Toys R Us to Challenge EToys With New Web Unit
With sales and market share slipping, Toys R Us said Tuesday that it will take online retailer EToys head-on by creating a separate Internet subsidiary that will overhaul Toys R Us’ Web site, run its own automated distribution center and, most likely, sell stock.
Toys R Us Inc., which last year lost its position as the country’s top toy seller to Wal-Mart, said the new Silicon Valley company will be a partnership with Benchmark Capital, the venture capital firm that bankrolled auction site EBay, among others.
In addition to competitive pricing, Paramus, N.J.-based Toys R Us said customers will be able to return merchandise to the stores, rather than face the hassle of mail returns and exchanges--a benefit few Web sites have managed. Online customers will also be able to avoid shipping charges by having merchandise sent to a Toys R Us store.
“We have a lot of respect for the accomplishments that EToys has made, but the fact is that we are an $11-billion company with 700-plus stores in the U.S.,” said Toys R Us spokeswoman Rebecca Caruso. “We are very, very, very serious about online retailing.”
Toys R Us is contributing $80 million to the online venture, $30 million of which will be used to build a distribution center in Memphis, Tenn. Benchmark said its investment exceeds $10 million.
But as with the company’s remodeling of its stores, part of a $508-million charge in 1998, some observers wonder if the online initiative is too little and too late.
The toy retailer last year reported that crucial fourth-quarter earnings were off 15% from the year before, and it posted a $132-million loss for 1998. Executives blamed lower sales on a weakness in the toy industry as well as on strong 1997 numbers that reflected gangbuster sales from virtual pets, action figures and video games.
Toys R Us also watched its market share fall from 18.3% in 1997 to 16.8% in 1998, while Wal-Mart’s share of the toy market rose to 17.4% in 1998 from 16.3% a year earlier, according to NPD Group, a Port Washington, N.Y.-based market research firm.
Meanwhile, EToys Inc. of Santa Monica has become one of the best-known companies on the Web and the medium’s leading toy seller, with $24 million in sales for 1998. The company’s brand recognition came in spite of the fact that EToys posted losses of $16.4 million last year.
“I think it’s better for Toys R Us to go after it than to sit there and not participate, but it’s going to be a small percentage of the overall sales initially,” said Amy E. Ryan, a retail analyst who covers the company for Prudential Securities.
One problem is that EToys customers are likely among those who have been turned off by Toys R Us’ jumbled store layout and lack of in-store assistance in years past, analysts said. Analysts said that a good Web site might be exactly the way to rebuild confidence.
“Toys R Us is a very powerful name,” said Kurt Barnard, president of Barnard’s Retail Trend Report. “The disappointment with Toys R Us is traceable to the store environment and the store service--their online site is going to be free of those handicaps; they can make their Web site very beautiful and no salespeople are involved.”
Even if the new venture does well, it can only make up a small portion of the company’s recent ills, analysts said.
In Other Tech News . . .
Shipments Suspended: Connectix Corp. has suspended shipments of its Virtual Game Station, software that allows Macintosh computers to operate certain Sony PlayStation game titles, after a U.S. District Court judge in San Francisco granted an injunction last week. Sony alleges that the Virtual Game Station infringes its intellectual property rights. Connectix President Roy McDonald has vowed to appeal the ruling.--CHARLES PILLER
New CEO for Cadence: Cadence Design Systems Inc., the No. 1 maker of software used in computer-chip design, said Chief Executive Jack Harding, 44, resigned and will be succeeded by Chief Financial Officer Ray Bingham. The company warned last week that revenue and profit growth will slow.
