The past few years have been anything but fun and games for New York-based cataloger/retailer FAO Schwarz. The purveyor of upscale toys survived two bankruptcies in the span of a year, closed its 43 stores, ceased catalog mailings for nearly a year, and shuttered its Website, all but staving off death at the hands of mass-market retailers.

But the iconic brand is back. Its catalog is once again in the mail, its Website is up and running, and it has two “destination” stores open.

The challenge before president/chief marketing officer David Niggli is to make FAO relevant again. “This is the story of a 143-year-old startup,” Niggli says.

Through the years

Shortly after opening his first store, in Baltimore in 1862, Frederick August Otto Schwarz became known for selling top-quality, unique toys. He relocated the business to New York in 1870 and six years later mailed his first catalog — about the same time a couple of marketing neophytes named Richard Sears and Montgomery Ward mailed their first catalogs.

More than a century later, FAO Schwarz was still going strong. The ostentatious ’80s helped fuel the demand for high-ticket toys for tots and the once downscale mail order industry had gone upmarket. The company expanded to 43 stores during the 1990s.

But the tide had begun to turn after the recession in the early ’90s, and conspicuous consumption fell out of favor. By the late 1990s, with the advent of the big-box retailers, FAO was languishing in sameness. It was carrying the same products from Mattel, Hasbro, and Lego, that every other store chain was carrying. “Those are great brands,” Niggli says. But at the end of the day our consumers were saying ‘Why should I come to you to buy these toys?’”

For certain, without unique product, “there was no reason to go to FAO anymore,” says Westlake Village, CA-based consultant Stan Fridstein, a cofounder of cataloger/retailer The Right Start. Making matters worse, competitors such as Wal-Mart and Target were undercutting FAO on price.

Amsterdam-based Vendex NV, which had acquired FAO in 1992, sold the then-$150 million company to The Right Start in 2001. (Fridstein was no longer with The Right Start by then.) The Right Start, which had also bought the Zany Brainy kids catalog in 2001, changed its name to FAO Inc. in 2002.

By the third quarter of 2002, King of Prussia, PA-based FAO’s losses had ballooned. FAO for Chapter 11 bankruptcy protection in January 2003, emerged from bankruptcy three months later, only to file Chapter 11 again in December 2003.

It came out of bankruptcy once again in January 2004, when New York-based private equity firm D.E. Shaw, through subsidiary D.E. Shaw Laminar Portfolios LLC, paid $41 million for the catalog and Internet businesses as well as for FAO’s 65,000-sq.-ft. New York flagship store and its 55,000-sq.-ft. store at the Forum Shops at Caesars Palace in Las Vegas. At the time of the sale, FAO was already liquidating its Zany Brainy retail chain and had agreed to sell its 34 Right Start stores to private equity firm Hancock Park Associates.

In May 2004, D.E. Shaw formed eToys Direct, having purchased the former Web business of defunct retailer KB Toys. It then purchased Denver doll cataloger My Twinn in June 2004. EToys now fulfills orders from FAO Schwarz’s two stores and direct operations as well as supports the e-commerce operations of a number of major retailers and sells direct to consumers under its own brand.

The comeback

The decision to operate only two FAO stores was in part a branding issue. “FAO had been a grand toy emporium with an over-the-top experience,” Niggli says, referring to the flagship Manhattan store. “But it was very hard to reproduce that same FAO experience in, say, 10,000 sq. ft. We also realized that we could no longer compete in the mass world.”

Shortly after its purchase by D.E. Shaw, FAO closed its two remaining stores for renovations to be completed in time for the 2004 holiday season. It also worked to relaunch its print catalog by late summer of 2004; the book hadn’t mailed since late fall 2003. New Rochelle, NY-based list services firm Estee Marketing Group was charged with the circulation planning for the relaunch.

This was no easy task, says Geoff Batrouney, Estee’s executive vice president. For one, “the [toy] selling season is very abbreviated.” And because time was short, “we didn’t have the opportunity to engage in split cover testing or complicated list testing,” he says. “We had to rent lists, line up database names from aged buyers. It was daunting.”

FAO mails more than 3 million catalogs annually. According to its data card, it has 63,956 12-month buyers, 80% of whom are female; the average order is $150. List procurement remains a challenge, as the company is still stigmatized by its previous bankruptcies. “We still spend as much time explaining the bankruptcy law as we do handling the process of list brokerage and acquiring lists for FAO,” Batrouney says. But for all intents and purposes, he adds, “this is a new company.”

The top priority for the “new” FAO was merchandising. Rather than compete with the big-box retailers, FAO has put new emphasis on exclusive, high-end toys that you can’t find in your nearby Wal-Mart.

“The number of SKUs has not really decreased,” Niggli says. “We were afraid that might be happening, but in actuality, there a lot of great products in the specialty toy world — so much so that we can’t carry all of them.”

When FAO analyzed its merchandise performance, “we found out that the best-sellers were our Steiff bears and Madame Alexander [doll collections],” Niggli says. “These are staples of the specialty world. Those are the things that are the constants.”

So FAO got busy striking partnerships and exclusivity deals with manufacturers. Yes, you can buy Mattel Hot Wheel cars just about anywhere toys are sold. But only at an FAO Schwarz store can kids customize a Hot Wheel at a toy factory kiosk by choosing the car’s type, color, wheels, and engine on a touch screen. In less than a minute, the customized car is delivered through a tube in the kiosk. The cost is $20.

