Amazon, Toys R Us to Link Online Sales Operations
Internet superstore Amazon.com and Toys R Us Inc. said Thursday that they will join their online toy efforts, the biggest statement yet that Web sellers and traditional bricks-and-mortar retailers might need each other more than they previously thought.
The 10-year contract puts Toys R Us in charge of toy selection and buying and gives Amazon the tasks of running the Web site and fulfilling orders. Toys R Us will pay Amazon flat fees and a small percentage of each sale.
Amazon critics note that the contract is for longer than Amazon has existed and longer than skeptical observers say the money-losing firm can last.
“While we aspire to have the [toy] merchandising skills of a Toys R Us, it would be foolish to believe we actually have them today,” said Jeff Bezos, Amazon founder and chief executive. “As we enter new product categories, there’s a learning curve. We get to skip that learning-curve process for the toy business.”
Deals with other traditional retailers in different product lines also are possible, Bezos said.
“It’s total capitulation,” said David Cooperstein, director of online retailing at Forrester Communications in Cambridge, Mass. “It’s Toys R Us saying, ‘We don’t get this “dot-com” mumbo jumbo,’ the tech side of it, and Amazon saying, ‘Wow. Toys are a really tough business.’ ”
The two companies’ division of responsibilities is a direct way of addressing investor and customer complaints about their sites last year: that Amazon.com ran out of top toys and that Toysrus.com, the separate company majority-owned by its namesake, fumbled at displaying and delivering their goods.
Amazon.com boasts one of the Web’s best retail sites, stellar customer service and top-notch delivery systems. Toys R Us, as the nation’s largest specialty toy store, has bargaining power with manufacturers for prices and products that Amazon, which entered the toy business last year just before the holidays, could only imagine.
The deal also helps Amazon meet investors’ demands to shave costs and boost operating income, while raising Toysrus.com’s profile more in line with its powerful brand name.
Toys R Us shares were unchanged at $17.38 on the New York Stock Exchange, and Amazon.com lost 44 cents to close at $30.44 on Nasdaq.
Toys R Us and Amazon said the arrangement, under discussion for only 60 days, will speed the Internet toy unit’s ability to generate profit. Toysrus.com said it expected to shave two to three years off its target date for making money, earning a profit by the fourth quarter of 2001 and for the year in 2002. Amazon declined to reveal its timeline.
Allowing the two companies to do what each does best, without the bother of learning new skills or trying to establish new relationships, could make the effort an even tougher player, analysts said.
That could be bad news for such companies as Santa Monica-based EToys, an Internet-only seller that last year generated the industry’s highest online toy sales at $107 million. Toys R Us recorded $50 million in online toy sales last year. Amazon does not break out its toy sales, but said that combined sales of books, videos and toys totaled $95 million.
Edward “Toby” Lenk, EToys founder and chief executive of one of the last online-only mega-retailers, said in an interview Thursday that the deal confirms that other online toy sellers, many of which have closed shop, had weaknesses that EToys does not have. What’s more, he said, EToys can now direct its competitive efforts at one major rival instead of two.
“Both of them realized they couldn’t go it alone,” Lenk said. “So this is a last-second scramble to avoid the difficulties they had last season.”
EToys shares fell 9 cents to close at $3.94 on Nasdaq, a record low.
“The strength of the Toys R Us brand and our merchandising expertise, combined with Amazon’s unbeatable Internet savvy, will create an online presence second to none,” said Toys R Us Chief Executive John Eyler in a meeting Thursday with members of the financial community.
Added toy industry analyst Sean McGowan: “I’ve been looking for ways in which this is not good for the two companies and I can’t find any.”
Toysrus.com also has agreed to buy Amazon’s remaining toy inventory, Eyler said.
Beginning this fall, consumers will be sent to the new joint Web store when they go to Toysrus.com or Amazon.com’s toy site. Eyler said he expects to add Babiesrus.com to the mix next year.
Although Toys R Us has long claimed that the ability to make returns and exchanges gives its stores a significant advantage, Amazon will handle returns at the joint venture through the mail. Eyler said in the future, Web purchases may be returned to stores.
Amazon maintains its ability to sell toy consumers additional goods because the joint toy store will be a link from the Amazon site. Both companies also hope that buyers of tools, books, housewares and the other Amazon categories will buy toys.
Details of the financial agreement were not released, but executives at the two companies said Toysrus.com will offer fixed payments, fees per item sold and a “single-digit” percentage of sales. Amazon also will get warrants allowing it to acquire 5% of Toysrus.com.
“It’s not enough to be technologically competent, and it’s not enough to be merchandising-competent,” Eyler said. “You must be both and very few companies are.”
