Rebuilding an icon: FAO Schwarz

FAO Schwarz, arguably the most well-known toy store in the world, even before the giant keyboard scene with Tom Hanks and Robert Loggia in “Big,” celebrates its 145th anniversary this year.

The retail icon has weathered two bankruptcies and now, under the leadership of CEO Ed Schmults, seems to be back on track and ready to pick up the mantle of its rich heritage.

FAO Schwarz started in Baltimore in 1863 as small family toy shop just six years after Frederick August Otto (FAO) Schwarz and his brothers Henry, Gustavus and Richard emigrated from Westphalia, Germany. The brothers specialized in hard-to-find German toys and sold them there until 1870.

Henry kept the store in Baltimore, Gustavus opened in Philadelphia, Richard opened in Chicago (and later moved to Boston after the Great Chicago Fire) and Frederick August Otto opened in New York.

The New York store changed locations through the years before ending up at its current location at Fifth Avenue and 58th Street in 1986.

The Schwarz family was highly regarded, both for its philanthropy and its retail milestones. FAO Schwarz published the nation’s first toy catalog in 1878 and Henry was the first retailer to have a live Santa Claus in his store. By the early 1900s, the brothers were singled out as pioneers of the toy trade by Playthings magazine, a sister publication of Kids Today. Thirty-four years after opening in New York, FAO Schwarz had the largest toy store in America.

The retailer’s first Web site was unveiled in 1995, www.fao.com, and a year later it began selling products on the Internet. In 1997 it opened its Las Vegas store at the Forum Shops at Caesar’s Palace.

The retailer grew to about 40 stores throughout the country and drifted into mall locations. In 2001, The Right Start Company bought 22 of the stores and closed the rest. Right Start filed for bankruptcy in 2002, emerged from it in April 2003 and re-entered in December 2003.

In July 2004, D.E. Shaw & Co., an investment and technology development company, bought the New York and Las Vegas stores and the catalog/Internet business for a reported $41 million, bringing them out of bankruptcy. The stores were shuttered for months for remodeling and reopened that November.

At the time, analysts said the way to rebuild the FAO brand was to get back to its roots, stop competing with mass merchants on price and number of stores, and make the two remaining locations the experiential shopping destinations FAO was originally known for.

Ed Schmults is doing just that. He was appointed CEO in 2005 and given the challenge of rebuilding the iconic brand. He brought more than 20 years of experience in multi-channel retailing and finance to the table.

He was the COO at RedEnvelope, a luxury catalog/Internet retailer when the opportunity presented itself and before that he led an international project team for an Italian Web-based high-fashion retailer, was president of a software company, and worked for both Patagonia and Moonstone Mountain Equipment. He started his career in investment banking at Goldman, Sachs & Co.

“Life was good and a headhunter called and said here’s this opportunity,” Schmults said. “And I thought, wow, what a great brand.”

Schmults’ previous professional experience has come in handy and by all accounts FAO Schwarz is thriving. Sales are “north of $60 million” and business in the New York store is up 19%; Las Vegas is up 5% and the Internet/catalog is up 9%.

“Working at Goldman Sachs right out of college taught me the focus should be on quality and teamwork; it’s not about the individual,” he said. “At Patagonia, it was all about quality, functionality and helping the environment. That taught me that a brand doesn’t need to be about 10 things but rather one to three things.”

Schmults says that reassessing FAO Schwarz’s core values — quality, creativity, trust and joy — has been the key.

There was a time when the stores were known for their extravagant items — like the $150,000 giant keyboard or $15,000 giant stuffed animals — and while there are still some of those products, Schmults said that’s not what the store is about anymore.

“Fundamentally, the power of this brand brings families in,” he said. “We do want them to buy but we want to wrap their experience up in a warm feeling. We now carry a lot less of the expensive items we were once known for and really have a lot of quality, safe, imaginative products that are affordable but not all found in mass retail stores.”

Schmults also is turning the business around with key partnerships. Within the store there are boutiques, like Maclaren, Silver Cross, Skip Hop and Zutano as well as a Harry Potter Shop, Newborn Adoption Center featuring Lee Middleton original dolls, a LEGO shop, FAO Baby and more. The boutique idea started three years ago when the company was reformed.

“Partnerships are very attractive,” Schmults said. “We can’t take our eye off our base business, it’s the golden goose that’s laying these eggs, but these shops within our store are proving successful. The shops are a significant part of the business.”

The companies with boutiques in FAO pay a portion of their sales and have to meet agreed upon sales goals. FAO approves the design and the company does the build out. It’s a win-win situation as each brand draws from its core consumer and enjoys the benefits of cross marketing and merchandising. The shops enjoy access to the 4 million people a year who walk through the doors of the New York store and FAO has another way to update the store to keep it looking fresh.

Another fruitful partnership is with Macy’s. In October 2007, FAO Schwarz opened a 5,500 square foot store inside Macy’s Chicago store. Before the shop opened, the retailers agreed that after the holidays the FAO space would be scaled back, but Schmults said it was so successful for both that they’re keeping the space and there are talks about expanding the relationship.

Schmults also diversified the company with the purchase of Best & Co., an upscale retailer and manufacturer of luxury children’s apparel and accessories. Best & Co. was founded in 1879 and was itself a shopping destination until it closed in 1971. In 1997, Susie Hilfiger bought an existing boutique in Greenwich, Conn., and renamed it Best & Co. The retailer returned to New York in 2001 with a boutique in Bergdorf Goodman.

“The acquisition is a strategic addition to the FAO Schwarz portfolio,” he said. “It will further transform us into a lifestyle brand. Both companies are known for classic products with a modern twist.”

The companies share resources on the back end and Schmults looks to expand the Best & Co. brand’s distribution as well as emphasize its catalog and Web site. Select items from FAO Schwarz’s private label toy collection are sold in Best & Co.’s Greenwich store.

Moving forward, Schmults’ goals are to expand the relationships he and his team have forged, grow the ecommerce business and increase the FAO brand of toys. He says there are currently about 300 products in development now and a number of those are eco-friendly products, a category he hopes to expand.

“We’re still working on getting back to what the brand is all about, what we want it to be and making sure those things are aligned,” Schmults said.

FAO Schwarz was fortunate last year during the onslaught of toy recalls, Schmults said, and wasn’t greatly impacted. It did carry some brands that were recalled, but overall it fared well. He says the store is focused more on smaller vendors that mirror the store’s ideas of quality and safety.

The retailer’s buyers shop the Nurnberg and New York toy fairs and it develops its private label toys and it also holds toy auditions four times a year. During these auditions inventors are invited to show their toys. Typically about 30 to 50 people show products ranging from fully developed toys, plush or games to concepts. One exclusive FAO line, Dog Park Plush by Derek Rippe, is an example of a concept that came through the auditions.

And, while one would think the CEO of a multi-million dollar company is secluded away in an office strategizing, Schmults spends a lot of time in the stores, particularly during the holidays.

“You learn so much about how the store is performing by being on the floor,” he said. “What’s working and what’s not.”

Private label products help build the FAO Schwarz brand.

More than 4 million people visit the N.Y. store each year.

Boutiques, like Maclaren’s, are an important part of FAO’s business.

The Middleton Doll nursery is one of many vignettes that makes FAO Schwarz an interactive shopping destination.