The No. 1 toy retailer was accused last week by the FTC of using its formidable size and marketing clout to boost toy prices and constrain competition by cutting deals with toy manufacturers. The FTC said the chain's practices prevent discounters and warehouse clubs from selling identical items, which also makes direct price comparisons impossible.
Toys "R" Us vowed to fight the charges in court in what promises to be a long, ugly battle.
The retail industry is watching closely, since the issues overlap similar ones affecting rivals of giant Home Depot, which is putting competitive pressure on regional home improvement stores around the country.
TOY INDUSTRY PROBE
The FTC has been quietly gathering ammunition for more than two years as part of a wide-ranging probe of the toy industry.
The charges may hurt Toys "R" Us' image with value-conscious consumers just as the company is beginning to regain market share lost last year to discounters Wal-Mart Stores, Target Stores and Kmart Corp. and various warehouse clubs, analysts said.
"This doesn't do them any good. It's like Mike Wallace [of `60 Minutes'] coming at your face right when you're struggling to get back on your feet," said Sid Doolittle, a partner with the retail consultancy McMillan/Doolittle.
COULD BE DISTRACTION
The flap also could distract Toys "R" Us from its crucial new mission of transforming its 651 U.S. stores into more consumer-friendly emporiums to keep up with a revolution in home electronic entertainment, the explosion of computers and software, and a trend toward educational toys and games.
But Toys "R" Us is unlikely to back down.
"We will vigorously contest the FTC's action in court and we are confident we will prevail," Toys "R" Us CEO Michael Goldstein said in a statement last week.
Analysts said it will be tough for the FTC to prove that Toys "R" Us' practices are illegal.
"It's a practice as old as retailing, in which major suppliers and manufacturers work out deals for unique merchandise and pricing .*.*. but the law is not clearly defined in many of these areas," Mr. Doolittle said.
Competition from discounters has increased dramatically since 1990, when Wal-Mart, Kmart and Target began carrying a bigger assortment of best-selling toys.
Toys "R" Us, the only remaining national full-line toy store, reacted by asking manufacturers including Hasbro and Mattel to create more customized versions of products, a widespread and growing retail practice.
Neither Hasbro nor Mattel would comment on the FTC case.
Toys "R" Us' share of the estimated $19 billion toy industry dipped last year, to an estimated 20%, but it has since regained ground, said Gary Jacobson, toy analyst with Jefferies & Co.
The retailer reported sales increased 10.7% for the quarter ended May 4, to $1.65 billion, while profits rose 1.6% to $18.7 million.
The FTC charges come at an unfavorable time.
In addition to the industry's typical summer sales slowdown, Toys "R" Us is in the midst of a clearance sale and just last month launched a huge coupon discount program.