The FAO Schwarz flagship store on New York City's famed Fifth Avenue used to represent the ultimate fantasy shopping experience for kids. Its giant floor keyboard, which Tom Hanks famously tap-danced on in the movie Big, once seemed the pinnacle of fun. The dusty old keyboard is still there, along with every other toy under the sun, but now it seems more nostalgic than enjoyable. (Editor's note: On Dec. 2, FAO Inc., parent of FAO Schwarz, Zany Brainy, and Right Start, said would it soon file for Chapter 11 bankruptcy protection.)
To find today's retailing fantasy for the almighty 8-year-old, you have to go 10 blocks south along the city's famed shopping boulevard. There you'll come upon the new American Girl Place, a three-floor retail "experience" jammed not only with the company's popular dolls, books, clothing, and accessories, but a theater hosting a live musical revue, a café, plus a hair salon and doll "hospital."
Welcome to the future of the toy business. While FAO (FAOO), has foundered partly because it can't compete on price with the likes of Wal-Mart (WMT) and Target (TGT), American Girl is thriving while selling toys and accessories exclusively for young girls at premium prices.
WINDY CITY SCORE. American Girl is a division of Pleasant Co. in Middleton, Wis., which was acquired by Mattel (MAT) in 1998. American Girl doesn't disclose its earnings, but it did $350 million in sales last year, up almost 17% from when it was acquired five years ago. "They started off with one brand, and now look at that store," says Richard Hastings, chief economist at retail consulting firm Bernard Sands. "That should have been the [new look of] FAO Schwarz."
Indeed, FAO could have taken a few lessons in retailing from American Girl Place. Pleasant Co. does most of its sales via mail order, but it has shown the knack for creating popular outlets. New York's store, which opened Nov. 8, comes five years after Pleasant Co. opened a similar, wildly successful store in Chicago.
Now deemed the highest grossing store on the Windy City's shopping thoroughfare, Michigan Avenue, it attracts more than 1 million visitors annually and generates $40 million in sales a year, estimates Michael Silverstein, head of the consumer and retail practice at consulting firm BCG. Pleasant Co. President Ellen Brothers says the average customer stay is two hours, compared with an average of 20 minutes for most retailers.
PERIOD PIECES. The secret to American Girl's success, says Brothers, is that it has turned the dolls into individual characters that children form emotional bonds with. Its original catalog debuted in 1986 and featured dolls as heroines from different eras. For example, "Samantha" is a wealthy orphan living with her grandmother in 1904. Every doll is sold with period clothing and accessories (as well as "dress like your doll" outfits for the owner) and a historically accurate book depicting the character in an inspiring tale.
In 1995, Pleasant Co. introduced a line of contemporary dolls as well as a "choose your doll" line that allows girls to order any combination of hair, eye, and skin colors. It seems girls get a kick out of owning a doll that looks just like them.
Silverstein believes the real secret of American Girl's success is its status as a "New Luxury" item, where despite premium prices, customers perceive that they're getting a good value for their money due to high-quality materials and skilled marketing.
LAUNCH PLATFORM. In his book, Trading Up: The New American Luxury, Silverstein describes how Pleasant Co. contracts with a manufacturer for a particularly well-made eyeball for its dolls. "It is a technical difference that delivers an emotional benefit -- the doll looks more real and feels more like a genuine character who can become a friend," Silverstein writes.
Hastings notes how the dolls have created a platform for a range of media-related businesses, much in the way Martha Stewart created her empire. Pleasant Co., which has sold more than 8 million dolls, has also sold 90 million books (the only item sold outside of its proprietary channels). It has 650,000 subscribers to its American Girl magazine and receives more than 200 million hits a month to its Web site, according to the company.
Its next big venture is a made-for-TV movie featuring Samantha that will air in 2004. "There's a great deal of power in that medium to take the story to a broader audience," says Brothers.
ANNUAL RELEASE. At a nuts-and-bolts level, the real secret of Pleasant Co.'s success may be that it controls its own distribution channels. That means it doesn't have to bargain with discounters for shelf space, an increasingly important dynamic in the hypercompetitive toy industry.
"They set the price," says Chris Byrne, an independent toy consultant. "They don't have to play games with retailers, and they don't have Wal-Mart (WMT) saying, 'We want to offer the doll for $69.99.'"
Pleasant Co. also doesn't have to flood the market with new products, which should add to the brand's longevity, argues Brothers. Each year it introduces one new doll with her own stories and accessories. This year's new character is Kailey, an environmentalist surfer girl who fights to save her favorite stretch of beach from being turned into a mall. Her "complete collection," including several outfits, a boogie board, and her dog Sandy, sells for $145.
ON THE AVENUE. And in a final twist, the makers of the American Girl line don't advertise, which means they don't wear out their audience with endless pitches. "You're not sitting watching television having American Girl glare at you," says Brothers. "It's a softer way to sell."
Despite the success of its business model so far, Pleasant Co. will have to struggle along with the rest of the industry. Changing demographics mean fewer young girls will be around to sell to in years to come. Mattel reported that in the third quarter, sales at American Girl brands declined 2% vs. the prior year, a dip Brothers says hardly signifies a downward trend.
If New York's American Girl Place catches on the way the Chicago store has, Pleasant Co.'s revenues could get a surge this year, not only from new sales generated at that location but from increased exposure to the brand from foot traffic through its prime Fifth Avenue location. Meantime, FAO Schwartz, sitting 10 blocks north and boasting an aging floor keyboard as its major draw, seems to be an endangered species. By Amey Stone in New York