AIM6348
    E-Commerce Strategy and Control
        Team project / Spring 2003

ToysRus.com

Team Members

Huang Huang

Cenk Tolunay

Greg Cohen

Yu-Ling Kao

Company Background

Toys R Us is the leading retailers of toys, children's apparel and baby products. Being an $11 billion business with 1600 stores worldwide, this huge regime operates in five divisions:

Toys R Us, U.S.

Toys R Us, International

Kids R Us

Babies R Us

Imaginarium

      In order to provide the customers the products and services whenever and wherever they need, Toys R us announced its plans to create an e-commerce subsidiary- ToysRus.com. In 1999, ToysRus.com has established as a premier online toy, video game and baby store outlet.

Tragedy happened at the end of 1999.  ToysRus.com did not prepare for the booming of the on-line Christmas shopping.  In fact, ToysRus.com let their customer down very hard.  Failing to handle the orders flushed into its website, the company totally lost track of thousands of orders or failed to deliver them on time.  The Federal Trade Commission fined Toys R us $350,000.  Although the company had pumped millions of dollars into setting up its own online operation and distribution network for order fulfillment it had to announce 75% slump in profits in 2000.

The company had to change its ailing e-commerce strategy and operation. In 2000, Toys R us announced its Internet joint venture with Amazon.com.  Toys R us would take charge of buying and managing inventory while Amazon will oversee all web operations of order fulfillment, and customer service.

Toys R us is now facing tense competition from giant Wal-Mart and KB Toys. Toys R us is trying hard to keep pioneer to drive further growth.  They are planning in 2003 to follow in the footsteps of some other retailers by allowing customers to purchase merchandise online and pick it up in local stores and also allowing customers to return merchandise purchased online to stores in their area. 

Industry Comparison

        Looking at the external environment and the number of firms, size of competing firms and concentration in the industry, we can see the online toy industry is fairly new, while the intensity of competition is high. ToysRus.com actually still holds many advantages in the on-line toy industry.

Much of ToysRus.com's competition comes from Etoys.com, which has much less brand recognition than ToysRus.com.  As purely online toy firms, Etoys.com had spent a lot more money on advertising to get the publics awareness. Toyrus.com has a competitive advantage in this area because they already have the parent name backing them This past year ToysRus.com spent .18 cents per dollar of revenue, whereas Etoys.com spent .37 cents per dollar on marketing. 

The competitors that are present do not have as wide a variety of products to offer to consumers compared to ToysRus.com. Backed up by the toy retail giant, Toys R Us, Inc., which operates globally and in different product lines, ToysRus.com, as the online store front, gathers the information about shoppers¡¦ preferences, and caters to them quickly and provides as many choices as possible.  

Wal-Mart has excellent penetration pricing, superb product availability, strong brick-and-mortar roots. As the largest toy retailer in real world, Wal-Mart is becoming a big threat to ToysRus.com.

The integration with Amazon.com increases the attractiveness of a company. The alliance is a great turn for two competitors - one powerful online, the other a longtime leader in its sector.  It allows them to use each other's strengths in a market where it is tough to serve.

Analysis

The partnership with Amazon.com

Pros

In the agreement of the partnership with Amazon.com, ToysRus.com is responsible to identify, purchase, own and manage the inventory and Amazon.com will handle site development, order fulfillment, and customer service, housing both ToysRus.com and its own inventory in Amazon.com U.S. distribution centers. Therefore, ToysRus.com grabs the expertise in buying and merchandising toys that sell and builds Toys R us brand identity. On the other hand, ToysRus.com saves its fulfillment and customer service costs and removes the need to invest in upgrading its distribution facilities through the alliance with Amazon.com. In addition, it also attracts more customers from Amazon.com to generate more revenue and take advantage of Amazon.com's customer bases.

Cons

Under the 10-year agreement, Amazon.com will be compensated by Toys R us through periodic fixed payments, per unit payments, and single digit percentage of revenue. Amazon.com will also receive warrants enabling it 5% ownership of ToysRus.com.  Toys R us corporate loses control of all web site operations.

 E-Tail vs. Retail

When Toys¡¦ R Us launched its e-commerce business in 1999 the company spent a considerable amount of money totaling $86 million to develop the site. Out of $64 million of this big sum was spent for establishing and operating its Internet subsidiary. As a result, the company posted a loss of $132 million that year. Also, an unexpectedly high run to its newly launched website created order processing and shipment problems which caused a deep dissatisfaction and mistrust with its customers. Eventually, this bad experienced affected its bottom-line.  Toys R us soon turned to Amazon.com for help.

