KB Toys' end game

You know the economy stinks when a toy store goes bankrupt during the Christmas season.

I'm not really talking about a store so much as a big retailing company. KB Toys Inc., of Pittsfield, filed for Chapter 11 bankruptcy protection yesterday with plans to liquidate its retail operations. It follows more than a dozen other retail companies, including Linens 'n Things Inc., Circuit City Stores Inc., and Steven & Barry's LLC, that have filed for bankruptcy this year.

This is not the first trip to US Bankruptcy Court for KB Toys, but it appears to be the last. The company filed for Chapter 11 protection in 2004 and emerged with about half of the 1,200 stores it once operated.

Today, KB Toys runs 277 mall-based stores and 154 locations in strip malls and outlet centers, including 26 stores in Massachusetts. It employs about 11,000 people, including 6,500 temporary workers hired for the holiday season.

The company plan filed in court yesterday: Run liquidation sales to close out retail operations during the last two weeks of the holiday season and attempt to sell a wholesale subsidiary separately.

This season has been tough on all retailers, but toy sales are under particular pressure. It all started in early October, when Wal-Mart Stores Inc. announced plans to slash the price of selected toys to $10. Competitors were pressed to match Wal-Mart, and a dangerous cycle of price-cutting ensued.

Executives at KB Toys didn't call me back yesterday, but court documents suggest the company's business started to fall apart in October. Company controller Raymond Borst said KB Toys sales were very modestly ahead of last year's pace through Oct. 4. But he said same-store sales plunged by 19.77 percent between Oct. 4 and Monday of this week. That sudden reversal sent KB Toys into a financial crisis.

Borst blamed the steep sales decline on "macroeconomic forces," which is how a controller might say his company's customers were worried about money and didn't want to shop. That's about half right. I suspect customers did go shopping, but fears about those economic forces led to the kind of bruising retail competition Borst's company simply could not survive.

KB Toys began as a family-owned business in 1922. In 1981, it was sold to Melville Corp., which in turn sold the company to Consolidated Stores Corp. in 1996. Four years later, the company was acquired in a management-led buyout backed by Bain Capital funds.

By that time, KB Toys was trying to distinguish itself among toy stores as the value-oriented retailer. It didn't always have the hottest items or the latest toys, but the prices were lower. That wasn't a bad business strategy, until Wal-Mart decided to get much more serious about toys. Low-balling Wal-Mart quickly became a losing proposition.

"Wal-Mart didn't always play toys so strongly," says M. Eric Johnson, a Dartmouth College professor who follows the toy business. He said Wal-Mart began heavily discounting toys early this decade and achieved dramatic results. "They've just pummeled everyone else," Johnson says.

Soon, KB Toys was in Bankruptcy Court. The company emerged smaller and stronger in some respects, but KB Toys was no longer included in the elite group of companies that dominated the retail niche.

Retailers can make a living from the back of the pack when the economy is strong, and that's what KB Toys did. Harder times like these are another story. Ask the people who run Linens 'n Things or Circuit City.

All the toy competitors stepped up with promotions of their own when Wal-Mart initially cut prices two months ago. But Wal-Mart started discounting a much broader range of toys in November. Johnson says surveys of prices at KB Toys stores showed him well before the bankruptcy filing that the company was in trouble.

Some popular toys heavily discounted at Wal-Mart were being offered at much higher prices at KB Toys, he says. "I had a feeling at that point they weren't even trying to chase Wal-Mart," Johnson says. "The fact that they couldn't stay in there and compete was the writing on the wall."

To be fair, other retailers haven't matched Wal-Mart toy for toy and dollar for dollar, either. But all the other big toy retailers have other strengths besides low prices.

The real message of this holiday retail season: It's a terrible time to be working from the back of the pack.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.