March Of The Toys -- Out Of The Toy Section

The Lego Co. thinks it has found a missing piece of its business. Earlier this year, the Danish toymaker rolled out a low-priced line of its famous plastic blocks. The new line, known as X-Pod, is sold in drugstores and supermarkets near the candy and magazines at the checkout -- with 40 small pieces going for just $3.49. "Everybody's feeling the crunch of retail consolidation and looking for alternative places to sell toys," says Michael McNally, a senior brand relations manager at Lego.

Lego is not the only company angling to sell toys in new and different ways this Christmas season. Faced with a shrinking pool of traditional toy stores and the growing domination of the business by giant discount chains, both large and small players in the $20 billion-a-year toy industry are rushing to stock the aisles of nontraditional outlets. And they're even selling their toys to grown-ups and kids alike wherever possible. Jakks Pacific Inc. (JAKK ) has been promoting its new TV Games line of retro video games, including Ms. Pac-Man and Pong & Asteroids, in clothing stores such as Urban Outfitters (URBN ). RC2 Corp. (RCRC ) is plowing new ground with a John Deere toy tractor available exclusively at Home Depot Inc. (HD ), and Screenlife LLC is selling its popular board game Scene It? everywhere from Nordstrom (JWN ) to Circuit City Stores (CC ).

Even the heavyweights Mattel Inc. (MAT ) and Hasbro Inc., (HAS ) are getting into the game. In a back-to-the-future move, Mattel is trying to market a new line of Barbie clothes at Macy's, which closed its toy department years ago, while Hasbro has repackaged its venerable Play-Doh for sale in arts-and-crafts stores. "This is an industry that needs to find growth wherever it can," says Sean P. McGowan, a toy industry analyst at brokerage firm Harris Nesbitt Corp. (BMO ).

The shift signals a new level of desperation by toymakers as the "big box" retail chains stomp all over traditional retailers. In the past dozen years, Wal-Mart Stores (WMT ) and Target have doubled their share of toy industry sales, to 32%, contributing to the decline of such retail mainstays as Toys 'R' Us (TOY ), KB Toys, and FAO Schwarz. Their downfall has been equally bad for manufacturers, who have seen margins get squeezed as a result.

To help gain entry into new outlets, toymakers are developing more exclusive products and packaging. Toy giant Hasbro has been pushing Play-Doh kits that come with cutting tools at arts-and-crafts stores. The Pawtucket (R.I.) company also bundles its new VideoNow personal video players for kids with extras such as headphones, software titles, and carrying cases for sale at warehouse stores, where shoppers are used to paying larger dollar amounts for a greater overall value. The move also helps Hasbro lessen its dependence on just a few customers. "Our mantra is to be anywhere kids and parents are," says Brian Goldner, the president of Hasbro's toy division.

Similarly, Mattel has been rolling out new Barbie boutiques in Macy's, a unit of Federated Department Stores (FD ). The boutiques, carved out of the children's clothing section, feature Barbie-themed clothing, accessories, and even a perfume, exclusive to Macy's. Mattel designs and pays for much of the in-store signage, displays, and the newspaper and billboard advertising. The company is even sponsoring a Barbie float in this year's Macy's Thanksgiving Day Parade in New York -- a rare event for the 45-year-old doll. "When you see it all fit together, it really makes a statement that we can't make in other places," says Richard Dickson, Mattel's chief of consumer products.

Board-game maker Cranium Inc. is considered a pioneer in these alternative retail outlets. The small toy company, founded in 1998 by a pair of former Microsoft Corp. (MSFT ) employees, persuaded Starbucks Corp. (SBUX ) to sell its board game, intended primarily for grown-ups. The company has since come out with children's versions of the game, which are now sold at the big discounters. But the company still tests new products at Starbucks and continues to look for new outlets. This December, Cranium representatives in company hard hats will walk the aisles of Whole Foods Market, handing out brain teasers written on cards to shoppers who'll be able to buy games at the supermarket. To survive in toyland nowadays, you have to think outside the box.

By Christopher Palmeri in Los Angeles

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