767 Fifth Avenue
Company Perspectives:
FAO prides itself in offering unique products in an unforgettable environment. Management designed its stores to interact with customers in a manner which distinguishes itself from other retailers. Considered the leading specialty seller of toys and collectibles in the United States, FAO is a mecca for toy lovers from all over the world.
FAO Schwarz operates a chain of more than 40 high-end toy stores around the United States, with its flagship outlet and headquarters located on Fifth Avenue in New York City. The company is renowned for offering the most exclusive and expensive toys available, but its approach has broadened in recent years to include more mainstream items as well. The firm has been through a series of owners since the Schwarz family sold it in 1963, with the Dutch retail conglomerate Vendex International the most recent, having acquired it in 1998.
1860s Origins
FAO Schwarz traces its beginnings to the Civil War era, when German immigrant Frederick August Otto Schwarz opened a toy store in Baltimore, Maryland, that specialized in dolls. In 1870 the store, known as Schwarz Toy Bazaar, moved to a location on Broadway in New York City, where Frederick Schwarz and his three brothers made a name for themselves by importing fine European toys. The growing business needed new quarters just a decade later, when it was moved to Union Square. After several further moves, FAO Schwarz (as it had become known) settled in 1931 at 745 Fifth Avenue, in the heart of Manhattan's most prestigious shopping district. The elegant new store featured a marble staircase and a slide that went from the first floor down to the main level. Schwarz toy displays were legendary, with the Christmas season's elaborately decorated windows a tourist destination in their own right. The name FAO Schwarz had by then become synonymous with the most exclusive, imaginative, and expensive toys available, and the store's clientele was drawn from the elite of New York.
The Schwarz family continued to run the store until the early 1960s, when a lack of interest among the younger generation led family members to decide to sell it. In 1963, it was purchased by Parent's Magazine, who just seven years later sold it to W.R. Grace & Co. Grace, too, lasted for only a short while, selling the company to toy retailer Franz Carl Weber International of Zurich, Switzerland, in 1974. By this time Schwarz had opened stores in several locations outside of New York. The chain's momentum faltered under the distant oversight of Weber, however, which saw less attention given to discovering new, innovative merchandise. Sales were also being lost to aggressive new discount toy and department store chains. By the early 1980s, Schwarz appeared to be in serious trouble. The chain of stores, which had grown to 32, soon shrank by ten as unprofitable outlets (some in hotel lobbies) were closed. The surviving stores included sites in Boston, San Francisco, Chicago, and New Orleans, as well as in a number of suburban locations. In 1985, Weber decided to abandon ship and sold the company to real estate and investment firm Christiana Companies, Inc. for $10.5 million. At this time Schwarz had annual revenues of approximately $20 million.
Just a few months later the firm's ownership changed yet again, this time when it was acquired by Christiana Companies president and CEO Peter L. Harris and a Philadelphia-based investment banker, Peter C. Morse. The 42-year old Harris was an 18-year veteran of California retail chain Lucky Stores, where he had served as president of its Gemco discount chain. He had earlier attempted unsuccessfully to acquire Schwarz on his own, before linking up with Christiana. Harris assembled a new management team of executives with retail experience at Macy's, The Gap, and other major retailers, and began to tackle Schwarz's myriad problems. One of the first ideas to be implemented was a broadening of the store's merchandise to offer a wider range of items, though the exclusive high-end toys the store was known for would not be abandoned. New trends and fashions were again sought out, the company's mothballed catalog was revived, and personal shopping services and home delivery were added. Another important change was the relocation of the chain's flagship store at 745 Fifth Avenue to a space across the street at 767 Fifth. The new store would fill 2 stories and 40,000 square feet at the foot of the General Motors Building, beginning in late 1986.
A Spectacular New Flagship Store
The converted GM auto showroom, which had entrances on both Fifth and Madison Avenues, was a third larger than the old store. The new location's redesigned interior also featured a more open layout that included 80 specialty boutique areas, prominent escalators, and lots of window space. For its grand opening, the store was wrapped in red cloth and a white bow, with a large card that said "Do Not Open Until November 6." New York mayor Ed Koch presided over the opening ceremony, which featured balloons and a parade of costumed toy characters. The new store was much more fanciful and "touchable" than the previous one, though it still offered the company's trademark selection of everything from teddy bears to a $12,500 half-size Ferrari car capable of reaching 30 miles an hour. There were also children's clothes, a kids' hair salon, and even gourmet peanut-butter and jelly sandwiches. The middle of the store featured a 28-foot tall, computer-programmed animated clock tower that played a song called "Welcome to Our World of Toys" every 15 minutes, and there was a glass-walled elevator and a life-size cave, among many other child-pleasing amenities. In addition to the toys available in the store, Schwarz' catalog contained even more elaborate gift options, including a cartoon written by and starring one's child ($180,000), an African Safari adventure ($50,000) and a 14-child overnight party at the New York store that included airfare, a stretch limousine, accommodations at the Plaza, and a tour of the city led by a costumed Pinocchio character ($18,000).
