Zany Brainy rescue reveals ray of hope for small chains - Brief Article

DSN Retailing Today, July 23, 2001 by Tony Lisanti

The recent financial woes experienced by specialty retailer Zany Brainy is yet another example of just how difficult it is for a small- to medium-sized retail chain, or any company for that matter, to survive in today's cutthroat and volatile marketplace.

For the 187-store chain with annual sales of $400 million, Zany Brainy's problems were more about liquidity and overzealous expansion than they were about the store format and brand identity.

Zany Brainy got caught in the trap that many other venerable retailers have also fallen into. Feeling the pressure from investors to jump on the dot.com gold rush, the Pennsylvania-based retailer invested $10 million in an on-line joint venture that was dissolved last December.

In addition, the pressure to accelerate growth led to the acquisition of its key competitor Noodle Kidoodle in July 2000. From this point on, the acquisition of the 59 units--combined with the Internet investment--continued to strain the company's financial position, ultimately leading to Chapter 11 filing in May.

But unlike other retailer companies that could never find a bona fide solution, Zany Brainy has found its white knight and a future that is once again full of hope and promise.

Earlier this month, Waterton Management will pump new life into Zany Brainy in the amount of $115 million, which will enable the company to payoff its DIP facility and other expenses and obligations. What makes this acquisition even more interesting are the co-founders of Waterton--Ken Abdalla and Ron Burkie, who purchased a 6% stake worth over $200 million.

Obviously, these entrepreneurs see enough value and potential in Zany Brainy to make such an investment in a small, struggling retail chain, which many retail analysts share little optimism for. There are several strengths Zany Brainy can leverage and return to the stature it once held as a hot growth company:

* Brand identity. The company has a loyal customer base and it can continue to improve its image for value as well as a fun place to shop.

* Low price. With price being such a driving factor for today's value-conscious families, Zany Brainy must be competitive with other mass retailers that have gained market share in the toy industry over the past several years.

* Merchandising. The retailer must focus more aggressively on attracting the pre-teen age group as it does with the younger kids. Perhaps expanding its assortments to this group, for example, could help retain its younger audience as they get older and expand its customer base. The retailer must also offer a broader and deeper selection in its core categories in order to enhance its position as a destination store

* Store format. The retailer needs to become less of a play room or product showcase for customers and drive sales, at least on impulse purchases. Barnes & Noble has always been challenged by this factor and has expanded sales with checkout merchandise as well as its venture with Starbucks.

* Focused expansion. The retailer needs to cluster its stores in major metro markets to streamline distribution, leverage local advertising and media and enhance its role in the communities.

Whatever Zany Brainy does in the future, it's still encouraging that in this volatile economy, with a retail market driven by mega-billion dollar players, an investment group has identified a small retail chain with potential.