Kay-Bee Toy Stores

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Kay-Bee Toy Stores

100 West St.
Pittsfield, Massachusetts 01201-5761
U.S.A.
(413) 499-0086
Fax: (413) 499-3739

Wholly Owned Subsidiary of Melville Corporation
Incorporated: 1922
Sales: $1,012 million
Employees: 13,000
SICs: 5945 Hobby, Toy & Game Shops

Kay-Bee Toy Stores is the fifth-largest retailer of toys in the United States and second only to Toys “R” Us among retailers that specialize in toys alone. Unlike the giant free-standing outlets run by its major competitor, Kay-Bee operates approximately 1,000 smaller mall-based toy stores. Kay-Bee stores carry brand name products along with stock from discontinued lines which are sold at bargain prices. Due to their smaller retail space Kay-Bee does not carry sporting goods, choosing instead to focus on video products, which account for 25 percent of overall sales. The company was purchased in 1981 by the multi-billion-dollar retail conglomerate Melville Corporation. Melville also owns Marshalls, Wilson’s, Linens ’n Things, Footac-tion USA, and CVS, among others. Ten years after becoming a part of the Melville family, Kay-Bee Toys reached the $1 billion mark in sales in 1990.

Kay-Bee began as Kaufman Brothers when two brothers in Pittsfield, Massachusetts, opened a wholesale candy business in 1922. Kaufman Brothers provided retailers with candy and soda fountain supplies. The Kaufman brothers got into the toy business by accident. During the 1940s they acquired a wholesale toy company from a previous client as payment for outstanding debts owed to Kaufman Brothers for purchased candy. It was an opportune moment for Kaufman Brothers to diversify, because the cost of producing candy was prohibitive during World War II due to shortages of important ingredients, especially sugar. Kaufman Brothers assumed operation of the toy company. changing its name to K-B Toy & Hobby Stores. By 1948 the toy business was so much more successful than the confectionary business that the Kaufman brothers decided to focus their energies entirely on toys. Kaufman Brothers opened its first retail toy store in Connecticut in 1959.

It wasn’t until 1973 that the Kaufman brothers, who still owned and operated the company, decided to move once and for all from wholesaling to retailing. They discontinued their wholesale business altogether and concentrated on their 26 retail stores. Suburban malls were popping up across the country, and the Kaufmans wanted to take advantage of the boom. By 1976, only three years after making the decision to focus solely on retail, K-B Toy & Hobby had more than doubled its number of stores from 26 to 65 across New England, New York, and New Jersey. One year later, in 1977, the company changed its name from K-B Toy & Hobby to Kay-Bee Toy and Hobby Shops, Inc., primarily to distinguish itself from competitors with initials in their names or logos. In 1981, when the company was operating 210 stores, it changed its name again, this time to Kay-Bee Toy Stores, reflecting a de-emphasis on hobby products. The company was purchased in 1981 by Melville Corporation. As a subsidiary of Melville, Kay-Bee acquired Toy World, with 52 stores, in 1982; Circus World, with 330 stores, in 1990; and K & K Toys, with 133 stores, in 1991. These three acquisitions moved Kay-Bee into the upper echelon of U.S. toy retailers.

Although Melville Corporation already had an impressive list of retail names as part of its corporate family before buying Kay-Bee Toys, the purchase price of $64.2 million represented the greatest expenditure that Melville had ever made. After the sale Howard Kaufman remained president of Kay-Bee Toys, and the company’s strategy remained essentially the same, exploiting the niche it had developed in malls.