Currently, Toys R us is experiencing stagnant revenue and profit growth. As the only growing division, ToysRus.com has achieved profitability for the first time during the fourth quarter 2002, a full year ahead of plan. The company said its e-commerce business was boosted by higher merchandise margins due to a number of factors including the effective bundling of items, growth in Babiesrus.com and Imaginarium.com, reduced inventory levels and expense controls.

Toys R us¡¦ traditional U.S. toy-store business is a source of headaches for the company. Sales at stores opened at least a year, known as same-store sales, were down 1 percent for the full year and for the fourth quarter.

The table below shows the net sales and operating earnings for major Toys R us divisions. Except Babies R Us and ToysRus.com, there is hardly any growth.

According to a Fortune magazine article for every $100 in sales, eToys spent $81 buying the toys, $29 on its web site and technology, $33 on fulfillment ("picking and packing"), and $37 on advertising. That's $180 total, for every $100 in sales. The article called the $37 on advertising the "killer cost," although it's better than the $460 that Pets.com spent in 1999, but looks bad compared to the $3 to $5 that a traditional store spends.

Some of the other numbers are more worrisome. After all, advertising could slow down once the brand becomes more established, but $29 on Web sites and the $33 on fulfillment are permanent. This can be called that $62 the "e-commerce burden" because it doesn't apply to a traditional store.

There is a considerable cost involved with launching and maintaining an e-commerce website. Having an own e-commerce infrastructure will not necessarily deliver the desired outcomes. Many dot-coms have proved the fact that e-commerce is not necessarily cheaper and some cases it is even more costly.

 Today, ToysRus.com is attracting more than 65 million visitors. Despite a difficult retail environment, sales grew by more than 54 percent -- from $180 million to $277 million -- in 2001. ToysRus.com reported net sales of $180 million, up from $49 million in 1999, reflecting increased market share and the benefits from its strategic alliance with Amazon.com, which combined the two companies¡¦ expertise to create a compelling online shopping experience. Sales at ToysRus.com and the company's other e-commerce sites, which include Babiesrus.com, Giftsrus.com and Imaginarium.com, totaled $340 million for the whole of 2002, compared with $277 million in 2001. The company attributed its online growth and operating profit to the strength of its brands, the growing popularity of online shopping, a reduction in price slashing and a drive to cut costs. Among the cost-cutting measures at ToysRus.com, was a move to combine much of its distribution and other business infrastructure with its parent company, leading to lower inventory costs.

The Graphs below shows the revenues of each division in Toys¡¦ R Us and the growth in percentages.

Graph 1

 
Graph 2

As it is shown in the Graph 1 the major revenue generation is coming from the store sales in the US followed by the store sales overseas and Babies R Us stores in the US. However the highly needed growth is coming only from the company's e-commerce division followed by its popular Babies¡¦ R Us stores.

Toys R us is certainly enjoying the growing sales of its ToysRus.com division.  A stagnant growth in its stores is expected to continue but its e-commerce division's explosive growth can help company to increase its overall profits. The deal it has with Amazon has helped the company to lower the cost of maintaining a website.  By sticking to its core operations of purchasing, storing and shipping goods will help Toys R us to enjoy even higher profit margins.

The bottom line is, e-commerce is not an alternative to old economy but it is a very affective channel that complements the old economy. Toys¡¦ R Us¡¦ brick and mortar business and e-business complimenting and supporting each other can deliver the desired our comes.   

Opinions / Suggestions

Toys R us will have to review whether or not to renew their contract with Amazon in 2010.  They have to ask themselves whether this business model is working and how well it has worked.  They need to analyze their opportunity cost to bring on again their own site or stick it with another 10 years with Amazon.  The deal they have signed with Amazon.com has helped them tremendously, but the opportunity to do better is extremely apparent.  It seems that Amazon.com needs Toys R us more than vice versa.  If Toys R us was to not renew the contract with Amazon, they could earn a much larger percentage than currently earning.  Since they have tried their own site in the past and have failed, doubts would come about if they would ever start it up again.  Right now ToysRus.com total sales are less than 3% of total sales.  We believe once ToysRus.com sales could be considerable percentage of total sales they should consider running e-commerce operations once again. Until then it seems like this relationship will continue for many years. 

International sales are also a key issue with Amazon.com and Toys R us.  This would open up a much larger market for Toys R us but Amazon.com is unclear if this is an option in the near future.  Since Toys R us stores are located in the UK, France, and Germany we would recommend them to launch eCommerce operation in the international markets.

We would expect Toys R us to renegotiate their contract in 2010 based increasing sales.  The future looks bright for both companies and one would expect this relationship could only help both to the same degree in the future years.