Kb Toys Business Information, Profile, and History

Company Perspectives:

The Company's goal is to build upon its leadership position in closeout retailing, a growing segment of the retailing industry, toy retailing and children's products by expanding its market presence in both existing and new markets.

History of Kb Toys

KB Toys is the second-largest retailer of toys behind Toys `R' Us and the largest mall retailer of toys in the United States. Unlike the giant free-standing outlets run by its major competitor, KB's chain consists of approximately 1,300 smaller mall-based toy stores in all 50 states, the American Territory of Guam, and the Commonwealth of Puerto Rico. KB stores carry brand name products along with stock from discontinued lines, which are sold at bargain prices at its KB Toys stores, KB Toy Works stores, KB Toy Outlet, KB Toy Express, and online at www.KBkids.com. Due to their smaller retail space, KB stores do not carry sporting goods, choosing instead to focus on video products, which account for 25 percent of overall sales. The company was purchased in 1996 by the retail conglomerate Consolidated Stores Corporation, a leading value retailer specializing in toys and closeout merchandise that also operates closeout stores under the names Odd Lots, Big Lots Furniture, Mac Frugal's, Close-Outs, and Pic `N' Save.

From Candy Wholesaler to Toy Retailer

KB 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 Kay-Bee 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, Kay-Bee 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 Kay-Bee 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, but producing enough electricity to light 48 homes for a month. The company also participated in New York's 'Goods for Guns' program, which offered gift certificates to people who surrendered real firearms. 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.

Restructuring in the Early 1990s

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, bigger stores during the same period, the chain 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 sales of $919,054. The realignment was well managed, however, and, by 1994, the company was back to $1.01 billion in net sales, despite continued store closings.

However, mall construction in the United States slowed during the early 1990s, and Kay-Bee was finding no attractive new malls in need of its 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 Toys `R' Us with this distinctive store design as well as by focusing on improved customer service. At the same time, Kay-Bee began expanding 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 floor space, and broaden the product line put Kay-Bee in direct competition with Toys `R' Us for the first time. Additional competition came from the large discount chains, such as Wal-Mart, Kmart, and Target, which in 1995, grabbed 40 percent of the U.S. toy market. Nevertheless, in 1996 Kay-Bee stores managed to increase sales by 6.4 percent over the previous year, to $1.1 billion.

Joining Consolidated in 1996

In 1996, after an aborted attempt in 1995 to spin off Kay-Bee Toys, the Melville Corporation decided to sell the chain of 1,045 stores to Consolidated Stores Corporation for about $300 million. Consolidated already operated Toys Liquidators, Toys Unlimited, and the Amazing Toy Store close-out stores, as well as general retailers Odd Lots, Big Lots, All for One, and the It's Really $1.00 stores. William Kelley, chief executive officer and chairman of Consolidated's board, said in a New York Times article that he expected the combined businesses to offer 'a great deal of synergy.' Kay-Bee, under the direction of president Michael Glazer, continued to be run as a separate business within Consolidated's new Toy Division despite talk of its merging with their Toy Liquidators chain. Immediately after the sale, the stock of Consolidated surged upward.

Kay-Bee provided a 50 percent return on Consolidated's investment in its first nine months of new ownership. In 1997, Kay-Bee's sales boosted Consolidated's revenue by about 70

1922:The Kaufman brothers open a wholesale candy business.

1948:The brothers exit the candy business to focus exclusively on their toy stores.

1959:Kaufman Brothers opens its first retail toy store in Connecticut.

1973:The company moves from wholesaling to retailing toys, calling itself Kay-Bee Toy & Hobby.

1981:The company is purchased by Melville Corporation, and becomes a division known as Kay-Bee Toy Stores.

1994:Company launches a new string of free-standing stores under the name Toy Works.

1996:The Melville Corporation sells the chain to Consolidated Stores Corporation.

1998:KBkids.com is started to market KB merchandise online.

Glazer, quoted in Discount Stores News in July 1997, attributed the chain's outstanding performance to closing underperforming stores and writing off lots of obsolete inventory prior to the sale to Consolidated. Consolidated also established a specific identity for the 1,200 stores and brushed up the chain's image with a new logo, KB. It integrated Kay-Bee with its core close-out business, and was boosting the chain's higher-margin close-out items from 25 to about 30 percent of its business.

By 1998, KB had annual sales of $1.6 million despite a somewhat difficult year in the toy industry. To combat the slowing trend, KB came up with some creative merchandising alternatives, such as working closely with vendors on promotions and preselling select toys in hot demand. The following June, Consolidated's Toy Division announced the formation of a new subsidiary developed in partnership with BrainPlay.com. KBkids.com LLC took advantage of the well-established KB brand name to launch its online retail business offering toys, video games, software, and videos. That fall, KBkids.com entered into a major partnership agreement with America Online, Inc., which provided the web toy business access as one of the premier toy retailers featured on AOL. In 1999, KBkids.com received top points from an e-commerce market research firm, the Gomez Advisors, in the categories of customer confidence, overall cost, and bargain shopping. Softletter named the site one of the 'Ten Best Online Software Stores of 1999' in its October 15th issue. Even the Wall Street Journal dubbed the site the 'best overall' online toy retailer. In a little more than four months online, KBkids.com increased its business more than 400 percent and twice ranked among the five biggest gainers on the NextCard eCommerce Movers index.

It seemed nothing could stop KB Toys from challenging its rivals in the toy industry. Operating profit for 1999 was up 51 percent from 1998. The company, seeking to capitalize on its growth, decided to hold an initial public offering in the spring of 2000, then postponed trading due to unfavorable market conditions. Notwithstanding this delay, KB was more focused than ever on fine-tuning its position in the very fashion-forward toy industry. With relatively small stores and a knack for innovation and creativity in marketing, KB was ready as ever to make quick adjustments to changing customer and merchandise trends.

Principal Competitors: Toys `R' Us, Inc.; F.A.O. Schwartz; Wal-Mart Stores, Inc.