December 26, 2000, 9:55 AM

Candyland it isn`t

The nature of the toy retailing beast-asphyxiating margins, expensive shipping and fulfillment operations and seasonal sales, as well as competition from giant names such as Amazon.com and eToys-is making the online toy segment into a game of Survival instead of Candyland. Parent companies that did not have the same vision as their online divisions have buried some online toy sellers, while the impending expansion of such super retailers as Toys R Us and Wal-Mart has some investors putting their money behind the big names instead of the pure-plays, analysts say.

Shakeups have hit the industry hard: Disney shut down Toysmart.com, Viacom shut down its RedRocket.com site, KBKids.com fired its CEO and 30% of its staff, and others are facing Wall Street snubs, such as Smarterkids.com, whose stock dropped from $17 to about $1.50.

Liz Leonard, analyst at Gomez Advisors, says Viacom’s defunct RedRocket.com site, which sold limited merchandise from the Nickelodeon children’s television shows among other items, had to compete with larger retailers who sold the same items and more. Leonard notes that while Viacom had expertise in children’s mass media, that expertise did not translate to selling toys online in that Viacom did not fully back RedRocket with a robust site. Analysts also point to Viacom’s failed retailing efforts in general, as its brick and mortar stores that sold quirky but popular merchandise, such as Star Trek curios, did not fare well in the retail world.

The toy industry in general is known for slim margins on commodity products, where competitors offer the lowest price. Add free shipping and other attention-grabbing measures for online retailers, and eventually profits and investment money are siphoned off just to stay afloat.

Meanwhile, Disney’s decision to pull the plug on Toysmart.com reflects its plans to do more on entertainment and leisure than e-commerce. Leonard notes that Disney has not had much success overall with e-commerce, rather, focussing on online content to support its offline endeavors. Even good consumer feedback is not enough to insulate toy sites from misaligned parent companies. Forrester Research’s most recent consumer-based PowerRankings would have slated Toysmart.com fourth among online toy retailers ahead of Toyrus.com, Wal-Mart and JCPenney.

KBkids.com, owned by brick-and-mortar discount toy seller KB Toys Inc., also had conflicting visions of online retailing. Even though the former CEO was Web-smart-having launched specialty toy site BrainPlay.com-Leonard says the offline store’s discount image did not jibe with the Kbkids.com online efforts, which had a more content-oriented focus than moving inventory the way the discount toy store chain did in the offline world. Problems with fulfillment and expensive marketing tactics, such as discounts on deliveries, also may have played a part.

But while the pure-plays sit at the top of the toy market for now, the sleeping brick-and-mortar giants are slowly staging a comeback in analysts’ and investors’ eyes. Brand name and offline infrastructure-including stores for returns and warehouses that get the best toys first and keep them in stock-may put the offline stores first.

While such sites as Toyrus.com and Wal-Mart do not yet have content, functions and features that rival eToys and Amazon.com, “the day they wake up” could shakeup the pure-plays, says Seema Williams, analyst at Forrester. “The online and offline combination in toys is so much stronger than just having an online presence,” she says.

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