February 28, 2001, 12:00 AM

The toy business becomes less fun for the pure-plays

Click-and-mortar toy stores and the Amazon.com/ToysRUs partnership may be a signal that play time is over for pure-play toy sellers.

No one is playing around anymore: Selling toys online is becoming harder. The powerful combination of Amazon.com and Toysrus.com is snatching market share while offline powerhouses Target, Wal-Mart and Kmart have all ramped up their online toy sales.

Just as market analysts predicted, the dynamic duo of online selling and offline supply and fulfillment is grabbing market share and forcing other toy sellers to reevaluate their businesses “The biggest firm in online retailing partnering up with the biggest brick-and-mortar name in toys is a major threat to anyone else selling toys via a mass market strategy,” says Paul Ritter, director of online strategies at The Yankee Group in Boston. He notes, however: “They must continue to execute well by keeping acquisition costs low, providing an easy web experience for consumers, maintaining high traffic in conjunction with high conversion rates, providing flawless fulfillment and offering impeccable customer support.”

The hardest hit

The biggest pure-play toy seller that was most affected by the Amazon/Toysrus competition is all but gone. After announcing in late 2000 that it would fall desperately short of expectations and would run out of cash by the end of this month, eToys informed its remaining 293 employees that they will be laid off by April 6. In mid-February, the company was still working with financial advisor Goldman Sachs to either reorganize or find a buyer or merger partner.

As analysts predicted, the other big-name offline toy sellers-Wal-Mart, Kmart through its Bluelight web site and J.C. Penney, as well as Target, KBkids and Zany Brainy-all are vying for a piece of online toy sales. “It’s coming down to the clicks-and-mortars because toys is such a difficult space to operate in, both online and offline,” says Barrett Ladd, senior retail analyst at Gomez Advisors. The toy market is so difficult, she notes, because most buyers of toys are price conscious and the resulting price competition makes for tight profit margins. On top if it, the majority of sales occur in the fourth quarter, meaning that any competitor has to have deep enough pockets to survive the rest of the year, something that online pure-plays sorely lack.

KBKids.com, in particular, is getting high marks from analysts. Forrester’s PowerRankings called KBkids.com’s customer service the fastest of e-commerce toy sites. KBkids.com customer service representatives responded to 80% of calls within 20 seconds or less. Improvements to the web site and a decision to bring online fulfillment operations in-house in August 2000 decreased the number of customer calls and e-mails by 54% compared to the 1999 holiday season. In late December, Keynote, a provider of Internet performance measurement, ranked KBkids.com one of the most accessible sites during the 2000 holiday season. During the heaviest traffic periods, KBkids.com’s average page-loading time was 1.89 seconds, availability was 99.52%, and 94% of all orders were processed in three days or less. SmarterKids.com’s web site took 2.26 seconds, while other toy sites-eToys, Amazon.com, Walmart.com and Bluelight-took between 3 and 5 seconds to download.

Room for specialists

Whatever the state of competition, though, all toy sellers will have to be online. Gomez, for instance. estimates online toy sales will reach $3.7 billion by 2004, representing nearly 11% of industry sales. Anyone not online will have a tough time competing.

Market observers say there still will be room for the specialty toy sellers. “There will undoubtedly be pure-play toy retailers that will succeed in the future, but it will be smaller firms that offer specialty toy products that appeal to a narrow demographic who are looking for unusual, hard-to-find toys, that will carry high margins,” says Ritter.

For example, educational toy seller Smarterkids.com started off competing with the big online toy names, but now it is refocusing its target market. In January, the company completed its merger with Earlychildhood.com and as a result stopped selling toys for 13- to 15-year-olds. And the company just reported a 32% increase in its Q4 2000 net sales, showing SmarterKids.com is on track.

“A firm could achieve profitability on a small scale following such a business model,” says Ritter. “But any firm looking to compete head-to-head with the few big players may ultimately be fighting a losing battle.”

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