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Mega Brands challenged as Wal-Mart trims toy shelf

Mega Brands Inc. is facing yet another unwelcome headache as one of its largest customers, Wal-Mart , is cutting shelf space for toys by half in hundreds of U.S. stores to focus on products with higher volumes and margins.

The test stores will also see the world's largest retailer phase out the sale of fabrics and reduce the breadth of craft products.

The change will affect all toy companies, but industry analyst Lutz Muller said it could represent a big long-term blow to the struggling Montreal-based Mega Brands, which he figures has lost at least half of its shelf space in the top three retailers over the last 12 to 18 months.

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Mr. Muller said he expects Mega Brands - which makes interlocking building bricks, magnetic toys and craft-based products - will lose half, if not all, of its remaining shelf space at Wal-Mart as the retailers focuses on the top sellers and very strong brands.

"It's a big blow for everybody, including Mattel and Hasbro in the short-term, but in the long-term it's a much bigger blow for the small guys who have been hanging on to Wal-Mart at the edge of their teeth," Mr. Muller of the Klosters Trading Corp. said in an interview.

But New York-based toy analyst known as The Toy Guy said Wal-Mart's move won't necessarily be doom and gloom for the toy business since the product can be ordered online and shelf space may expand during the key holiday rush period.

As Wal-Mart focuses on high-volume, decent margin promotional toys, manufacturers will look to opportunities at Toys R Us, which typically has broader selections, said Chris Byrne.

"I don't believe that it's going to critical to Mega Brands at all."

Wal-Mart officials couldn't be immediately reached for comment.

Mega Brands spokesman Harold Chizick wouldn't specifically discuss its sales with Wal-Mart, but said "things will balance out within the industry."

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"The industry has been aware of this for about six months and most companies have adjusted accordingly," he said, adding that all retailers support strong brands that attract customers.

Mega Brands shares were unchanged at 37 cents in Tuesday trading on the Toronto Stock Exchange.

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