Dive Brief:

• Party City is the latest national retailer to jump into the toy game, with an announcement this week that it is piloting around 50 pop-up toy stores this year at its Halloween City locations.
• Dubbed Toy City, the pop-ups through early November will take up about a third of the stores, which run on average at around 12,000 square feet, with Halloween City products taking up the rest of the space, a Party City spokesperson told Retail Dive in an email. After early November, the stores will transition mostly to toys. The stores will carry products from major toy makers, including Hasbro, Mattel, Spin Master and others, the spokesperson said. Categories include action figures, dolls, construction toys, crafts, puzzles and board games.
• The spokesperson said that the company does not expect the 50 toy pop-ups "to have a material impact on the business" but added: "This year is really about testing, evaluating and assessing Toy City in a controlled and strategic way. We will recalibrate our strategy as necessary moving forward based on what we learn through the initial pilot."

Dive Insight:

With Toys R Us potentially facing retail oblivion, after years of underinvestment and decline, both competitors and newcomers have been piling into the category in an effort to grab a slice of the failed toy seller's $1.3 billion in U.S. sales.

Party City might be uniquely positioned to pick up some toy sales as Toys R Us winds down. The retailer's customers share close demographic similarities to those of Toys R Us, including location, age, incomes (a little over $60,000 in both cases), education and ethnicity, according to data from mobile location data and analytics company UberMedia emailed to Retail Dive.

Party City has managed to keep growing its earnings and hold onto more than $2 billion in sales every year. The retailer has done so even through a period of retail upheaval and competition from mass merchants, dollar stores, craft stores like Michaels and Hobby Lobby, other party stores and — of course — Amazon. Key to Party City's expanding profits and low prices is its vertical integration. Not just a retailer, the company says it is "one of the largest global designers, manufacturers and distributors of decorated party supplies."

In the case of toys, the retailer is working with outside vendors. A spokesperson told Retail Dive, "As we deepen our understanding in the category and assess learnings from the pilot, we may, over time, explore potential sourcing opportunities for certain sub-categories, but that is not the core objective of this pilot."

Party City will have plenty of competition in the category from other retailers. Walmart, Target, Kohl's, J.C. Penney and others all plan to expand their toy offerings this year to cash in on the holidays and the collapse of Toys R Us, which had been losing share to mass merchants and Amazon for years before getting crushed by competition last holiday period, a terrible performance that helped seal its fate in bankruptcy.

Another potential competitor in the toy space is Toys R Us itself. While the retailer goes through the process of complete liquidation in the U.S., there is reportedly still an effort by former CEO Jerry Storch and the buyer of the retailer's Canadian unit to revive the chain and keep alive potentially hundreds of stores in the U.S. An auction for Toys R Us' IP in August will likely determine the ultimate fate of the retailer after its disastrous run in bankruptcy.