Toys R Us maintained that it was acting in the best interests of its customers and said it would appeal a decision Wednesday by the Federal Trade Commission, which charged the company with engaging in illegal practices that reduced choice for consumers and kept toy prices high.
"We've been in business for 50 years and have worked hard to earn the trust of our customers, and frankly, nothing is more important to us," said Rebecca Caruso, spokeswoman for the Paramus, N.J.-based Toys R Us. "We are fully prepared to take it to the next level."
The order, which takes effect in 60 days, accuses Toys R Us of reducing competition by coercing major toy makers, such as Hasbro, Mattel and Fisher Price, to stop selling certain toys to low-priced warehouse clubs.
Toys R Us wanted "to prevent consumers from comparing the price and quality of products in the clubs to the price and quality of the same toys displayed and sold at Toys R Us, and thereby reduce the effectiveness of the clubs as competitors," wrote FTC Chairman Robert Pitofsky in the commission's opinion.
Rather than lowering prices to compete fairly with dramatically cheaper warehouse clubs, Toys R Us threatened toy manufacturers that it would not buy from them, forcing them to sell only unique or highly differentiated toys to the discount distributors, according to the FTC.
Under the commission's order, the company would be prohibited from entering into such agreements with suppliers and would have to cease all existing arrangements. Toys R Us also would be barred from requesting information from suppliers about their sales to any toy discounter.
The FTC first announced its complaint against Toys R Us in May 1996, and the charges were upheld by an administrative judge in 1997. Toys R Us appealed, and the commission heard oral arguments in February of this year.
By selling brand-name products at low prices, increasing product turnover and reducing costs, warehouse clubs emerged as serious competition for the toy retail chain in the early 1980s. But rather than cutting its prices in response, Toys R Us attempted to stifle its competition, the FTC said.
Toys R Us buys about 30 percent or more of the large toy companies' output and is usually their most important customer. This gave it the market clout to influence toy makers, the FTC said.
The company warned toy makers it might stop carrying certain toy lines if the products also were offered to rival discount stores. Toy manufacturers would also report to Toys R Us if their competitors began selling to the discounters, helping the company enforce its agreements.
The 10 manufacturers that entered into the restrictive agreements with Toys R Us are: Mattel, Hasbro, Fishr Price, Tyco, Little Tikes, Today's Kids, Tiger Electronics, VTech, Binney & Smith, and Sega, the FTC said.
Toys R Us had argued that such agreements were needed to prevent other stores from benefiting from its advertising and display of toys. But the commission found this justification without merit and said the company is compensated for any services it provides the industry.
The company also faces a lawsuit from 44 states, the District of Columbia and Puerto Rico, on similar charges. New York State Attorney General Dennis Vacco, who began investigating the company after the trade commission started its probe, filed the suit against Toys R Us in October of 1997 in the Eastern District of New York. The lawsuit also names toy companies Mattel, Hasbro, Tyco Industries and Little Tikes Co. as defendants and seeks an undetermined amount in damages.
Toys R Us has 650 stores in the United States and an additional 300 stores in foreign countries.
Written By Kalpana Sprinivasan