Toys ‘R Us not playing by the rules, FTC says

WASHINGTON (AP) — The Federal Trade Commission ordered Toys ‘R Us Wednesday to stop coercing toy manufacturers to restrict the toys they sell to its competitors.
The order is effective in 60 days, but the nation’s largest toy retailer denied the FTC’s findings and said it would appeal the decision in court.
The agency charged Toys ‘R Us with reducing competition by persuading major toy makers — such as Hasbro, Mattel and Fisher Price — to stop selling certain toys to low-priced warehouse clubs.
Toys ‘R Us wanted “to prevent consumers from comparing the price and quality of products in the clubs to the price and quality of the same toys displayed and sold at Toys ‘R Us, and thereby reduce the effectiveness of the clubs as competitors,” wrote FTC Chairman Robert Pitofsky in the commission’s opinion.
Rather than lowering prices to compete fairly with dramatically cheaper warehouse clubs, Toys ‘R Us threatened toy manufacturers that it would not buy from them, forcing them to sell only unique or highly differentiated toys to the discount distributors, according to the FTC.
Under the commission’s order, after 60 days the company would be prohibited from entering into such agreements with suppliers and would have to cease all existing arrangements. Toys ‘R Us also would be barred from requesting information from suppliers about their sales to any toy discounter.
“We’ve been in business for 50 years and have worked hard to earn the trust of our customers, and frankly, nothing is more important to us,” said Rebecca Caruso, spokeswoman for the Paramus, N.J.-based Toys ‘R Us. “We are fully prepared to take it to the next level.”
The FTC announced its complaint against Toys ‘R Us in May 1996, and the charges were upheld by an administrative judge in 1997. Toys ‘R Us appealed, and the commission heard oral arguments in February of this year.
By selling brand-name products at low prices, increasing product turnover and reducing costs, warehouse clubs emerged as serious competition for the toy retail chain in the early 1980s. But rather than cutting its prices in response, Toys ‘R Us attempted to stifle its competition, the FTC said.
Toys ‘R Us carries more toys and purchases a larger percentage of manufacturers’ toys than any other retailer. It buys about 30 percent or more of the large toy companies’ output and is usually their most important customer. This gave it the market clout to influence toy makers, the FTC said.
The company warned toy makers it might stop carrying certain toy lines if the products also were offered to rival discount stores. Toy manufacturers would also report to Toys ‘R Us if their competitors began selling to the discounters, helping the company enforce its agreements.
The 10 manufacturers that entered into the restrictive agreements with Toys ‘R Us are: Mattel, Hasbro, Fisher Price, Tyco, Little Tikes, Today’s Kids, Tiger Electronics, VTech, Binney & Smith, and Sega, the FTC said.
Toys ‘R Us had argued that such agreements were needed to prevent other stores from benefiting from its advertising and display of toys. But the commission found this justification without merit and said the company is compensated for any services it provides the industry.
Toys ‘R Us has 650 stores in the United States and another 300 stores in foreign countries.