And yes, stuffed animals are commonplace. But only FAO Schwarz sells Steiff dogs made to American Kennel Club (AKC) specifications. The stuffed canines, which sell for $20-$45 each, come with an AKC certificate and official carrying case.

Then there are the luxury items that make FAO the Neiman Marcus for the schoolyard set: the miniature gas-powered Ferrari that will set you back $50,000, the 3-D motion simulator for $300,000, the Custom Couture dress for $800. By emphasizing these products, the company is returning to its roots. “These kinds of items have always been a part of FAO,” Niggli says. “Also when people come to the store they love to see them. It’s part of the excitement. What we’ve done is make them more accessible so that people can enjoy them more.”

Indeed, such items should help cement FAO’s image as a retail destination. More than 3 million people a year visit the New York store, which reopened on Thanksgiving Day 2004. The revamped store is airier and less jammed with merchandise than it used to be, the better to flaunt its floor-to-ceiling views of Fifth Avenue and 58th Street. A massive LED grid now covers the ceiling, with more than 20,000 lights that can be individually programmed to create a range of color and pattern effects. The design also comes complete with two urban tree houses, one with a balcony 12 feet above the ground store, the other standing 27 feet tall.

The Las Vegas store, which reopened in late October 2004, is also a stunner. A 48-ft. animatronic Trojan horse that rises the full three stories of the store greets arrivals. Visitors can enter the horse from the second level to access a balcony overlooking the store.

Translating the experience

Perhaps the biggest challenge for FAO is translating the razzle-dazzle of the stores onto the print and Web pages. For instance, the FAO stores have a Lee Middleton doll adoption center — an area of the store where girls can come in and take their pick of one of the amazingly lifelike $80 Middleton baby dolls. Replicating that tactile experience in the print catalog and online is tough, but Niggli says that the product line has sold remarkably well in its catalog, because FAO provides enough real estate in the print books to describe the product.

“In the catalog we get to tell the story,” Niggli explains. “We give it luxury and get to romance the story by telling about it.” For instance, the Web copy for the Lee Middleton line declares, “These beautiful dolls look and feel like infants — and the process of adopting one echoes the steps required in real life adoptions including presentation of the doll by a ‘nurse’ and the completion of a birth certificate.”

The progress of the Website has lagged behind that of FAO’s stores and catalog (see “Ripe for a Web redo,” below), and Niggli admits that the company has a lot of work to do online. “The first stages were to get the first stores open and this year tweak the catalog more and operationally get ready for the holiday season.” But getting the Web up and ready “is a lot more doable today, especially with today’s evolving technology.”

Niggli would not reveal any specifics about financial results. But in February 2005, D.E. Shaw founder David E. Shaw told BusinessWeek that the catalog and online businesses have exceeded expectations and that FAO Schwarz is profitable.

The company also has a new CEO, Ed Schmults, coming on board this month. Schmults, formerly the chief operating officer of gifts merchant RedEnvelope and previously a senior executive with outdoor apparel marketer Patagonia, is no stranger to multichannel retailing. So going forward, FAO Schwarz should be in good hands.

Ripe for a Web redo

FAO Schwarz is the first to admit it needs to work on its Website. We asked New York-based catalog consultant Glenda Shasho Jones to take a look at the FAO site. Here’s her critique:

While the site itself is relatively easy to shop, it misses the opportunity to use Web technology to better engage the shopper and reflect the FAO Schwarz brand. In fact, what happened to all the sizzle of the brand? FAO Schwarz conjured up images of luxury and uniqueness, often communicating it through the dramatic presentation of its products. That’s not at all reflected in its Website.

While clean, the Website’s home page is relatively plain. One doesn’t expect the Toys ‘R’ Us drama that comes from color and type, but I think the shopper would expect to see the excitement that might come from some dramatic Web photography or Flash technology. We all know that channels require different interpretations of creative applications, but FAO’s Website seems to be missing some of the imagery that’s made it famous.

To better reflect its brand, catalogers such as Hanna Andersson, BabyStyle, and Garnet Hill use a variety of on-figure and location photography to support their Web selling shots. These beautiful and sometimes amusing photos remind shoppers of where they are and of some of the brand components. In most cases, the photography probably was used in the print catalog, so the cost of developing it has already been incurred. Plus, it makes for a much stronger association between the Web and catalog channels. This channel synergy is missing for FAO, and although the home page does link to store information, it is less important because FAO has only two stores.

In the effort to be upscale, the FAO site is not very hardworking. Wealthy or not, people need a push to shop and buy. There’s nothing wrong with a more aggressive approach in a shopping venue, whether it’s Web, print, or store. Pottery Barn Kids takes a hardworking approach to its home page, letting the customer know about the variety of features, information, and new products throughout the Website.

Since we know that a majority of shopping for kids is done as a joint activity between parent and child, it would seem that a Website that sells children’s gifts and toys might be a bit more engaging, more approachable, and fun for the kids. Discovery Kids, for example, has onsite games with names such as Chomp or Bug Off that use fun Flash technology and hook into its positioning as an educator to bring everyone in and encourage time spent on the Website. FAO Schwarz could benefit from this type of feature.