All We Want For Christmas Is…To Sell Toys in July
By Andrea McKenna Findlay
The online toy sector has been hit hard in 2000: Major players such as Toysmart.com and RedRocket.com went out of business and companies that survived fired employees, suffered brain drain in crucial management ranks and just plain didn’t make money. Heading into the fourth quarter, online toy sellers are hanging high hopes on profits from holiday shopping as well as hoping to prove that they can do things better than last year, when some retailers ran out of merchandise and experienced major shipping delays that have cost them customers.
But Christmas cheer may not be enough to keep these vulnerable sites in business. Like the song that wishes it were Christmas all year round, market observers say online toy retailers must find a way to sell throughout the year. To achieve year-round sales, dot-com toy sellers are focusing on seasons other than Christmas, deepening their customer relationships with loyalty programs, and playing niche markets. “Online toys is a category that relies on getting huge percentages of sales in the fourth quarter and that creates all kinds of problems,” says Seema Willams, analyst at Forrester Research. “The dot-coms should be thinking of how to stock the hot toys for longer as well as adding fulfillment capabilities and customer service people to handle the increased traffic.”
Improving on last year’s mistakes is paramount to success in the 2000 toy-selling season. The merchants say that means getting back to basics: Are there fulfillment problems? Is the site working? How is the customer service? And now to turn up the competitive heat, Amazon.com and Toys R Us last month entered a 10-year deal by which Amazon will run Toysrus.com (see If you can’t beat ’em, join ’em, p.6).
A major move for most online toy retailers is to gear up for Q4 by expanding warehouse capabilities. “The biggest thing we have spent most of 2000 on has been fulfillment,” says Michael Wagner, chief operating office of KBkids.com. “Dot-coms realize that if your fulfillment process doesn’t work you have major customer service problems.” Denver-based KBkids.com, a division of KB Toys Inc., opened a fulfillment center in Danville, Ky., in late summer. It’s a huge investment—$15 million to $20 million—but an important one for online players.
Newcomer Bluelight.com, owned by K mart Corp., is taking fulfillment and shipping into its own hands by assigning Bluelight employees to manage the process at the Memphis-based Submitorder.com warehouse.
Educational online toy retailer SmarterKids.com opened a warehouse in Mansfield, Mass., in early June to help with the holiday rush. Last year SmarterKids.com hired a distribution house to ship orders; the company brought the operations in house to keep more control over the process. All the executives help out packing and shipping when necessary, says Al Noyes, executive vice president.
A stress test
With its five years of experience in online fulfillment, Amazon.com has spent a lot of time on the logistical infrastructure and operating systems, says Jorrit Van der Meulen, merchandising manager for Amazon.com’s toy division. That expertise helped Amazon clinch the Toys R Us deal. Amazon.com is geared up for the holidays with six U.S. distribution centers, all of which will be operating more than a year by the 2000 holiday season.
On the customer service side, most online toy retailers are upgrading site capabilities. KBkids.com is installing custom software packages that combine customer information on one database so customer service reps have everything they need to answer questions. To help with holiday traffic, the company also is instituting more automatic messaging capabilities to tell consumers immediately if there are problems, such as delays, with their orders.
Being able to handle the large surge in traffic during the holiday season is another area some toy retailers are looking to improve on from last year’s performance. KBkids.com this summer moved its site hosting from California to Denver to get the necessary bandwidth to handle orders from Internet servers all over the country, which was not previously available in KBkids.com’s headquarter city. Having the site in Denver also saves the company money because its tech support team is there.
Wagner says KBkids.com will perform a stress test on the relocated site’s ability to handle volume, which he says is 30-50% higher during the fourth quarter. SmarterKids.com also enhanced its web site capacity to handle more traffic and reduce delays by making a number of improvements, including adding processors to existing machines, redesigning its databases to accelerate transaction activity and increase transaction capacity and adding edge caching to deliver frequently requested site content without accessing the web servers.
Once the basic web specifications are in place, retailers can focus on the crux of Q4—selling toys. That is not as easy as it sounds for online merchants because online sales still are a small percentage of overall toy sales. As a result, some online retailers don’t have the muscle with suppliers that real-world retailers have. Thus, last year, for example, many sites did not have enough Pokemon stock to keep up with demand.
