Cornering the market on specialty toys. (Power Retailer FAO Inc.).(Company Profile)

While most retailers look back despondently on 2001, The Right Start ceo Jerry Welch sees it as the year of opportunity. This ambitious toy visionary had his eyes fixed on specialty toy retailers Zany Brainy and FAO Schwarz for quite some time before the start of the year, and he knew that together with The Right Start these three players would create a formidable specialty toy empire. For his final act of the year, Welch realized this vision with the formation of FAO Inc., the corporate holding company of the three divisions: The Right Start, Zany Brainy and FAO Schwarz.

Both Zany Brainy and FAO Schwarz were struggling and in need of a financial bailout. In May, the 187-store chain Zany Brainy filed for Chapter 11 just 10 months after it merged with competitor Noodle Kidoodle, blaming soft sales and a dearth of hot toy product. FAO Inc., then The Right Start, stepped in to acquire the fledging chain.

Zany Brainy was a trailblazer in the early 1990s, carving out the educational toy niche and bringing it to the masses. But the retailer got too comfortable and soon cost structure became a problem, said Welch. "American retailing is a contact sport. It's brutal," he added.

Zany Brainy's initial success attracted the attention of retail behemoths. And by the start of the millennium, big-box retailers such as Wal-Mart and Toys "R" Us had cozied up to the idea of educational toys and …