December 26, 2000, 9:55 AM

All We Want For Christmas Is…To Sell Toys in July

The online toy sector has been hit hard in 2000: Major players such as Toysmart.com and RedRocket.com went out of business and companies that survived fired employees, suffered brain drain in crucial management ranks and just plain didn’t make money. Heading into the fourth quarter, online toy sellers are hanging high hopes on profits from holiday shopping as well as hoping to prove that they can do things better than last year, when some retailers ran out of merchandise and experienced major shipping delays that have cost them customers.

But Christmas cheer may not be enough to keep these vulnerable sites in business. Like the song that wishes it were Christmas all year round, market observers say online toy retailers must find a way to sell throughout the year. To achieve year-round sales, dot-com toy sellers are focusing on seasons other than Christmas, deepening their customer relationships with loyalty programs, and playing niche markets. “Online toys is a category that relies on getting huge percentages of sales in the fourth quarter and that creates all kinds of problems,” says Seema Willams, analyst at Forrester Research. “The dot-coms should be thinking of how to stock the hot toys for longer as well as adding fulfillment capabilities and customer service people to handle the increased traffic.”

Improving on last year’s mistakes is paramount to success in the 2000 toy-selling season. The merchants say that means getting back to basics: Are there fulfillment problems? Is the site working? How is the customer service? And now to turn up the competitive heat, Amazon.com and Toys R Us last month entered a 10-year deal by which Amazon will run Toysrus.com (see If you can’t beat ’em, join ’em, p.6).

A major move for most online toy retailers is to gear up for Q4 by expanding warehouse capabilities. “The biggest thing we have spent most of 2000 on has been fulfillment,” says Michael Wagner, chief operating office of KBkids.com. “Dot-coms realize that if your fulfillment process doesn’t work you have major customer service problems.” Denver-based KBkids.com, a division of KB Toys Inc., opened a fulfillment center in Danville, Ky., in late summer. It’s a huge investment-$15 million to $20 million-but an important one for online players.

Newcomer Bluelight.com, owned by K mart Corp., is taking fulfillment and shipping into its own hands by assigning Bluelight employees to manage the process at the Memphis-based Submitorder.com warehouse.

Educational online toy retailer SmarterKids.com opened a warehouse in Mansfield, Mass., in early June to help with the holiday rush. Last year SmarterKids.com hired a distribution house to ship orders; the company brought the operations in house to keep more control over the process. All the executives help out packing and shipping when necessary, says Al Noyes, executive vice president.

A stress test

With its five years of experience in online fulfillment, Amazon.com has spent a lot of time on the logistical infrastructure and operating systems, says Jorrit Van der Meulen, merchandising manager for Amazon.com’s toy division. That expertise helped Amazon clinch the Toys R Us deal. Amazon.com is geared up for the holidays with six U.S. distribution centers, all of which will be operating more than a year by the 2000 holiday season.

On the customer service side, most online toy retailers are upgrading site capabilities. KBkids.com is installing custom software packages that combine customer information on one database so customer service reps have everything they need to answer questions. To help with holiday traffic, the company also is instituting more automatic messaging capabilities to tell consumers immediately if there are problems, such as delays, with their orders.

Being able to handle the large surge in traffic during the holiday season is another area some toy retailers are looking to improve on from last year’s performance. KBkids.com this summer moved its site hosting from California to Denver to get the necessary bandwidth to handle orders from Internet servers all over the country, which was not previously available in KBkids.com’s headquarter city. Having the site in Denver also saves the company money because its tech support team is there.

Wagner says KBkids.com will perform a stress test on the relocated site’s ability to handle volume, which he says is 30-50% higher during the fourth quarter. SmarterKids.com also enhanced its web site capacity to handle more traffic and reduce delays by making a number of improvements, including adding processors to existing machines, redesigning its databases to accelerate transaction activity and increase transaction capacity and adding edge caching to deliver frequently requested site content without accessing the web servers.

Once the basic web specifications are in place, retailers can focus on the crux of Q4-selling toys. That is not as easy as it sounds for online merchants because online sales still are a small percentage of overall toy sales. As a result, some online retailers don’t have the muscle with suppliers that real-world retailers have. Thus, last year, for example, many sites did not have enough Pokemon stock to keep up with demand.

When it comes to stocking the hottest toys, offline toy retailers that are also online have an edge over pure-plays because they can sell enough product in both channels to get the attention of manufacturers. JCPenney.com, leveraging its offline toy connections, plans to have more than 1,000 products in the online toy department by the holiday season. Apart from carrying the entire toy selection from J.C. Penney’s catalog, JCPenney.com will continually add products during Q4 And JCPenney.com will be working with Nintendo and Sega to highlight the season’s hottest interactive and video games.

The new supersite combination of Toysrus.com. and Amazon.com clearly will be an inventory force to be reckoned with, as Toys R Us is one of the largest offline toy retailers and is known for stocking all the hottest toys all the time.

Beyond Q4

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