Toys 'R' Us is target of antitrust action Big retailer denies unfairly maneuvering to keep prices high


WASHINGTON -- In an unusual 3-2 split vote, the Federal Trade Commission charged yesterday that Toys 'R' Us, the world's largest toy retailer, had illegally pressured manufacturers since 1989 to quit selling some of their hottest toys, ranging from Barbie dolls to G.I. Joes, through warehouse clubs that offer steep discounts.

The two dissenting votes came from commissioners appointed by then-President George Bush and could signal some uneasiness with the recent aggressive approach to enforcing antitrust laws.

Toys 'R' Us, based in Paramus, N.J., insisted that it did nothing wrong, accused the government of stretching the law and vowed to vigorously contest the allegations.

In essence, the FTC charged that Toys 'R' Us, which pioneered discounting in the toy industry 20 years ago, had forced consumers nationwide to pay higher prices by using its marketing power to shut out nettlesome competitors.

The agency said the company, which accounts for more than 20 percent of the $19 billion worth of toys sold annually in the United States, demanded that toy makers refrain from selling some of their most popular products to the discount clubs and that it refused to sell those toys if the toy makers did not comply. FTC officials said they could not estimate how much such restraints would have cost consumers, though some private analysts said the total could reach tens of millions of dollars.

But the FTC also charged that, by 1994, most of the top manufacturers, including the two biggest, Mattel Inc. and Hasbro Inc., had reluctantly agreed to the demands, and it maintained that most of the questionable practices continue.

In one example, the agency said Hasbro had refused to sell "Hall of Fame" G.I. Joe soldiers directly to the discount clubs.

In other instances, said William J. Baer, director of the FTC's Bureau of Competition, Toys 'R' Us would "extract agreements" requiring toy makers to sell popular items to the discount chains only if they were packaged with costly extras that negated any efforts to undercut the prices at Toys 'R' Us.

At a news conference yesterday, Baer held up a box containing a "Hollywood Hair" Barbie doll made by Mattel, which retails at Toys 'R' Us for $10.95. "You can buy 'Hollywood Hair' Barbie at a warehouse club," he said. "But only if you buy it packaged with a dress, and pay half again as much," typically $15.99.

Baer said that in the late 1980s and early 1990s, Toys 'R' Us "was feeling threatened by these new, fast-growing competitors." He added that, 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."

But Michael S. Feldberg, a New York lawyer representing Toys 'R' Us, countered that there is "no foundation in law or in fact" for the FTC charges and "very simply, we think they're wrong."

Feldberg acknowledged that Toys 'R' Us might have told some manufacturers that it "may not buy" particular toys if they also allowed the discounters to undercut the Toys 'R' Us price on the items. But he said, "we have not pressured anybody," and the company is "confident we will prevail."

The case will be tried before an administrative law judge, a process that could take six to 12 months. The charges are civil ones, and the FTC is seeking an order requiring Toys 'R' Us to halt the alleged practices.

Share of Toys 'R' Us, which operates 650 stores in the United States, fell 75 cents to $29.125.

While Baer indicated that some industry executives were willing to testify that Toys 'R' Us had improperly pressured them, a spokesman for Mattel denied yesterday that his company had been coerced. Other toy makers, including Hasbro, declined to discuss the matter and sought to steer clear of the fray.

There also were questions about why the two Bush appointees, Mary L. Azcuenaga and Roscoe B. Starek 3rd, voted against bringing the complaint.

Kevin Arquit, a former director of the FTC's competition bureau, said the agency would normally view a market share of about 20 percent, as Toys 'R' Us has, as being at the low end of what would it take to dominate an industry.

But, he said, "I think clearly this decision shows there's a willingness at the FTC to bring cases even if they don't fit the traditional patterns if they feel the actions are anti-competitive enough."

Indeed, under its chairman, Robert Pitofsky, an appointee of President Clinton, the FTC has been more eager to push antitrust regulation in new directions.

Last month, the Rite Aid Corp. dropped its proposed $1.8 billion purchase of Revco D.S. Inc. after the FTC questioned whether a merger of the nation's two largest drugstore chains would sharply increase prices. The FTC staff also is preparing to recommend that the commission block Time Warner Inc.'s proposed $7.5 billion acquisition of Turner Broadcasting System Inc.

Pitofsky has generally been able to win unanimous support on the panel in several recent cases.

At the news briefing, Baer contended that Toys 'R' Us also had "crossed the line" by working out deals with various toy makers in which they all agreed to limit their sales to the discount clubs in a similar way.

He said it also had effectively gotten veto power over what some makers could sell to the warehouse chains, which mainly sought to sell some of the popular toys at Christmastime.

But Feldberg, the Toys 'R' Us lawyer, denied both of those assertions. He also said "the law is crystal clear that the government can't tell you you can't say you won't carry an item."

Pub Date: 5/23/96

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