Web Sales R Us

Built-in brand recognition is a big plus when launching online, but as retail toy giant Toys R Us Inc. found, it’s only half the battle. Three years ago as an Internet newbie, the 50-something brand took a major drubbing over well-publicized holiday shipping trouble which suggested that in going online it had bitten off more than it could chew.

Fast-forward to Holiday 2002, however, and ToysRUs.com is looking like a winner. With holiday sales that rose 12% to $179 million year over year, and 11-month sales that jumped 24% to $326 million, the web was a bright spot whose gains outshone the performance of Toys R Us stores. By contrast, comparable U.S. store sales dropped 1% from both the previous holiday period and in the first 11 months, prompting January layoffs of more than 700. Including results for ex-U.S. comparable store sales, sales at other stores operated by the company, and the web’s contribution, Toys R Us Inc. posted total holiday sales that grew a mere 2% from last year to $4.4 billion.

So what happened at ToysRUs.com between its stumbling launch and now? The privately held company, which operates independently of Toys R Us Inc., regrouped and looked for solutions. Among them was a groundbreaking alliance with Amazon.com in 2000 that aimed to shore up ToysRUs.com’s fulfillment and technology infrastructure issues, while boosting Amazon’s toy sourcing power and toy industry expertise. Another was to leverage the web for what it can do best—quickly establish niches that appeal to a

targeted group of buyers without the huge investment that such a move would take in stores.

Blocking and tackling

Two years later, the numbers suggest that the Amazon partnership is doing what it set out to do. “We’ve spent the majority of the past three years perfecting the blocking and tackling of e-commerce. That’s the right product, the right price, the right box to the right house-and making sure we can do that on a scalable basis,” says Greg Ahearn, vice president and general manager of ToysRUs.com.

Though it may have mastered the blocking and tackling of e-commerce, at this point, so have plenty of other online retailers. Today, ToysRUs.com faces the tough economic climate that challenges all of retail, consumers’ changing shopping habits, and increased competition from big-box merchants, led by the seemingly inexorable march of Wal-Mart Stores Inc. and WalMart.com. Competing on the playing field now takes more than a mastery of the basics, a fact that’s guiding the next stage of development at ToysRUs.com “We’re at the point where we are looking at how to get more sophisticated in how we market to our customers in a more proactive and meaningful way,” says Ahearn.

Toward that end, ToysRUs.com pursues the strategy of life stage marketing. It mirrors to some extent the strategy at Toys R Us Inc., which seeks to draw parents of infants to its Babies R Us stores and then transitions them over time to both Toys R Us and Kids R Us stores, which offer clothing and other gear.

But ToysRUs.com takes the strategy further, with a large and growing collection of web site sub-brands that target parents and kids at more discrete stages of the child’s development from prenatal needs into the teens.

Core to that strategy is BabiesRUs.com, launched by Toys R Us as a stand-alone site and bought onto the Amazon platform in 2001.The site, stocked with prenatal and infant gear, offers an online gift registry for expectant mothers. Though the company doesn’t break out online sales by sub-brand, executives call BabiesRUs.com “a significant contributor to online revenue.” With only about 160 Babies R Us stores, the web turns the store brand into a bigger national brand, as a large number of registries are created by expectant mothers located in areas without Babies R Us stores.

Toys for adults

To handle educational toy needs from the toddler stage into pre-teen years, ToysRUs.com offers Imaginarium.com, the online presence of a store brand that’s a collection of learning products ranging from musical blocks to interactive electronic toys such as LeapPad books to science kits for the pre-teen. There’s also Baby Imaginarium, a sub-brand that offers a transition point between infant necessities and a baby’s first educational toys.

Now, to capture sales as preteens become teenagers, ToysRUs.com has within the past few months added RZonegames.com, focusing on video games and youth electronics, which even offers some handhelds that teens can use to prepare for college admissions tests such as the SAT. There’s even an offering for adults seeking toys for themselves: a Collectors tab on ToysRUs.com features an assortment of special, limited editions of collectible toys.

“We want to serve Mom’s toy and leisure product needs all the way through the life stages her kids are going through,” Ahearn says. “And over the last few years we’ve been filling in the building blocks we need to be able to do that.” The integrated approach, he adds, creates a trail that helps Mom-as-consumer move from stage to stage with the expectation of consistent quality and service as she progresses to different offerings within the larger brand.

Personalization

To support the life stage offerings, the web site wraps them in services. BabiesRUs.com customers, for example, can opt to receive a newsletter that focuses on pregnancy and the childrearing experience, which aims to keep them interested in the site throughout that stage of their child’s development. Visitors to Imaginarium and Baby Imaginarium on the site can shop for educational toys by age or by learning value, according to what subject areas they want to pursue with their child.

If the toy business today is largely a commodities business, then the launching of the sub-brands on the web site, particularly Imaginarium and Baby Imaginarium, allows mass toy merchant ToysRUs.com to expand into toys that aren’t really considered mass merchandise. “Yet they are some of the best-selling, higher-quality specialty brands, such as Brio and Playmobil, that are out there,” Ahearn says.

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.

IRCE 2008 Conference Multi-Media CD-ROM

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.

“That’s where we felt we had a potential competitive advantage over eToys,” Ahearn says. “We could spend our money on creating conversion-oriented programs so consumers can get toys at the same discounts online that they can get in the stores as opposed to spending money to drive them to the site in the first place.”

Now, when other multi-channel retailer web sites have been reabsorbed by the larger corporation in response to rising costs and a sinking economy, ToysRUs.com believes its continued status as an independent company—and its alliance with Amazon—constitute an edge: it can ride on Toys R Us Inc. advertising and avail itself of its buying power without bearing any responsibility for store performance.

It bears responsibility only for its own performance, and though the life-stage strategy is a sensible one for the web site, the toy retailer still faces significant challenges in the current economy and the battle for share, Goetzinger says. “The web could be a meaningful contributor if the strategy works, but for right now, people simply aren’t spending as much and there’s more competition,” he says.

That’s not stopping Toys R Us from setting its sights on expansion as it plans to leverage the brand with tighter cross-channel integration in months to come. Already, Toys R Us catalogs provide product numbers for items available online that, typed in the web site’s search box, will bring shoppers directly to that item. Toys R Us Inc. has recently started taking phone orders from its catalogs and the web site for the Babies R Us business, and is eying expanding that service to the Toys R Us catalogs and site.

“We have been concentrating on operations. We’ve been driving this business toward profitability, and we think that 2004 will be the year,” says Arthur. “We have a tremendous opportunity here and—and a tremendous amount of work to exercise that opportunity.”

mary@verticalwebmedia.com