

By limiting key items, Schmults successfully appealed to consumers’ scarcity bias and increased demand for FAO merchandise. Though the more limited selection disappoints some consumers like me, this move makes sense because 1) I am no longer FAO’s primary target so my opinion does not matter as much and 2) experience seems to be more important to children nowadays so FAO is better suited to focus resources on cultivating experience for its young patrons.

The in-store boutiques have been very successful at increasing traffic and sales. The Harry Potter Shop, the first of its kind, is designed like Hogwarts and Diagon Alley to offer customers a sense of living in Harry Potter’s magical world. Styled By Me Barbie Boutique is also a major attraction where children can customize their own Barbie dolls. I believe that FAO Schwarz’s success lies in these attractions because they are what draw in customers. Once customers are in the store, they are almost bound to purchase something. Therefore, FAO must continue offering innovative and unique attractions. One of the ways to accomplish this is to set up temporary boutiques. These boutiques change themes according to the latest bestseller books or cartoons. Having these temporary boutiques not only keeps customers coming back but it also tunes into their scarcity bias, urging them to purchase goods before the boutique closes down.

Another initiative that Schmults took is opening different kinds of stores. In Nov 2007, Zutano, an upscale children’s clothing store, opened a boutique in FAO Schwarz’s Manhattan location. This past fall, FAO opened stores in over 200 Macy’s stores, and according to the partnership agreement, more are to come in the next year. I appreciate Schmults’s desire to diversify and expand the brand name, but his attempt risks brand erosion. In the case of opening Zutano, though FAO Schwarz may be able to capture more profits from parents who are normally just waiting for their children, the concept of having an apparel store within a toy store does not fit. FAO Schwarz has always been about the kids, but purchasing clothing is generally parent’s jobs so this creates a disconnect in the brand’s image. The same logic applies to having FAO Schwarz in Macy’s. Although this makes FAO’s products more accessible, it also undermines the company’s uniqueness and exclusivity.

The aforementioned establishments are only a few among a list of marketing initiatives. Though some of these efforts have shown positive results, I feel that FAO Schwarz is just pursuing every possible channel to improve its profits, and in doing so, it is starting to lose focus. The retailer is also in a shaky position right now because its performance has just gotten back on track and now the US is suffering a recession. Schmults just resigned last Wednesday (March 18), and new leadership under Barry Erdos could either make it or break it.

Sources:
http://www.fao.com/custsvc/custsvc.jsp?sectionId=525
http://online.wsj.com/article/SB123740406135574913.html#articleTabs%3Darticle