Battered by severe price competition from Wal-Mart and other toy retailers, FAO Inc., the parent company of FAO Schwarz, Zany Brainy and the Right Start, is filing for bankruptcy—for the second time this year. As part of FAO's plan to stay in business, it will close all 89 Zany Brainy stores, and it began liquidating Zany Brainy's inventory last week. It hopes to sell the rest of the company to a third party.
Although FAO tried unsuccessfully to sell its 15 FAO Schwarz and 39 Right Start stores last month, there are "multiple parties" interested, according to a source close to the company quoted by Dow Jones. One possibility is Saks Fifth Avenue, which has FAO Schwarz boutiques in four of its stores.
The closing of the Zany Brainy outlets is expected to have more of an impact on publishers of educational-oriented titles than publishers of children's trade books. The closing of FAO Schwarz, however, would be a bigger blow to those mainstream publishers that have used FAO Schwarz to help launch and relaunch major children's book characters (and their movies) such as Madeline and Olivia. "I'm not sure who would take on that strategic role," one publishing executive said.
In addition to competition from mass merchandisers, Zany Brainy suffered from back-office problems. The chain had "MIS systems and inventory control problems" from its founding, said a publisher. "That really hurt them. They've been struggling for quite some time."
Despite FAO's problems, Borders Group will continue with the market test it has been conducting in a few of its stores using products supplied by FAO. A Borders spokesperson said the company will continue with the test throughout the holiday season to assess customer interest in the "play and learn" items that are featured in the section; if interest is high enough, Borders could source the material from different vendors.
The market test was part of an alliance Borders signed with FAO in August. As part of the agreement, Borders was helping to manage the book sections at FAO. The Borders spokesperson said the company stopped shipping product to FAO "some time ago."
