December 26, 2000, 9:55 AM

If you can`t beat `em, join `em

Just when online toy retailers thought the lines were drawn for this year’s holiday shopping battle, two of the most influential players-Toysrus.com and Amazon.com-combined in a move that could start another segment shakeout. The two companies announced in mid-August that they would pool their strengths to launch a toy and electronic game site in September and a baby goods site in January. “There is an obvious, mutually beneficial situation,” says Liz Leonard, analyst at Gomez Advisors. “Toys R Us has significant buying power and experience as a high-quality merchandiser that can get the hot-selling products, while what Amazon.com clearly does better than anyone else online is customer service and fulfillment.”

Under the cobranded deal, Toys R Us will provide the toys, which will be housed at Amazon.com distribution centers, while Amazon will sell the products via the web. Amazon will handle customer service, online ordering, web marketing and management. Consumers who go to Toyrsus.com or click on the Amazon.com toys section will go to the cobranded site. Both companies will promote the site.

Amazon.com’s 10-year deal with Toys R Us Inc. will give the yet-to-be-profitable pure-play a steady infusion of cash. Although the companies did not disclose financial terms, Toys R Us will pay Amazon.com periodic fixed payments, per unit payments and single-digit percentage of revenue. Amazon also will be entitled to buy 5% of Toysrus.com. Plus, Toysrus.com can avoid another disastrous delivery season like 1999, which left many customers without their toy orders before Christmas. The site, which had trouble keeping up with online deliveries as well as site traffic, ended up paying $350,000 in penalties to the Federal Trade Commission for violating the Mail and Telephone Order Rule by not notifying customers when shipments fell behind.

Before the surprise announcement, the competitive atmosphere pitted online stores such as Amazon and eToys against offline would-be toy e-retailers such as Toys R Us and J.C. Penney Co. Inc. Many said the offline store web sites would eventually overtake the online players due to their ability to consistently get the best merchandise and accept returns at real-world stores. “This is an attention-grabber,” says Lisa Allen, research director at Forrester Research. “Once you get past that, though, you see that it makes sense. Each partner complements the other’s weakness.” She adds that the combined stores will make for a powerhouse during Q4’ s major shopping season. “This could be a real shakeout,” says Allen.

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