Day two of the Strategy & Innovation Forum kicked off with a general session by FAO Schwarz CEO Ed Schmults. Ed talked about the challenge of expanding their reach, while protecting their brand.

FAO has been around since 1862. There were two recent bankruptcies in 2002 and 2003. However their direct-to-consumer business is growing. Their retail locations are in New York City and Las Vegas. With their brand equity they are looking to expand their private label toys.

FAO has some brand perception issues. They're perceived as expensive. The store is sometimes seen as a museum or a tourist site. Other issues: Net relevant to today's kids, it's all about the New York store, just for the holidays.

The plan was to repurpose the brand. This started with the merchandising strategy. They wanted to target items that had: Quality, Design Integrity, Orginality, Health/Safety.

With this change they removed hundreds or brands and vendors. Shortly afterward same-store sales rose 20%. Other than Thomas the Tank engine, FAO did not carry a single recalled toy. That's part of their focus, safety and quality.

Their product mix is very selective. There are more private label products and exclusives. The brand repositioning has allowed FAO Schwarz to stand out among children's retailers once again. This change has led Hollywood to their door. Movie studios look to FAO for exclusives for movie-related toys (think Charlotte's Web, Harry Potter, etc).

Their research has shown that FAO is strongly associated with quality. They also had a very high net-promoter score. FAQ has brand recognition similar to large global luxury brands. There is also high affinity within children.

Research showed that FAO is seen as the expert in child development. At first it's kind of scary, but now they're looking to really embrace that. FAO is working with an advisory board to help build that development arm. Ed was sure to mention that their advisory board was a real board of experts, and not a pretend board like some others.

The key questions are: How do they appropriately participate in the parenting community? Who is our audience? Women are a key customer segment. "Women don't just buy brands, they join them?"

Ed noted that they passed on WebKinz. They had a first look at the product, but they felt the quality of the plush was not that great. But that's not what the toy was meant to be. With that

FAO is leveraging their brand by working consignment deals. Vendors pay for the build-out, repay staff costs and FAO only pays for inventory sold. Ed noted that he has brands lined up for these deals. For FAO it's great, they can constantly update/upgrade their stores with no capital outlay.

Recent external capital investments did not focus on IT or infrastructure. Moving forward, one of the key focusses is updating the infrastructure.

With the brand repositioned, FAO is building new revenue channels. They include clothing, health & wellness as well as publishing.

Looking beyond the storefront (Catalogue and Internet) there are things they need to improve on. Their site was boring and not up to date and it doesn't match the excitement of he store experience. They're looking to replicate the in-store experience as much as they can.

Retail expansion has been spearheaded by their Macy's in-store presence. The Chicago Macy's story is performing way beyond expectations.

The next phase is licensing. They're working to license the FAO name to media properties, etc. Internally they're developing a brand book. The brand books sets internal and external expectations.

For Ed, one of the things that drew him to FAO was the ownership. They're owned by a hedge fund. Ed asked the audience, "How many of you are owned by private equity firms?" A few hands went up....Ed's response, "Just you wait, it's coming."

Ed described the relationship he has with the owners, it's not unlike a traditional board. There is a need for constant communication. You need to know are they investors or operators? Investors are starting to think like brands. They want to be seen as innovators.

However, owners will always look to extract brand value. You need to watch this since it can lead you astray.

The key challenges of working with owners:
- Want it all, want it now
- Push for every opportunity
- Challenge convention
- Uncomfortable pressure
- How much do you shield your team?
- Must be comfortable working with senior people
- Expectations of success
- Fear

Lessons learned:
- Great brands are much more rugged than most people think.
- FAO's key asset is its brand. We need to honor our heritage, but keep relevant.
- Chart a path that has a chance to succeed.
- Know your customer.
- All innovation must pass the brand filter.
- Private equity ownership has been a huge plus for FAO Schwarz.