The new store was a huge hit with the public, and in 1988 it was featured in a scene in the popular Disney movie Big in which characters played a huge piano by jumping on the oversized keys. Schwarz was subsequently deluged with requests for the $15,000 instrument and a smaller model that cost $6,250. The company, which did not advertise, was frequently mentioned in children's books and movies, a testament to its reputation as the ultimate toy store in the world.
The latter half of the 1980s saw Harris and his team continuing to fine-tune Schwarz operations, with under-performing locations closed and a new superstore opened in San Francisco. The latter featured a miniature city with a drive-in theater that showed the film Godzilla on a 2-inch screen, among other imaginative details. Venture capital funding of $7 million was obtained to help with the company's evolution, and by 1990 sales had more than doubled to approximately $50 million. Schwarz, now operating solidly in the black, was also readying new stores for Beverly Hills, Chicago, and Boston.
1990 Purchase by KBB
In 1990, the company was sold yet again, this time to Dutch retail giant NV Koninklijke Bijenkorf Beheer (KBB), for an estimated $40 million. Chairman and co-owner Peter Morse left the company, while Peter Harris and the remainder of his management team remained in place. KBB had sales of $2.4 billion for 1989, and its deep pockets were expected to fund further expansion of the chain, perhaps including Europe and Japan.
The year after the sale the company announced plans to open seven more new stores, including two in the Boston area and a second, 30,000-square foot location in Chicago's North Michigan Avenue shopping district. The latter would be Schwarz's fourth in the metropolitan area. 1992 saw turnaround guru Peter Harris step down to move to the San Francisco Bay area, where he would several years later be named president of the 49ers football team. He cited family reasons for his decision to leave. His place was taken by 44-year-old John Eyler, the Harvard-educated CEO of Hartmarx Specialty Stores, Inc. of Chicago.
In the fall of 1992, Schwarz opened its first "Barbie Boutique" at the Fifth Avenue location, a store-within-a-store dedicated entirely to the venerable, hourglass-figured Mattel doll. An expanded bookstore, "Bookmonster," was added during the year as well. More new stores were opened in 1993, including 12,000 square foot "mall flagship" units in Bellevue, Washington; Costa Mesa, California; and St. Louis, Missouri. The company was in the process of upgrading its non-New York sites, trying to give each some of the glamour of the Fifth Avenue store, which the public had come to expect via its frequent appearances in movies and on television.
By the mid-1990s, Schwarz's profits were again dropping, partly due to the competitive toy marketplace, which had seen a number of chains fail under the dominance of Toys "R" Us and discounters like Target and Wal-Mart. The company was also hurt by its higher cost of doing business, which included the fanciful decorative elements each store now featured.
In 1995, the company introduced a line of exclusive licensed products in conjunction with the American Museum of Natural History. Later in the year Schwarz invested in and co-produced the Broadway musical version of the movie Big which featured a recreation of the scenes in the Fifth Avenue store. The $9 million production opened the following April.
Mid-1990s: FAO Schweetz Debuts
In 1996, Schwarz began to introduce a new concept, FAO Schweetz, an interactive store-within-a-store in some of the company's locations which offered canister-filled and bulk candy. The company had previously sold the products under a licensing agreement in New York and San Francisco, but acquired the manufacturer and set up the business as a division. The company's older store on North Michigan Avenue in Chicago was later completely converted into a Schweetz outlet.
Schwarz allied with television marketing giant QVC in 1997 to offer specialized merchandise and FAO Schwarz-branded products on a 2-hour program called "FAO Schwarz--The Premier." In the summer of the year, new "mega-flagship" stores were readied for the tourist destinations of Orlando, Florida, and Las Vegas, Nevada, while the Manhattan store prepared to expand from 40,000 square feet to 60,000. By this time the company had a total of 39 locations, including 23 mall flagship sites and 12 smaller stores. Schwarz also distributed 6 million copies of its catalog to customers worldwide, which generated 11 percent of total sales. A third of its merchandise was exclusive to the chain, while another third was considered hard to find and the remainder consisted of mass-marketed goods like Barbie. The average item cost $26, with the Mattel doll the single most popular item. During this time the company was expanding its line of house-branded toys, as well as those offered in partnership with major manufacturers, such as the "F.A.O. Barbie" which sported fashionable clothes, an F.A.O. bag, and a credit card.
