| NEW YORK
NEW YORK Barnes & Noble Inc (BKS.N) has begun testing large "store-in-store" toy boutiques at a handful of its locations, looking to make use of shelf space freed up by declining book sales.
In the last week, the largest U.S. bookstore chain has opened 3,000-square-foot play areas with educational toys and games at five stores in New York, New Jersey and Connecticut on a trial basis, with plans to open more if the boutiques prove successful during the upcoming holiday season.
"It could be huge for us," Chief Executive William Lynch told Reuters in an interview, though he declined to say how large a share of sales toys and games could eventually be.
Barnes & Noble has faced years of falling book sales as readers have migrated to digital formats.
The chain has addressed that partly with the launch of its Nook e-reader last year, which Forrester Research estimates is now the second best selling e-reader after Amazon.com's (AMZN.O) Kindle.
But the company, which operates about 720 stores, has said it has no plans to significantly reduce its store count and instead intends to repurpose much of its floor space for Nook demonstration areas and more toys and games for kids.
"On the margins, this is something that can drive traffic, and probably targets more affluent customers that have more disposable income for the holidays," said Morningstar analyst Pete Wahlstrom.
Wahlstrom said it was conceivable that toys and games could eventually account for 10 percent or so of overall sales, though he does not believe it is a panacea for Barnes & Noble's challenges.
Barnes & Noble put itself up for sale in August and in September fended off a proxy fight waged by dissident investor Ron Burkle.
Barnes & Noble has always been a popular spot for parents seeking a space to entertain their kids and Lynch said the company was trying to capitalize on that.
The retailer already has children's sections in its stores, but the boutiques are far larger, feature their own signage and are organized in five sections according to the goal of the toys, such as building, learning and playing areas.
It is also broadening its array of items at its children's department at 500 stores for the 2010 holiday season.
NOT TAKING ON TOYS R US
Barnes & Noble has decided to largely eschew standard toys such as action figures, understanding how difficult it would be to go up against heavy hitters such as Amazon and Wal-Mart Stores Inc (WMT.N).
"We're not trying to create Toys R Us," Lynch said.
Instead, the boutiques will prominently feature Lego toys and specialty toys such as trailer sets by Automoblox, with a focus on items that foster kids' development.
"Everything in here has an educational element to it," said Marnie Lawrence, the chain's director of educational toys and games, as she gave Reuters a tour of a boutique in the Bronx, New York, which was launched on Monday.
The bookseller is working with Lego on possible exclusive toys down the line and is the only U.S. retailer to carry some items such as the British "Me to You" line of plush dolls.
The boutiques and the expanded selection follow its launch in October of a digital collection of more than 12,000 books on its nookkids Website to draw young readers.
Lynch said he will gauge the success of the boutiques based on how much shopper traffic they generate, and ultimately, sales.
"We think we should be the largest seller of educational toys and games in the U.S.," Lynch said.
(Reporting by Phil Wahba; Editing by Bernard Orr)