February 1, 2005, 12:00 AM

Playing in a bigger sandbox

(Page 2 of 2)

EToys Direct recently improved the operations of eToys.com, MyTwinn.com and KBtoys.com by implementing new site search functions from Endeca Technologies Inc., producing more relevant search results, and by implementing web site analytics technology from WebSideStory Inc. to better understand customer shopping behavior. It`s also using rich media technology from RichFX Inc. to present online electronic versions of its catalogs.

The investments have paid off, Wagner says. "Traffic at eToys was up dramatically last year, and conversion rates and sales were also up," he says.

Leveraging knowledge

One way eToys.com has leveraged its new analytics tool is to use knowledge of customer buying behavior to support its new Birthday Club, which lets shoppers register their children`s names and birth dates to get reminders and tips for shopping. "One of the biggest challenges in site personalization is when you have one person shopping for three children," Wagner says. "In the Birthday Club, they come to us for suggestions. They don`t want to be told what to buy, but they want relevant items for each age group."

EToys has also improved service at MyTwinn.com by expanding its staff of artists who prepare customized dolls with freckles, hairdos and other characteristics ordered by customers. The custom doll retailer, which does about 65% of its sales on its web site, did $10 million in the fourth quarter of last year, its first quarter under eToys, and Wagner expects its full-year revenue to quickly pass its former annual revenue of $26 million.

EToys earns about three-quarters of its revenue from its own direct-to-consumer operations--65% through eToys.com, KBtoys.com, their complementary catalogs and the Sears Wish Book catalog, and 11% through MyTwinn. The remainder, about 26%, is through its e-commerce services to its retail partners.

Over the long term, eToys Direct`s services business could drive a larger share of revenue if it continues to mature with a reputation bolstered by the experiences of its small but high-profile list of clients. The eToys experience at Macys.com, which launched just before Thanksgiving, has been good so far, Anderson says.

"It has worked out extremely well," he says. "We had a great year overall, but toys were a real surprise. They exceeded our expectations by 50%, and we had set aggressive expectations."

Daunting options

Anderson admits that taking on online toys sales for the first time was too tough a challenge to do in-house. "We looked at our options and found them pretty daunting," he says. "We didn`t know enough about toys."

EToys offered experience, support for Macy`s ideas and a good financial plan, Anderson says. "They were well organized, and their business model made a lot of sense," he says. EToys guarantees that its retail partners will make a profit on sold toys, regardless of the final selling price. "Our partners never have to worry about markdowns," Wagner says.

Macys.com, deciding to focus on high-quality toys with a nostalgic appeal, presented about 300 toys ranging from electric trains and racecar sets to a $150 wooden Victorian-style doll house. "We didn`t want to slug it out on price with mass merchants," Anderson says.

EToys sources toy inventory based on Macys.com`s specifications and provides product images. EToys owns the inventory and provides fulfillment; Macy`s uses its own content management tools to manage merchandising and pricing, and handles its own customer service, Anderson says. The two companies work together to assure that products are in stock if they appear online, he adds.

Taking on more retail clients would press eToys` capacities in some respects, most notably its need to ramp up its warehouse and call center labor forces during peak shopping periods. With 70% of toy sales every year coming in the fourth quarter, it already must expand its number of warehouse workers from 100 to about 1,300, and its call center staff from 20 to about 500, when fall arrives, Wagner says.

But Wagner adds that he`s not too worried about the labor pressures that additional clients could bring. In fact, he says, he`s in a position to benefit from the early foresight--and excessive investment--of the original eToys of the wild web days of the late 1990s.

The wild card

EToys Direct still uses the 650,000-square-foot automated warehouse built by the original eToys in Blairs, Va., an area chosen for its ample availability of workers left over from shrunken tobacco and textile industries.

"A peak day in our warehouse now handles about 134,000 individual toys, but we could do up to 200,000 units a day," Wagner says. "We could increase our revenue over 50% before we`d have to open another warehouse."

Still, much of what happens in the toy industry and with eToys Direct`s future depends on forces outside of the young company`s control. "The toy business has been tough for years, and now the wild card is what will happen to Toys R Us," Wagner says.

On the one hand, the industry could see more cutbacks in the number of stores, which could only help online sales and eToys` growth internally and through its partners. On the other hand, it could see more competition with margin-cutting efforts like free-shipping and discounting--moves that could hurt eToys` goal of maintaining its expected operating profits at a time when it`s financing large inventory bills. "Our challenge is how to grow our business and stay profitable," Wagner says.


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