Zany Brainy, Inc.

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Zany Brainy, Inc.

2520 Renaissance Boulevard
King of Prussia, Pennsylvania 19406
U.S.A.
Telephone: (610) 278-7800
Fax: (608) 849-3614
Web site: http://www.zanybrainy.com

Public Company
Founded: 1991
Employees: 2,000
Sales: $168.5 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: ZANY
NAIC: 45112 Hobby, Toy, and Game Stores

Zany Brainy, Inc., is the first educational multimedia superstore for children. Zany Brainy’s 100-plus stores in 26 states are stocked with over 20,000 educational toys such as science kits, puzzles, and learning games. Using the slogan “a zillion neat things for kids,” Zany Brainy markets toys that are nontoxic, nonviolent, multicultural, and gender-neutral. The company designs its stores to be as much fun as the toys within them. Each store has brightly colored walls; plush carpeting; aisles large enough for kids, adults, and strollers; comfortable, kid-sized couches; and a video theater. Each of the toys in a Zany Brainy store is on display, so parents and children can try it out before they buy it. Specially trained “kidsultants” enthusiastically help customers. Stores are divided into areas with different themes, such as “Bright Star” and “Let’s Pretend.” The company is dedicated to developing positive relationships with the communities in which its stores are located. Zany Brainy donates a portion of the proceeds from each new store’s grand opening to a local charity, such as a zoo or science center. At 10,000 square feet, Zany Brainy stores are much smaller than toy superstores such as Toys ’R Us. Most Zany Brainy stores are located in strip malls in the Northeast, Southeast, Midwest, and California. Zany Brainy founder David Schlessinger owns approximately four percent of the company.

A Brainy Idea

When he was only 18, David Schlessinger purchased a bookstore in downtown Philadelphia. He paid for the store with money he had saved from summer jobs and gifts and had borrowed from his younger brother and sister. Schlessinger called the store Encore Books. In just a few years, Encore books became one of the largest retail bookstore chains in the United States. Eventually, however, Schlessinger grew tired of the bookstore business and wanted to pursue other interests, including starting a family. In 1984 Schlessinger sold a controlling stake in Encore Books to Rite Aid; in 1986, he sold his remaining shares and left the company entirely.

After his departure from Encore, the 31-year-old Schlessinger spent a lot of time with his nieces and nephews. Schlessinger became frustrated when he tried to buy creative, fun toys from which they could learn. He found that most creative toys were only available through mail order catalogs or were sold in cramped stores with small selections, poor service, and high prices. Schlessinger researched the educational toy market, but couldn’t find any chains that specialized in the kind of toys he thought were good for kids.

Schlessinger envisioned a toy store that sold high-quality, safe, educational toys at affordable prices, which was also attractive, cleverly stocked, and “kid friendly” with knowledgeable and friendly sales associates. In late 1991 Schlessinger launched Zany Brainy, Inc., the first store of this kind, under the parent company Children’s Concept.

The First Zany Brainy, 1991

The first Zany Brainy store, located in Wynnewood, Pennsylvania, a suburb of Philadelphia, opened its doors just two days after the birth of Schlessinger’s son on December 1, 1991. The store was 6,000 square feet and stocked with more than 15,000 toys, including wood knob puzzles that teach letters, numbers, and geography, telescopes, globes, and archeological tools. All of the toys in the store were on display so children could play with them. Kids could watch videos in the Zany Showtime Theater and play computer games on kiosks in the store. Sales associates called “kidsultants” answered parents’ questions. Zany Brainy scheduled special events and programs such as book signings, miniconcerts, and software demonstrations. The store became actively involved in the community. It donated a portion of its opening day sales to the Columbus Zoo’s 1996 Zoo Fund and invited the zoo officials, local theater groups, and museum officials to give presentations at the store.

The first Zany Brainy was a great success. By 1993, the company had opened a second store in Wynnewood. By 1994, it had expanded outside of the Philadelphia area and opened stores in Atlanta, New York City, and Washington, D.C. Zany Brainy had 32 stores by 1995.

Tough Competition in the Mid-1990s

Zany Brainy’s success generated some tough competition. Stores similar to Zany Brainy were opened, such as the New York-based Noodle Kidoodle. Right Start and Sesame Street opened retail outlets in the King of Prussia mall, which was only miles from the company’s Wynnewood headquarters. Large toy superstores, such as Toys ’R Us, Inc., created departments similar to Zany Brainy’s stores. In 1994 Toys ’R Us tested educational software in five of its Philadelphia-area stores, and then greatly increased the number of software titles and educational products in all of its stores.

Retail toy stores were also engaged in a price war that made competing even more difficult. Many retailers that were either emerging from Chapter 11 bankruptcy or trying to avoid it launched discount and going-out-of-business sales and cut prices far below average. Like many toy stores, Zany Brainy was losing money.

In an effort to get the company back on track, Schlessinger hired a new senior management team. He hoped his management team would handle Zainy Brainy’s day-to-day operations, so he could focus on the company’s future growth. Howard Ross, a partner in the company’s accounting firm, commented on Schlessinger’s decision in the Philadelphia Business Journal. “While people may try to copy the concept, I take comfort in the fact that David is working on the second or third version of Zany Brainy while every one else is trying to figure out the first,” he said.

