NEW YORK (CNN/Money) - For Diana Nelson, the holiday season has been brutal.

Nelson, who owns Kazoo Toys, a toy store in Denver, said sales were down 6 percent for the year heading into the last-minute Christmas rush compared with last year. Customers are cautious, given the still sluggish economy. But there's another, bigger factor at work.

For Nelson and other independent toy retailers, making a living selling toys has become tougher in a world dominated by discount chains. "I feel like we're having to fight for every dollar" this season, Nelson said.

That's why they are focusing on upscale specialized toys and offering gobs of customer service, hoping to carve a niche for themselves.

Discount chains have been steadily stealing market share from specialty chains for at least a decade, but the shift has become even more pronounced given last year's recession and rising unemployment, which has made consumers much more conscious of price, industry analysts said.

The effects are particularly felt in the volatile toy business, which often depends on a hot trend to drive sales. Discount chains have become such a force in toys that for the first time in its 100-year history, the Toy Industry Association is holding two toy fairs this year, one just for discounters and mass-market retailers, and one for smaller stores, spokeswoman Shannon Eis said.

Mass merchants buy toys for the holiday season up to a year and a half in advance of Christmas, compared with specialty chains which typically buy just 10 months ahead of the season, which is the reason for separate shows this year. Eis said the decision to hold two shows this year came after a survey of what the big stores needed.

The stepped-up competition means more retailers fighting for a bigger piece of a fairly static pie. Toy sales grew just 1 percent last year, in large part because there was no one hot toy that got buyers excited, Eis said.

Since the economy turned sour in 2000, discount chains have become even more popular as consumers, worried about job security, have sought lower prices on everything from toothpaste to toys.

In 1996, discount chains accounted for 40.7 percent of total toy sales, according to market research firm NPD Group. In 2000, the latest period for which figures are available, discounters have 41.8 percent of the retail market for toys.

Meanwhile, independent toy shops took in $4.30 of each $100 of toys sold in this country in 1996, but that fell to $3.40 in 2000.

"This is not the day and age for high-priced toys. Who really knows what a kid wants?," said Kurt Barnard, president of Barnard's Retail Consulting Group. "The issue basically is pure price. So the consumer thinks why not go to Wal-Mart, or Target or Kmart or any of those to buy toys?"

Wal-Mart, the world's biggest retailer, has also become the world's biggest toy seller. And other discount chains like Target and Kmart sell a broad assortment of toys.

"The customers who would normally come in and spend between $1,000 and $1,500, are now spending $200," said Nelson of Kazoo Toys. "They're coming in with a budget this year and that's never really happened before."

Nelson, like other independents, is finding other ways to survive. She doesn't sell many popular low-profit items like dancing Elmo or Barbie dolls since practically every mass-market retailer in the country carries them. Instead, she focuses on more profitable educational toys that the big chains disregard or stock only in minimal quantities.

For instance, she sells a $37 bucket that holds a wide variety of 15 plastic vehicles, and a set of Phonics Tiles for $85. But watching prices has also become important, so Nelson offers lower-priced items such as $18 Erector Sets and an $8.99 Playmobil Alien Hovercraft.

She is focusing on expanding her Web site, which accounts for 15 percent of her total sales, with customers overseas a key part of that effort.

Ana Cohen has found herself in a similar situation. She has had to become more creative at her Montclair, N.J., store, Toys in the Attic, over the last five years.

"The discounters have siphoned away a certain amount of business. That's a fact of life," Cohen said. "I personally don't feel it's doom and gloom. I've been in business for 18 years and you have to adjust to a whole lot of things."

Cohen said this year has been good for her store despite the tough economy, in part because after Sept. 11 people were looking for "comfort items," including old-fashioned specialty toys. But this year, the shorter holiday shopping season, due to shift in the calendar, has been a challenge.

Special discounts have periodically boosted sales, Cohen said, and the Web has also been a new source of revenue. One basic marketing tactic that's helped: e-mailing customers to tell them of local children's events, and to offer coupons for discounts.

Meanwhile, Jennifer Pope, owner of The Red Balloon in Chicago, said she boosted sales more than 40 percent from a year ago, but she had to expand her product line to include books, clothing, toy chests and other items.

She offers the free gift wrapping, will ship anywhere, and specializes in toys not usually found in mainstream stores. In addition, Pope sells "nothing that requires batteries."

But still, the tough economy and stiff competition from discounters have prompted her to keep a keen eye on price.

"If you come into our store it's a boutique-y feel, but you can still find things that are not expensive," she said, adding there always at least a few items under $10.