In the realm of cyberspace, where the company had first established its presence with the launch of www.fao.com in 1995, Schwarz reached revenue-sharing deals with a number of Web-based companies such as Prodigy and Yahoo! to sell toys over the Internet. A marketing deal with General Motors was also signed in January of 1998 in which the GMC "Jimmy" Sport Utility Vehicle was designated the "Official Big Kids Toy" at all of the chain's stores. Schwarz would sell a toy version of the SUV and insert GM advertising literature into shopping bags with purchases. The two companies' Web sites were linked as well. In early 1998, Schwarz's ownership changed when KBB was acquired by another Dutch retailer, Vendex International.
Late 1990s Under Vendex
During the summer of the year, the hit movie Titanic spawned a series of toys that were produced by Schwarz in conjunction with film studio 20th Century Fox, including a $395 doll and a Baccarat crystal rendering of the ship priced at $2,500. Controversy arose in the fall when allegations of racist treatment of employees surfaced in a lawsuit filed by eight former workers at the Fifth Avenue store. The complaints centered upon a single manager, who subsequently left the firm. 1998 was a weak year sales-wise, with the company's heavy promotion for the film Babe: Pig in the City failing to pay off when the film did poorly. Vendex later began floating rumors that the chain was for sale, although a deal did not materialize.
Continuing to move forward, in 1999 Schwarz signed a host of new licensing agreements that brought in additional exclusive products, such as Creative Optics eyewear and lines of clothing and furniture. The company also unveiled a new corporate logo and redesigned store interiors. The rebranding was intended to impart a more playful and cartoon-like ambience, with the company's longstanding rocking horse icon retained as a design element. A new slogan, "Wish Big," replaced the previous one, "We're Serious About Play." An additional Internet marketing agreement, with San Francisco-based FamilyWonder.com, was also announced in 1999.
January of 2000 saw the company lose its top officer, John Eyler, to rival Toys "R" Us. Eyler took the positions of president and CEO with the discount chain, which was now dealing with a variety of problems. Among other achievements, Eyler was credited with greatly boosting the percentage of exclusive items offered in Schwarz stores. He was replaced by Bud Johnson, Schwarz's president and chief operating officer. Schwarz subsequently filed suit against both Toys "R" Us and Eyler, alleging "irreparable harm" would result from his changing employers. The same year, 2000, also saw a new store opened in Atlanta's Mall of Georgia, which was the first to be built around the revised brand identity. Other developments included formation of an alliance with Discovery Communications to offer its Exploration Toy Shop inside the Fifth Avenue store, and a redesign of the Schwarz Web site.
In 2001, a new concept, FAO Baby, was launched, first as a department in the Fifth Avenue store, and then as a freestanding outlet in Chestnut Hill, Massachusetts, where it replaced an older store. FAO Baby was divided into separate boutiques from different manufacturers, such as Baby Gund, Lamaze, Fisher Price, and Playskool. As in Schwarz's other stores, the emphasis was on upscale toys and clothing attractively displayed. The firm also worked during the year with Irwin Toy to develop products for preschoolers based on the PBS television series Caillou.
As the company approached the Christmas shopping season of 2001, rumors were again surfacing that owner Vendex was seeking a buyer for Schwarz, reportedly due to the Dutch firm's desire to focus on its European operations. Expansion plans were nonetheless ongoing, with new large locations expected to open in both San Francisco and Los Angeles in 2002. In the aftermath of the September 11, 2001 terrorist attacks on New York City and Washington, D.C., the firm announced it would partner with New Yorkers For Children, making a donation to that organization's special fund for children and families affected by the collapse of the World Trade Center.
Celebrating its 140th anniversary, FAO Schwarz remained the world's premier toy retailer, known for its imaginative and expensive offerings, as well as for the wonder-inspiring environments of its stores. Although the possibility of new ownership was yet again on the horizon, the company was continuing to do what it had done best for generations: satisfying the cravings of children for the toys of their dreams.
Principal Divisions: FAO Schweetz; FAO Baby.
Principal Competitors: Toys "R" Us, Inc.; Wal-Mart Stores, Inc.; Target Corp.; K-B Toys.
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