In 1996 Schlessinger hired Keith C. Spurgeon as CEO. Spurgeon had a strong background in retail. Most recently he had served as Toys ’R Us vice-president for Asia and Australia. The company believed expansion was the key to future success. In 1997 Zany Brainy opened nine more stores, including its first West Coast stores, in Thousand Oaks, Torrance, and San Diego, California. During its rapid expansion, the company took care to promote from within: two regional managers and all district managers were former kidsultants, and many Zany Brainy customers were hired as kidsultants. “They love the Zany Brainy experience as shoppers, so it is easy for them to transition into a sales role,” Surgeon explained. “I know of no other retail company that is as mission-driven as ours. We really strive to maintain our position as the expert resource for our customers. Our kidsultants build trusting relationships with customers through their credibility. They can talk confidently to customers of any age.”

Zany Brainy also tried to maintain its competitive edge in a number of other ways. The company added a limited assortment of its own branded products to the toys already offered in its stores. Zany Brainy’s products included chess and checker sets and a new cooking category with recipes and basic cooking implements. With the cooking category, children could prepare dishes such as holiday candy, fudge, pasta, and pizza. The store maintained its specialized advertising, which was almost all direct mail. Issues of “Zany Zone” were distributed to customers monthly, and the company published a 52-page holiday gift guide. Some Zany Brainy items were also sold on QVC.

Despite its struggles, Zany Brainy was recognized for its contributions to the retail toy industry. Its many honors included the 1998 Independent Retailer of the Year award from the National Retail Federation and the 1998 First Award for Store Promotion from Playthings Magazine. In 1998 Spurgeon replaced Schlessinger as chairman of the company. That summer Schlessinger resigned from Zany Brainy’s board of directors to spend more time with his family.

Going Public in 1999

To pay off its debt and raise money for expansion, Zany Brainy went public in June 1999, under the symbol ZANY on the NASDAQ exchange. The company sold a total of 6.1 million shares at $10 per share to raise approximately $34 million. Schlessinger sold 1.2 million of his own shares during the IPO and decided to remain with the company only as an investor. During the same year, Zany Brainy relocated its headquarters from Wynnewood to King of Prussia, Pennsylvania, and opened a new distribution center. The company also changed the name of its parent company from Children Concepts to Zany Brainy, Inc.

Company Perspectives:

Zany Brainy, Inc., provides the best merchandise for children at the right price. We seek interactive products that encourage a sense of wonder and stimulate creativity. Our stores have everything kids need for creative play —with over 20,000 books, toys, electronic learning games, creative crafts, science kits, software and teacher resources. It’s a kind of “kid-rific” collection of the most innovative and exciting children’s products on the market today, including many items not found anywhere else. We are also committed to developing and maintaining strong relationships with the local communities our stores serve. We regularly invite local theaters, museums, and other cultural groups to host in-store events.

Zany Brainy opened its 100th store on September 24, 1999, in Bridgewater, New Jersey. To celebrate the milestone, the company scheduled ten days of special events in each of its stores and raffled off a $10,000 U.S. savings bond to be used toward a college education. “Our 100th store opening provides us with a platform to reinforce our dedication to the development and education of children,” Spurgeon said in Business Wire.

In October 1999, Zany Brainy announced a joint venture with the Vermont Teddy Bear Company. In an effort to combine the nation’s largest teddy bear manufacturer and Zany Brainy’s interactive philosophy, the two companies designed a “Make-a-Friend-for-Life” kiosk and set it up in a Zany Brainy store in Marlton, New Jersey. Using the kiosk, called the “Huf-fin’ Puffin’ machine,” customers selected a “fat free” teddy bear and everything they needed to assemble the bear, including its outfits and accessories. For about $20, a customer could assemble his or her own personal bear onsite in about twenty minutes. A “certified official” recorded the bear’s time of birth on a birth certificate.

Around the same time, Zany Brainy launched its web site, www.zanybrainy.com. The site was a joint venture between Zany Brainy and Online Retail Partners (ORP), a company that provided Zany Brainy with the marketing and technical expertise it needed to launch the site. The web site offered customers a large selection of high-quality toys similar to those found in Zany Brainy stores.

A Bright Future

In 1999 Zany Brainy planned to continue its aggressive expansion. “Every new store opening is a testament to our

commitment to bring Zany Brainy to children and adults in the community and give parents hands-on access to a unique merchandise assortment that combines learning, discovery, and fun,” Surgeon said in a company press release.

The company hoped to expand into new areas including Denver, Minneapolis, and Salt Lake City and strengthen its presence in the West Coast.

Principal Competitors

Barnes & Noble, Inc.; Borders Group, Inc.; CompUSA, Inc.; Consolidated Stores Corporation; eToys Inc.; FAO Schwarz; Noodle Kidoodle Inc.; Sears, Roebuck and Co.; SmarterKids .com Inc.; Target Stores, Inc.; Toys ’R Us, Inc.; Wal-Mart Stores, Inc.; World of Science, Inc.

Key Dates:

1991:: Founder David Schlessinger opens the first Zany Brainy store in Wynnewood, Pennsylvania.
1993:: Schlessinger opens a second store in Wynnewood.
1994:: The company expands outside of the Philadelphia area and into other states.
1996:: Schlessinger hires Keith C. Spurgeon as CEO.
1997:: Zany Brainy opens its first West Coast stores.
1999:: The company goes public and launches an e-commerce Web site.