The toy business itself went through enormous structural changes during the period of Kay-Bee’s rise to prominence. The relationship between manufacturers and retailers became much closer, to the detriment of wholesalers, distributors, and smaller retailers. Many small retailers were driven out of business during the 1970s and 1980s; however, Kay-Bee was large enough and could buy in enough volume to compete with its major competitors. Kay-Bee could also take advantage of its long-standing policy of buying discontinued stock from manufacturers at a favorable rate and selling it at extremely reduced prices. Kay-Bee’s strategy was to pack the entrance of its locations with these bargains to entice shoppers into the store. Once inside, managers reasoned, shoppers would be likely to purchase higher-end products that were priced more conservatively. In this way Kay-Bee developed a very different strategy from most of its competitors. Kay-Bee’s main competitors, Toys “R” Us and Wal-Mart, were developed as free-standing stores that customers would make a conscious decision to visit with the intention of making purchases. Kay-Bee, on the other hand, realized that having its stores inside large malls meant that most of its customers probably came to the mall for some other reason, and that Kay-Bee needed to draw this mall traffic in. An important part of this plan was store design. All Kay-Bee outlets were designed with bright, eye-catching colors at the front of the store along with neatly arranged stacks of toys at bargain prices.

Kay-Bee’s corporate image was just as bright and wholesome as the look of its stores, with the company’s public relations philosophy emphasizing family values as much as value for dollars. In 1994 Kay-Bee developed the program Prescribe Reading Early to Kids (Pre-K) to help foster literacy in disadvantaged families, providing grants and free books to the program, which was organized in conjunction with local health care and community organizations. Kay-Bee was also sensitive to issues of violence in children’s toys. In 1993 Kay-Bee withdrew the Sega product Night Trap, which was controversial for its violence, despite the fact that Kay-Bee had a close relationship with Sega of America and that video sales were one of Kay-Bee’s most important sectors.

Kay-Bee Chairman and CEO Ann Iverson took a strong stand against violence when she removed all realistic toy guns from Kay-Bee’s stores in 1994. This decision was prompted by an incident earlier that year in New York City in which a 13-year-old boy was shot and killed by a policeman who mistook his toy weapon for the real thing. Almost 300,000 toy weapons were incinerated as a result of Iverson’s decision, constituting an undetermined loss in revenue for Kay-Bee Toys. The company also participated in New York’s “Goods for Guns” program. Although Ann Iverson left as chairman in 1994, her policy of not selling look-alike guns was continued by her successor, Alan Fine, who had been senior vice-president before becoming president and CEO.

In the early 1990s Kay-Bee began a major restructuring process that paralleled that of many other subsidiaries in the Melville Corporation group. Kay-Bee closed nearly 250 less-profitable stores from 1993 to 1994 in what the company described as a strategic realignment program. While Kay-Bee also opened some new stores during the same period, they nevertheless suffered somewhat in overall sales due to the dramatic number of store closings. After having reached the $1 billion mark in 1990, the company fell below that level for the year 1993 with $919,054. The realignment was well managed, however, because by 1994 the company was back to $ 1,012,164 in net sales, which was almost on par with their pre-alignment numbers despite continued store closings. One reason that Kay-Bee rebounded so quickly was that the company began to open new, bigger stores while it was closing older, mall-based stores.

Although Kay-Bee had been extremely successful in mall-based outlets, mall construction in the United States had slowed during the early 1990s, and Kay-Bee was finding no attractive new malls in need of a Kay-Bee outlet. For this reason, Kay-Bee decided to launch a new string of free-standing stores in 1994, under the name Toy Works. Each of the approximately 75 Toy Works stores had a race course design with colorful markings and category signage to guide shoppers through the wide aisles of stores averaging 15,000 square feet. Kay-Bee hoped to differentiate itself from competitor Toy “R” Us with this distinctive store design as well as by focusing on customer service. At the same time, Kay-Bee began expanding the floor space of some of its mall-based stores from an average of 3,500 square feet to 5,000 square feet. The bigger stores sold an expanded product line, including sporting goods and toys for adults.

The decision to move into free-standing stores, enlarge floorspace, and broaden the product line brought with it some potential risks, putting Kay-Bee in direct competition with Toys “R” Us for the first time. However, if Kay-Bee continues to dominate the market in nearly 1,000 malls while competing successfully in free-standing superstores, Kay-Bee could have a shot at becoming the number one toy retailer in the United States.