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Toys 'R' Us: Beaten At Its Own Game

Under heavy pressure from Wal-Mart, the chain may sell off stores and shift focus

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March 29, 2004 at 5:00 AM UTC

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He sings, he dances, he shakes it all about. For thousands of toddlers, Hokey Pokey Elmo was one of the great things about Christmas, 2003. But for Toys 'R' Us Inc. (TOY ), Elmo was the fuzzy red embodiment of all that went wrong: He was just too cheap.

Last October, two months before the heart of the holiday rush, Wal-Mart Stores Inc. (WMT ) surprised all of its competition by dropping Elmo's price from $25 to $19.50, a full $4.50 below what many retailers had paid for it. Within days, Toys 'R' Us dropped its price to $19.99. The price war dominoed all the way down the toy aisle. "Our choice was short-term profit vs. long-term market share; we chose to protect market share," says CEO John H. Eyler Jr., who thinks all stores could have sold out of the popular doll at $29.99.