When it comes to stocking the hottest toys, offline toy retailers that are also online have an edge over pure-plays because they can sell enough product in both channels to get the attention of manufacturers. JCPenney.com, leveraging its offline toy connections, plans to have more than 1,000 products in the online toy department by the holiday season. Apart from carrying the entire toy selection from J.C. Penney’s catalog, JCPenney.com will continually add products during Q4 And JCPenney.com will be working with Nintendo and Sega to highlight the season’s hottest interactive and video games.
The new supersite combination of Toysrus.com. and Amazon.com clearly will be an inventory force to be reckoned with, as Toys R Us is one of the largest offline toy retailers and is known for stocking all the hottest toys all the time.
Beyond Q4
Getting back to basics also means gone are the days when online toy retailers pumped money into huge marketing campaigns. Consumer acquisition costs are too high for most online retailers and the toy set say they are concentrating on their current customer base to drive sales. KBkids.com will spend less on marketing and will focus mainly on getting customers who shop in the offline stores to make their first online purchases by giving $10 web coupons to store shoppers. “People coming to our 1,300 stores are toy buyers who probably shop online for other things,” says Wagner, noting that enticing existing customers to shop online could mean getting repeat customers. He adds that KBkids.com also will promote the site in its usual newspaper advertising circulars.
SmarterKids.com says it is doing more direct response marketing with existing customers rather than spend millions on TV ads which do not pay a return. “We did a small-scale TV ad test last year with spots in eight cities and we confirmed that it’s an ineffective way to acquire new customers,” says Noyes.
Even though Amazon plans to advertise on television in the fourth quarter targeting toy-shopping moms, Van der Meulen and other toy retailers say the old standby for online veterans is word of mouth advertising, which is extremely valuable because it’s based on someone’s positive shopping experience. And with the new Toys R Us co-branding deal, Amazon.com also has the benefit of being associated one of the best-known toy retailer names.
Although SmarterKids.com has forgone costly brand advertising to acquire new customers, the company is developing its existing customer relationships just in time for the Q4 shopping season. SmarterKids.com rolled out a shipping rewards program for its frequent shoppers in late July in response to data gathered through surveys and focus groups. The site is offering customers who make cumulative purchases in 2000 of $150 or more free standard domestic shipping on any additional orders of $25 or more through Dec. 31. Customers don’t have to enroll and they can track points via the “my account” feature on the site. “Our most loyal customers said they preferred it over other possible programs like merchandise credits or frequent flier miles,” says Noyes.
Although SmarterKids.com is launching the rewards program to coincide with holiday shopping, clearly this is a move to encourage customers to shop on the site year-round. And enticing customers to think about the site in July as well as in November is key to an online toy retailer’s success. Noyes says the program makes for loyal customers who will spread the word about the site and bring the site more business.
Online pure-play eToys made a push to sell toys in other seasons by promoting toys for summer. An $8 million television campaign promoted its summer store, with such products as snow cone machines, stargazing equipment, a musical hopscotch game and 38 styles of swimming pools. While eToys will not reveal the success of the summer ad campaign, other online toy retailers are taking the same approach.
Amazon.com, a pioneer in online personalization for shoppers, plans to use email reminders for birthdays, Easter, Halloween, summer sporting activities, and other potential toy-buying times of year, says Van der Meulen.
Niching the niche
Targeting a niche market to maintain an online presence also is a viable way to maintain a business outside the fourth quarter. SmarterKids.com, which Forrester’s PowerRankings ranked second behind mammoth Amazon.com, takes the approach that education is a year-round event. “We don’t think of Christmas as an event but as a continual phase,” says Noyes. SmarterKids, whose site not only sells educational toys online but also provides educational information about toys, is adding more personalization enhancements to help parents determine which toys fit their child’s education level and ability. “Education is a year-round thing,” says Noyes. “And the content we deliver, along with the way we are able to suggest toys to parents based on their child’s abilities, is only available on the web.”
