FTC: Toys "R" Us Doesn't Play Fair

The Federal Trade Commission charged today that Toys “R” Us, the nation’s largest toy retailer, has used its power to keep toy prices higher and reduce toy outlet choices for consumers. The FTC alleged that Toys “R” Us extracted agreements from toy manufacturers to stop selling certain toys to warehouse clubs, or to put the toys into more expensive combination packages, so consumers could not obtain lower-priced toys from the clubs, or compare prices easily. Toys “R” Us feared that it would lose sales to the clubs, and that consumers would draw unfavorable comparisons between the clubs and its own prices that could undercut its reputation for everyday lower prices.

“In fact, Toys 'R’ Us does not have the lowest retail prices among national toy retailers,” said William J. Baer, Director of the FTC’s Bureau of Competition. “By impeding the growth of the clubs as deep-discounting toy outlets, Toys ?R’ Us has succeeded in keeping consumer prices higher than they otherwise would have been. The FTC is acting today to restore to consumers greater choice in where they can buy toys, and to ensure they can buy them at the lowest prices.”

Toys “R” Us, based in Paramus, New Jersey, has 600 stores located throughout the United States and another 300 stores in foreign countries. Its 1995 sales totaled $9.4 billion.

According to the FTC complaint detailing the charges in this case, Toys “R” Us has market power over manufacturers. Toys “R” Us has used this power illegally to compel the manufacturers to go along with its efforts to keep the warehouse clubs from competing effectively with Toys “R” Us and from undercutting the chain’s image as a discounter, the FTC charged. Before the challenged conduct, the FTC alleged, warehouse clubs were growing at a much faster rate than other retailers. At the same time, toy manufacturers were looking for new and growing outlets for their toys. Prior to the Toys “R” Us conduct, the complaint states, the clubs could buy popular individual toys from open stock from most manufacturers, which the clubs generally sold at substantially lower prices than Toys “R” Us. But, beginning as early as 1989, Toys “R” Us began entering into agreements and understandings with the manufacturers under which:

• the manufacturers would not sell to the clubs the same individual toys that Toys “R” Us carried;
• if a supplier wanted to sell the same toys to warehouse clubs that it sold to Toys “R” Us, it would package them as higher-priced club specials (usually, combination packs of two or more different items) that could not be readily price-compared to Toys “R” Us and that cost more to produce, which raised club member prices; and
• the suppliers agreed to advise Toys “R” Us in advance what items they planned to sell to the clubs so that Toys “R” Us could determine whether the sales posed a competitive threat to its own sales.

The FTC further alleged that, because some manufacturers were reluctant to give up their sales of individual toys to the clubs so long as their competitors were still selling through that outlet, Toys “R” Us facilitated understandings between competing manufacturers to deal with the clubs in a similar, anticompetitive way. Toys “R” Us then enforced its policy by taking products off its shelves or not buying products that manufacturers had sold to the clubs, the FTC said.

“As a result, by 1994, most of the major U.S. toy manufacturers stopped selling popular individual toys carried by Toys ?R’ Us to the warehouse clubs,” Baer said. “This has hurt the growth of warehouse clubs as toy retailers, it has made it difficult for consumers to compare prices, and it has left consumers paying higher prices than they otherwise would have had to pay.”

Following trial by an administrative law judge, the FTC is seeking an order that would prohibit the chain from entering into agreements with manufacturers similar to those challenged here, attempting to pressure or coerce suppliers in terms of how they deal with toy discounters, and directly or indirectly seeking assurances or explanations from suppliers about their dealings with toy discounters. The proposed order also would prohibit Toys “R” Us from asking or accepting from any supplier information about the supplier’s sales to toy discounters, and from attempting to facilitate agreements among manufacturers by passing along information about the manufacturers’ dealings with toy dicsounters. The proposed order also would prohibit Toys “R” Us, for five years, from taking any adverse action against a supplier because the supplier is dealing with toy discounters.

The Commission vote to issue the administrative complaint was 3-2, with Commissioners Mary L. Azcuenaga and Roscoe B. Starek, III, dissenting.

NOTE:  The Commission issues a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The issuance of a complaint is not a finding or ruling that the respondent has violated the law. The complaint marks the beginning of a proceeding in which the allegations will be ruled upon after a formal hearing.

Copies of the complaint and proposed order are available from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov

(FTC File No. 941 0040)