February 27, 2003, 12:00 AM

Web Sales R Us

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They are also to some degree a point of differentiation from ToysRUs.com’s big-box competition. To further position itself along those lines, ToysRUs.com recently added another service mass merchants are less likely to offer: personalized products. GiftsRUs.com, which launched on ToysRUs.com in November, allows online visitors to order gifts ranging from stuffed animals to clothing, to home décor that can be printed, monogrammed, hand painted or engraved with personalized messages. To make personalized gifts available, ToysRUs.com has partnered with leading manufacturers such as Gund and Personal Creations, a state of the art manufacturer of personalized gifts across a variety of product categories.

Like Toys R Us Inc., ToysRUs.com seeks to stay ahead by pursuing toy category must-haves in timeliness, trends and price. “We get the best product, the hot toy product, we make sure it’s available when people want it, we get it at reasonable prices that can let us make a profit and we design marketing programs to drive sales,” says Ray Arthur, president of ToysRUs.com.

That’s worked for Toys R Us historically, but recent years have introduced new challenges and new competition and made a successful web presence even more imperative for Toys R Us. Ten years ago, Toys R Us Inc. controlled about 20% of the U.S. toy market, the largest single share. Today, with an estimated 16%, it’s still the national’s largest specialty toy retailer, but mass merchandiser Wal-Mart now owns the biggest share of the estimated $35 billion U.S. toy market, about 20%, says analyst Tom Goetzinger of research firm Morningstar Inc.

The drop in share was partly the result of a fundamental market change, analysts say. “Demographic changes aren’t favorable for Toys R Us,” Goetzinger says. “In more families, both parents are working and have less free time. They are more apt to just go to Wal-Mart on the weekend and take care of all the shopping at once than make a trip to Toys R Us.” That plays out even more outside the holiday season, when general mass merchandisers such Wal-Mart continue to drive traffic. With the largest chunk of toy retailers’ sales coming during the holiday season, Goetzinger points out, it’s more difficult for them to get traffic in stores during the rest of the year.

The eToys factor

But while a Toys R Us store may be a time-consuming trip across town for the consumer already at Wal-Mart to buy groceries, sweatshirts or CDs, ToysRUs.com is just a click away on the web. Shoppers too busy to visit multiple stores are turning to the convenience of the web for the same reason-a potential opportunity for ToysRUs.com, if it can corral those shoppers and give them a reason to keep coming back, and not just at the holidays.

It was the now-defunct eToys that first drew the attention of Toys R Us Inc. to the web in the late 1990s. “It was obvious that this was going to be a popular channel and that consumers expected this type of service. Toys R Us Inc. decided it needed a web presence; the idea was to build one to compete with what was then the preeminent web site in toys, eToys,” Arthur says.

With its eyes on a possible future IPO, like other retailers who went online at that time, Toys R Us Inc. formed a separate corporation for its web site, retaining majority ownership but also bringing in venture capital funding from Softbank and including significant employee ownership in the form of stock options. The site launched in 1998 with a limited offering from a smaller catalog put out by the brick-and-mortar stores, relaunching with a major redesign in May 1999.

“We wondered how well we were going to do online with the Toys R Us name-this was a different kind of channel,” Arthur says.

The brand translated well online, with the site ringing up $49 million in sales in its first full year, but its popularity during Holiday 1999 backfired on ToysRUs.com. Site operations and fulfillment proved to be more than the novice e-retailer, then with a single warehouse in Memphis, could handle. “We couldn’t keep up with the traffic and the demand,” says Arthur, calling the site’s first-year performance “less than stellar.”

Indeed, after its 1999 holiday season, the site faced a consumer lawsuit and fines from the U.S. Federal Trade Commission for failing to deliver merchandise to customers on promised schedules.

To ensure it didn’t repeat that performance the next year, ToysRUs.com started building out its internal fulfillment capacities, improving systems in its Memphis facility, adding new distribution facilities in California and Pennsylvania, and continuing to invest in web site development. In the summer of 2000, Amazon, whose own venture into toys hadn’t made much of a splash, approached the company with the proposal for the first of what was to be a string of similar alliances between Amazon and chain retailers.

After reviewing options, ToysRUs.com went for the deal, taking a write-off of about $118 million in 2000 for facilities and technology it would no longer use plus sales lost while it migrated to the Amazon platform. Amazon took over fulfillment, customer service and site operations, while the toy e-retailer retained responsibility for merchandising, marketing and sourcing inventory. Under the 10-year agreement for a co-branded site, Amazon gets a base utilization fee for maintaining capacity for ToysRUs.com, plus a per-unit fulfillment fee and an undisclosed percentage of sales.

Top brand awareness

That left ToysRUs.com free to concentrate on doing the kind of marketing and merchandising that Toys R Us Inc. did to build itself into a $12 billion company, the difference being that the web site didn’t have to build its own brand. It piggybacks on the name already developed by Toys R Us Inc., which ranks somewhere between MacDonald’s and Disney in unaided brand awareness, studies show. Name recognition remains high thanks to the multi-million dollars that Toys R Us Inc. spends each year on advertising to keep it that way.

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