Developing their niches further, SmarterKids.com and eToys are touting back-to-school supplies on their sites. Smarterkids.com, which sells educational toys based on childrens’ ages and parents’ preferences, is featuring school supplies for preschool through grade nine. The on-staff teachers also created Back-To-School Essentials Kits and Fun Kits, containing grade-appropriate tools for school, which cost 25-30% less than purchasing the individual items. EToy’s Back-To-School Shop offers 750 school products and grade-based learning tips for the school year. Parents can shop by grade or category. The store also has a “What’s Hot in the Schoolyard” section, where parents can learn about popular toy items.
The new co-branded Toysrus.com/Amazon.com site also is exploiting online segmentation. The online toy mecca is launching its new toy web site in September and will launch Babiesrus.com in January. Analysts say Babiesrus.com customers will naturally migrate to the Toysrus.com/Amazon.com site as their children grow. And the addition of sporting goods adds yet another niche for consumers looking for one-stop shopping. And it has the added benefit of attracting customers to the site at times other than the holidays.
Taking steps to insulate online businesses by adding niches is key for toy retailers because selling toys is a business with thin margins. Add the pressures of impressing investors with actual sales and revenue and the prospect of folding seem realistic. But analysts suggest that online toy merchants have more options. Adding revenue opportunities means not only selling more toys by having a great web site, but aligning with other merchant categories to expand coverage and provide more products.
Liz Leonard, analyst at Gomez Advisors, suggests that toy e-retailers add private-label products like toy bins to make extra money. And some retailers are listening. Etoys confirmed earlier this summer that it plans to increase sales by providing 500 private label goods by Christmas, including eToys toy chests and furniture.
Finding a partner that provides a related product can extend the online retailer’s value to the consumer, says Leonard. “It needs to be a partner that would fulfill a need such as national baby furniture or clothing supplier,” she says.
The offlines may prevail yet
While the top three online toy retailers are pure-plays (Amazon.com before joining with Toysrus.com, SmarterKids.com and eToys.com) the offline players may move up in the ranks as they head into Q4’s online shopping season. The new Toysrus.com and Amazon.com site may become the exception, since it is the first example of a newer offline player teaming up with an online veteran. And it remains to be seen if other sites look for similar deals.
But until then, the other offline players still are formidable opponents for the remaining pure-plays. After a slow start, K mart finally launched Bluelight.com this summer, KB Toys’ KBkids.com has plans to entice offline shoppers to shop online and JCPenney.com is ramping up with a full catalog of online toys.
Market observers say these players are a threat to the online toy sector because having an offline presence that can give customers the option to make returns at real-world stores is a major differentiating factor that could kill the pure-plays. “If they can integrate their online presence with their offline distribution [for such things as taking returns] then beating the offline players will be tough,” says Tom Rhinelander, senior analyst at Forrester Research.
And the offline retailers are already in the know. Despite its lack of market impact in the toy sector thus far, JCPenney.com believes its multi-channel model makes it the only e-retailer offering product pick-up and return in the real world, in this case at one of J.C. Penney’s 2,300 catalog desks and selected Eckerd drugstores nationwide. “This option ensures that no children will find gifts sitting on the front step from the postal service before Christmas,” a spokesperson says. Deliveries are completed in two to three business days, and consumers are not charged for expedited shipping fees.
But the hard-luck online toy sector could still be in for another shakeout, not the least of which could be the impact of the Toys R Us/Amazon.com deal. Offline/online retailers have the fulfillment edge while online pure-plays are veterans of the Internet shopping world. “People are looking for a light at the end of the tunnel,” says SmarterKids.com’s Noyes. “And that is a function of not having a business model that makes sense for the web.” Taking an existing brand online—such as the offline toy retailers—is one way to go. The other is taking the pure-play approach—such as eToys and SmarterKids.com—that uses web personalization to cater to consumer’s needs in an electronic forum. Both types exist online today.
Mixing the right amount of Christmas cheer, by having the ability to handle, support and deliver to Q4 toy shoppers, with year-round reality checks that keep toy customers shopping online other times of the year, could mean some toy retailers stay in business. After consumers make their final clicks for holiday 2000, site traffic, sales numbers, delivery, web performance and year-round marketing plans will tell which strategy survives in the new year.
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