December 26, 2000, 9:55 AM

Holes in the Holiday

Three days before Christmas, the virtual Santas at SmarterKids.com were still making lists and checking them twice. A message on the site’s home page reassured customers that the educational toy retailer was on track with holiday deliveries. But behind the scenes, the already-intense pace had grown more anxious. At an emergency meeting, executives pored over warehouse and delivery reports, then reviewed checks of the site’s computer system to ensure it was handling the volume. “We sat down saying, ‘Let’s make sure we’re not missing anything,’” recalls Al Noyes, senior vice president of sales and marketing.

Earlier on Dec. 22, rival Toys “R” Us sent spasms across the Internet-and into the workdays of Noyes and his colleagues-by announcing that its Web store could not fill hundreds of orders promised for Christmas delivery. Reports of fulfillment snags at other sites, rippling through the trade press for weeks, soon intensified. “I’m sure these other companies thought they were running everything okay,” Noyes thought at the time, “and they were surprised.”

The staff at SmarterKids already had worked hard not to be surprised. Every employee, including CEO David Blohm, logged shifts in the company’s warehouse throughout the season. “I spent several weekends from 7:00 a.m. to 7:00 p.m. on the warehouse floor, picking and packing,” Noyes says. “In the end, we weren’t all needed, but we wanted to err on the side of making sure we delivered.”

The larger issue is what the fulfillment fallout from Toysrus.com and other Web merchants will mean for consumer confidence across the board. It’s an issue that won’t go away. In a filing with the Securities & Exchange Commission, eToys confirmed that the Federal Trade Commission is investigating whether it violated rules governing the timely delivery of mail and telephone orders. Separately, the Web’s third most visited site during the holidays reported that it delivered 99% of orders on time. No matter who is singled out, the pall is cast wide. “It makes the whole online retailing group look bad when that happens,” says Brian Birtwistle, product development manager for toys and games at Amazon. “We were truly hoping that everybody would provide a good customer experience.”

In fact, customer satisfaction with online shopping was a mixed bag during the 1999 holiday rush. Overall, satisfaction rose slightly from Christmas 1998-scoring a respectable 8.4 on a 10-point scale-according to BizRate, a market rating firm based in Los Angeles. Yet BizRate says more than a quarter of orders failed to arrive on time, and customers listed late deliveries as their top concern. E-retailers have even more work to do in bringing customers back for more. Though 92% of holiday customers had purchased goods on the Web before, only 33% were returning to sites they had shopped in the past.

Amazon expanded aggressively all year long to be ready for the rush. The company opened seven distribution centers across the country to handle its move into toys, electronics and other new product lines. It wasn’t disappointed: Fourth-quarter sales more than doubled last year’s figures, shooting up from $253 million to $676 million. The Internet titan says it delivered 99% of its orders on time, but doing so came at a cost: Amazon’s loss deepened to $185 million during the quarter, prompting executives to calm Wall Street’s growing uneasiness by projecting a narrowing of losses by the year’s end.

In sales at least, other Web retailers appear to have done just as well during the fourth quarter. BizRate estimates that holiday sales alone more than tripled from 1998, and Forrester Research, Cambridge, Mass., puts the online holiday tab at $5 billion. But Noyes and others think sales and traffic numbers would be even higher without worries about fulfillment delays. A Goldman Sachs-PC Data survey shows that Internet sales dropped 30% the week before Christmas.

News about delayed orders “spooked people,” says Noyes, causing a drop in new customers to SmarterKids. Yet he can’t complain too much, since the site’s fourth quarter sales hit $4.3 million, blowing away last year’s $22,000.

As these and other results rolled in after the holidays, troubles at Toys “R” Us surfaced again. A disgruntled customer filed a class action suit against the retailer for failing to deliver merchandise she ordered on Dec. 7, days ahead of the site’s cutoff for Christmas orders and two weeks before the company announced its fulfillment problems. Though analysts doubt the suit has merit, it could leave all Internet retailers with a black eye. “It’s a landmark case,” says Liz Leonard, senior analyst at Gomez Advisors, Lincoln, Mass. “It’s a very sensitive matter, showing that fulfillment issues need to be addressed.” The suit is also a warning that companies cannot “buy off” angry consumers, she adds, noting that Toys “R” Us offered $100 gift certificates to inconvenienced customers.

As toys go,
so goes the Web

Others consider toy retailers one of the success stories of Christmas 1999 and a good proxy for all Internet shopping. Toys tend to be a bellwether for the volume of products being purchased on the Web, says Seema Williams, senior analyst at Forrester. Amazon, eToys, Toy “R” Us and KBkids were among the top 25 highest trafficked sites during the holiday season, according to Media Metrix, New York. About 22 million households shopped online during the five weeks from Thanksgiving to Christmas, according to Forrester, and that number is expected to jump to 42 million by 2002. Growth in Internet shopping shows most shoppers are having a good experience, says Williams. “That’s a lot of customers who didn’t have a bad experience and a lot who won’t.

Whittling the ranks

Yet that doesn’t mean there’s room for slackers. Online retailers know they must scramble to keep and please customers who came on board during the holidays. In the toy category, like others, Williams expects to see the ranks whittled down by the race for repeat business. Too many players are offering similar products, she adds. “The leaders will end up being two brick-and-mortar stores, because they have the strength and resources that they are learning slowly to tap into.”

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