Flexible toy selection mirrors demand

Kmart still ranks among the top five toy retailers in the country, but it hasn't kept pace with rivals like Target and Wal-Mart as they've grown and changed the business over the past five years. And while its merger with Sears presents an opportunity to make up ground, it doesn't seem likely given the tough competition in toy retail.

With its 1,482 stores, Kmart maintains a significant share of the toy business in the U.S. and does a good job of keeping the most popular toys in stock and offering a wide variety of key genres like action figures and learning toys. But it lags well behind the Big Three in toy retail and almost seems content simply to retain its position.

"They [Kmart] don't break out their toy sales, so it's hard to be sure, but I'd say they have about 5% to 7% of the toy business compared to about 25% for Wal-Mart and 22% for Toys "R" Us and Target," said toy industry analyst Chris Byrne. "They do a good job of stocking the big hit toys each year, but they're not a big destination for toys."

In addition to stocking the most popular toys, Kmart specializes in top brands and dedicates entire aisles to key vendors such as Fisher Price. It also carries a merchandise mix that appeals to a diverse ethnic consumer base with toys based on popular Latino series such as Dora the Explorer and Mucha Lucha.

But Kmart's merger with Sears won't bring much to the table for toys. Even though Sears' new Sears Grand stores have small, year-round toy sections, the bulk of its stores have carried toys only during the holidays in sections stocked by specialist KB Toys.

Theoretically, the merger could provide Kmart with an opportunity to become a bigger player in the business and increase its market share given the new economies of scale. "The two companies combined have a lot more buying power and would have more clout with vendors," said Byrne. "But it depends on whether they want to pursue it."

Given the state of the toy industry, which has been plagued by flat sales and brutal price wars that have top specialists like Toys "R" Us on the ropes, it seems Kmart will use its newfound clout elsewhere. "The margins on toys are so squeezed right now that I don't see why they would want to have a larger role," said Byrne.

The more likely scenario is that Kmart will move away from having toy departments confined to a set footprint and opt instead for sections that will shrink and grow based on demand.

In an interview with DSN Retailing Today, Kmart co-chief merchant Peter Whitsett said the chain is looking at more fluid merchandising in which departments across many categories will have a "different assortment at different times of the year based on when those businesses peak." He also said the merchandise mix in departments could vary from store to store depending on the market.