The Wall Street Journal Interactive Edition -- October 1,
                             1997

 Toys 'R' Us Loses FTC Ruling
 With Marketing Implications

 By WILLIAM M. BULKELEY and JOHN R. WILKE
 Staff Reporters of THE WALL STREET JOURNAL

 WASHINGTON -- In a case that could have broad
 implications for the pricing and marketing of
 consumer goods, an administrative judge at the
 Federal Trade Commission upheld charges that Toys
 "R" Us Inc. illegally pressured manufacturers to
 deny popular toys to warehouse-club discounters.

 Legal experts say the judgment, if upheld on appeal
 to the full FTC and federal courts, could make the
 government more aggressive in attacking exclusive
 dealings and arrangements between retailers and
 manufacturers. The ruling "changes the rules of the
 game," said antitrust expert J. Mark Gidley of
 White & Case in Washington.

 James P. Timony, the FTC judge, found that Toys "R"
 Us's efforts, which the FTC staff alleged had begun
 in 1989, were so effective that by 1993, Mattel
 Inc., Hasbro Inc., and other toy makers had stopped
 selling to warehouse clubs. Other toy makers would
 sell only discontinued merchandise or large
 packages to the warehouse clubs.

 Appeal Is Planned

 Toys "R" Us, which said it was "disappointed" with
 the ruling, said it will appeal to the full
 commission, and if it loses there, will go to the
 U.S. Circuit Court of Appeals. A Toys spokeswoman
 said the company believes its actions are legal and
 that it plans to continue its practices. In New
 York Stock Exchange composite trading Tuesday, Toys
 stock rose 18.75 cents to $35.4375.

 James Sinegal, president and chief executive
 officer of warehouse-club operator Costco Cos. of
 Issaquah, Wash., said the ruling "pre-emptively
 means that [manufacturers] will think twice before
 withholding merchandise from us." However, he said
 it probably won't have much impact in the Christmas
 toy-selling season because "this winter, the die
 has already been cast." Mr. Sinegal was a witness
 for the FTC in the spring, testifying that his
 stores had been denied such hot toys as Mattel's
 Holiday Barbie doll; an anniversary edition of
 Monopoly, which is made by Hasbro's Milton Bradley
 unit; and Tyco Toys Inc.'s Dixie Magna Doodle.

 Peter Caruso, an analyst with Merrill Lynch & Co.,
 said the ruling, even if upheld, won't have much
 impact on Toys "R" Us. "Warehouse clubs aren't a
 real factor in the toy industry. Toys "R" Us's
 challenges come from discounters like Wal-Mart and
 Target -- not the warehouse clubs."

 But legal specialists said the ruling was
 important. Timothy Muris, former competition chief
 at the FTC in the Reagan administration, said "this
 could be a significant case" because it would
 reverse a 20-year trend of courts permitting
 companies wide latitude in setting nonprice
 restraints on the sale of goods. Mr. Muris, who
 served as an expert witness for Toys "R" Us, said
 he still thinks the ruling will be overturned on
 appeal.

 'Competitive Threat'

 In his ruling, the judge said that while in 1989
 the warehouse clubs had a minimal market share,
 Toys "R" Us's internal documents predicted they
 could grow to 6% to 8% of the industry by now. The
 judge said that Toys "R" Us 'viewed the clubs as a
 competitive threat' that would hurt Toys" low-price
 image. The clubs' markup to customers from their
 cost of goods was 10% compared with 30% for Toys,
 the judge said.

 Toys "R" Us has said it opposed sales to the
 warehouse clubs because they wanted to carry only a
 small number of hot toys at the Christmas season,
 which the big retailer called "free-riding" on the
 marketing and advertising that it does all year.
 However, Mr. Timony said that most advertising in
 the industry is done by manufacturers, and Toys
 reaped other benefits by selling toys year round.

 Some lawyers said that the ruling may have limited
 application in other industries because it is rare
 to see a company with as much market clout as Toys
 "R" Us. The company, one of the first to employ the
 large-store, single-category specialization tactics
 that are now common in retailing, is estimated by
 analysts to have about 20% of all U.S. toy sales.
 The judge said the big chain also accounts for 29%
 of the sales of the biggest 10 toy makers.

 He made a point of noting that the FTC case
 differed from one brought by Toys in 1990 against
 Macy's, which had pressed manufacturers not to sell
 to Toys' Kids "R" Us subsidiary. But the judge in
 Tuesday's case drew a line between the two cases,
 saying that Macy didn't have the same level of
 market clout Toys had. He also said that Toys
 aggressively orchestrated agreement among toy
 makers to shut out the clubs.

 Mr. Timony issued an order-stayed pending
 appeal-that would prohibit Toys from making deals
 with any toy maker to restrict sales to discounters
 or transmitting information back and forth among
 toy makers regarding their plans for dealing with
 discounters. The ruling also would bar the company
 for five years from refusing to deal with a
 manufacturer that sold to a discounter.

     Copyright (c) 1997 Dow Jones & Company, Inc. All Rights