Toys with a Second Life

Can Ganz's Webkinzplush animals with online alter egosstay ahead of the copycats?

Webkinz are the hottest things in toyland—and competitors have noticed. The little plush animals come with codes that activate an online version of the toy in a virtual "Webkinz World." At least eight other companies are trying to follow Webkinz's lead, with similar new products that link real-world toys with the Web.

Virtually every toy-industry heavy hitter is involved. Dollmaker Russ Berrie (RUS) is selling Webkinz-like Shining Stars at Toys 'R' Us and other major retailers. Mattel (MAT) has created a new online world for Barbie. And Hasbro's (HAS) Littlest Pet Shop has a VIP ("virtual interactive pet") section.

So Ganz, the privately held Toronto company behind Webkinz, is trying to stay ahead of the pack with a push into accessories. In addition to $15 stuffed animals, Webkinz fans also can buy $7.50 lip gloss, $9 bottles of mango body spritz, and various charms, bookmarks, and clothing items. Like the animals, each accessory has its own code that redeems a prize for pets' online avatars.

Webkinz are sold in a variety of stores, including card shops, gift shops, and some big chains like Target. Hallmark stores have sprouted accessories displays just as big as the cases of stuffed animals. At Limited Too, a hip mall shop where tween girls go to see and be seen, 11% of store transactions involved a Webkinz product in the last quarter. "The pink polka-dot hoodie for these just one of the best-selling items we have anywhere in the store," says Robert Atkinson, who directs investor relations for Tween Brands (TWB), which owns Limited Too.

Ganz, which doesn't disclose its financials, must now strike a delicate balance: maximizing profit from the fad without alienating parents and kids. Visitors to spent more than a million hours there in November, but the site is free. As a result, "they haven't made anywhere near as much money as you'd think," says Sean McGowan, an analyst at Needham, who guesses Webkinz sales are north of $100 million. He adds that none of the nascent competitors has figured out how to capitalize on kids' Web time, either.

Indeed, Ganz has stumbled trying to cash in. In mid-December, the Campaign for a Commercial-Free Childhood noticed ads on Webkinz World for the Alvin and the Chipmunks movie. More than 1,000 protest letters were sent to Ganz. In October, Webkinz ran a similar campaign for Bee Movie. Ganz spokesperson Susan McVeigh says no further online ads are planned, but she did not rule them out for the future. Ganz has "selective standards about what we would consider."

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