FAO Schwarz toy store is latest victim of online retail, high rent

The toy soldiers have stood down, the Big Piano has played itself out, and on July 15 shoppers gave the oversized stuffed animals a farewell squeeze.

At New York's iconic FAO Schwarz, one of the world's most famous toy stores, some very grown-up financial forces have shelved the fun and games.

The brand's flagship Manhattan location joined a growing list of traditional toy-retailer casualties as it shut its doors on Fifth Avenue, citing unaffordable rent.

Industry analysts point to Manhattan's sky-high real estate as well as the rise of cheap online retailers as the forces driving the legendary store out of the 65,000-square-foot midtown space it's occupied since 1986. The FAO brand said it will seek a new location in the city for a 2016 reopening.

"It sucks," said Calgary tourist Boyan Demchuk, 15, who dropped by the shop with his family for one final look around.

"When you're a little kid, going to the toy store is better than anything," he said.

"Just going on the internet today and picking out stuff, that's nothing."

To the larger toy market, however, digital sales are the new way forward.

NPD Group, which tracks toy industry retailing trends, estimated in 2013 that more than 20 per cent of toy purchases would be made through online channels by the end of that year.

Those figures are forecasted to keep trending upwards.

As children lined up for the last time to dance on FAO's oversized keyboard — a fixture made famous by Tom Hanks in the 1988 film Big — e-commerce juggernaut Amazon.com celebrated its 20th birthday by rolling out sales that it promised would be "bigger than Black Friday."

Those deals, a wider product selection and the convenience of shop-at-a-click bargain hunting have put pressure on brick-and-mortar retailers.

Not long ago, Vinanti Puri was taking her seven-year-old daughter Ariyana to check out the offerings at physical toy stores. By the time her youngest child Aryav was born, Puri was shopping almost exclusively online for toys.

"He's four years now, and we literally have not shopped at toy stores," Puri said, while browsing a rack of Star Wars plush characters. "Online is taking over. For parents, it's less hassle."

Even so, Puri said she felt compelled to bring her children to the New York landmark before it closed.

"I want them to experience the toy store. It's almost like an outing, and you don't want to take the charm of looking at toys away from a child."

In New York, though, the concept of the toy store wonderland is disappearing.

"FAO, Toys "R" Us and even Build-A-Bear are all leaving midtown, all at the same time," noted industry analyst Stephanie Wissink, managing director and senior research analyst with Piper Jaffray.

"Are we shifting to e-com only? No, but how those stores are being used best now is as showrooms, or as experiential retailing."

Toys "R" Us Inc., which operates the FAO brand, announced in March that it will be packing up its flagship 110,000-square-foot Times Square location next February.

The company said last year it was aiming to obtain nearly $1.4 billion in new loans to refinance its debt. Reports have circulated since last year that Toys "R" Us is set to close as many as 100 stores, though chairman and CEO Antonio Urcelay has denied that "a significant number of stores" would close.

KB Toys, a chain that at its height operated 1,300 stores in malls across 50 states, filed for bankruptcy in 2009, citing a "sudden drop" in sales.

Wissink said toy stores have been getting squeezed out by big-box general merchandisers for years.

"The FAOs and Toys "R" Us flagship stores are not the go-forward model," she said.

Although roughly 80 per cent of toy sales are still completed in physical stores, even Target and Walmart are downsizing shelf space for toys in favour of groceries and health and beauty aids.

Meanwhile, toy sales in the U.S. in 2014 were up 4 per cent from 2013, according to a January NPD report.

"Real estate is getting smaller, but the category is growing, so the only obvious thing plugging that hole is e-commerce," Wissink said.

Wissink noted that sales figures for toys do not include video games, a growing space that could threaten to take market share as younger children put aside action figures for more screen time.

Sales growth in the category of "youth electronics," which includes video games, is fast outpacing traditional toy sales, with an 11 per cent growth in 2014 compared to the previous year, according to the January NPD report.

For her part, Joanna Mileos, owner of the Granville Island Toy Company in Vancouver, feels independent and specialty stores that offer a more personalized service have little to worry about.

"But we don't just offer toys," she said. "We offer an experience as well. We stand behind our products and try to sell the proper toy that's the right fit for the child."

Indeed, the 30-year-old company is expanding, and just opened its third location. 

But a toy store is no place to discuss business.

Back at FAO Schwarz, shopper Michelle Zaken rolled her eyes at the mention of market trends, experiential retail and e-commerce.

"This is like the best place in the city. I grew up coming here. That's all it is," said Zaken, 27, and now living in Los Angeles with her husband and three children.

"It's really sad. This was a fantasy world, and I wanted to bring my kids here as they got older. Unfortunately, I don't know if they'll be able to remember it later."