Mired in a crippling recession and facing consumer spending fallout in light of recent tax hikes up to 56% of national income, German retailers are taking one of two tacks: they’re either hunkering down, slashing prices to bring people in and sticking with what works; or they’re getting creative and evolving their marketing style.

Last year was hardly a banner one – the German toy biz experienced close to a 5% loss in sales in 2002, and between 300 and 500 toy retailers are expected to close their doors in Q1 2003. ‘No one is shopping right now,’ says Marlies Rasl, managing director of MR Merchandising & Retail. ‘Retailers are trying to find creative solutions, but mostly they are simply cutting prices.’ At the end of the day, consumers are sticking to tried-and-true brands like Lego, Zapf and Playmobil, along with hot licenses such as Harry Potter and Lord of the Rings.

Given these realities, it’s understandable that retailers seem less willing to try out new merchandising strategies on products that could end up in a clearance bin. But that’s a self-fulfilling prophecy, according to Jan Verachter, managing director of elite licence, which reps properties like Teletubbies and Bananas in Pyjamas in Germany.

‘We did a check yesterday in a major toy store in Munich, and it’s scary to see that the only real licensed product they were promoting strongly was the new James Bond car,’ he says. ‘We always say it’s a disaster the way the retailer treats licensed products because people that are interested in it wouldn’t even find it in the shop.’

The stores that are sticking with the traditional category-by-category approach to merchandising are keeping a close eye on companies like Lego, which has been actively promoting brand merchandising for the past few years and currently runs 30 branded stores. The toyco opened the first in a series of über-brand stores in Cologne in October, and each outlet will feature large TV screens with product demos, bulk brick bins and events to mark new product launches. According to Lego COO Poul Plougmann, the company’s market surveys have shown that its share, currently sitting at 12%, is growing faster than most of its competitors, and Lego sales have also been steady.

HIT Germany GM Jill Hutchins says Toys ‘R’ Us, which controls 10% of the market, has borrowed from the playbook of its U.S. counterparts and does a good job at brand merchandising and in-store boutiques. But it’s a different story at other big-box stores. ‘Usually all the puzzles are together, all the Legos are somewhere else – it’s not merchandised by brand,’ says Hutchins.

And trying to get hypermarkets and department stores, which comprise 34% of Germany’s toy market, to cross-merchandise is difficult because the buyers are spread out between products – for example, a department chain like Karstadt or Kaufhof will have different buyers for clothes, publishing, videos, etc., and the products are also on different floors.

‘It takes a long time and a lot of argument to convince everybody that it has to be presented together,’ says Roger Balser, director of marketing for Hasbro Germany. ‘But the traders who do it are more successful than the others in terms of sell-through.’

With the German government attempting to breathe life into the markets by lifting restrictions on promos, the country’s retailers can now do much more in terms of giveaways, product add-ons and mail-in rebates. Because they were only allowed to be worth 3% of the product they promoted, premiums in Germany used to consist of 2-D paper-based figures. But now articulated 3-D figures or bundled products with a much higher play value are possible.

Hasbro is one player that jumped on the promotional wagon quickly, and gift-with-purchase and mail-in rebate offers have increased its sales by as much as 75% in puzzles and 50% in games. Sesame Workshop partnered with TRU in December on a two-phase promo for the 30th anniversary of Sesame Street that involved a Bert or Ernie commemorative Mattel plush gift with each US$150 purchase.

But most companies aren’t taking advantage of the relaxed promo regulations, says MR’s Rasl. Convincing the smaller independent retailers that comprise 40% of Germany’s toy sector to run a promotion when their floor space is limited to 50 or 100 square meters can be tough. But many stores benefit from the additional support from manufacturers, which provide promotional and display materials that add to a store’s aesthetic appeal. Hasbro’s sell-through increased by between 10% and 15% when it introduced in-store boutique promotions for Star Wars, Action Man and girls lifestyle brand bang on the door in TRU and some indie stores in 2002.

Hasbro’s Balser says the unique buying patterns of German kids also makes it difficult to use marketing templates that work in the rest of the world. German kids as young as three like construction toys, which comprise 12.5% of the German toy market as opposed to a 5% share in the U.S. At 15%, games are also more popular than in the U.S. (10%), as are educational toys – notably for preschoolers. The boys action market is narrow at 1.6 % (compared to 6.5% in the U.S.) because German parents shun violent and war-related toys.