eToys.com – A Premier Internet Toy Store
Table of Contents
Part I.
Reviewing the Big Picture: The U.S. Toy Industry
Part II.
Comparing Big Picture Pieces: Online Toy Market Competition
Part III.
Studying a Critical Piece in the Big Picture: eToys.com
Part IV.
Learning the Latest: Recent News about eToys.com
Part V.
Discussion Questions
Part I. Reviewing the Big Picture:
The U.S. Toy Industry
The U.S. leads the world in toy development, sales support, marketing, advertising, and special
promotions. In 1998, the U.S. toy industry shipped 3.37 billion toys, representing about 30 percent
of world toy sales. Trade sources note that there are more than 150,000 kinds of toys, or stock
keeping units (SKU), with literally hundreds of product groups.
The major categories are numerous. Jigsaw puzzles, indoor games, riding vehicles, outdoor play toys,
car and train sets, miniature die-cast vehicles, other vehicles, model kits, and construction sets
comprise some categories. Other categories encompass arts and crafts, musical toys, science and
education, playhouses, dressing-up toys, adult imitation toys, television and computer games and
hardware, radio-controlled toys, other electronic or battery-powered toys or games, dolls and
accessories, action toys, soft (plush) toys, talking toys, activity toys, and pre-school/toddler toys.
Toy Design and Licensing
The toy industry is product driven; therefore, product design and creativity are crucial. Many
companies shift to subcontract manufacturing, yet still maintain and expand their own design and
product development centers. The world’s largest toy maker, Mattel, in spite of outsourcing about
70 percent of toy manufacturing, still employs some 600 toy designers in southern California. Larger
toy makers can fund expensive R&D; in contrast, smaller toy makers can be more flexible and
creative. As a result, acquisition of small toy companies (and new popular toys) is a common way for
larger industry players to extend their product lines.
New product development consists of two major stages:
• Concept/character development
• Physical product design
It is difficult to generate creative ideas in a fad driven industry, and many companies resort to
character licensing and product licensing. In character licensing, toy production and marketing are
regularly integrated with Hollywood movies and TV programs. In product licensing, a toy inventor,
person, or company with an original product idea grants a company, usually a manufacturer, the
right to exploit that idea. Sometimes a manufacturer combines both character licensing and product
licensing. In addition, toy designers often use advanced technologies for product design, prototype
development, and testing.
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Suppliers
According to the U.S. Census Bureau, in 1997, doll, toy, and game manufacturers purchased about
$2 billion in materials and components, constituting about 40 percent of shipment value. A list of
traditional toy materials and components includes:
• Plastics resins and plastics products in various shapes and colors, and PVC
• Natural and man-made fabrics (e.g., cotton, wool, acrylic), stuffing materials (e.g., cotton,
foam, plastic beans), artificial and human hair
• Beads, wooden parts, modeling clay and other material, paper and cardboard
• Electronic components (e.g., circuit boards, voice and sound modules), specialty materials
(e.g., leather, suede)
Most raw materials are commodities, with relatively low or no differentiation. However, recently
some input suppliers have differentiated through branded materials that increase product safety and
quality. Quality and material safety are imperative requirements to all toy materials since
manufacturers strive to pass standard safety tests and exceed the requirements of the Consumer
Product Safety Commission and Toy Manufacturers Association. For some product categories (e.g.,
die cast products, action figures) better quality also means better product appearance, lower waste
rate and manufacturing costs, and faster production cycles.
Toy Manufacturers
Traditionally the U.S. toy industry was highly fragmented among small independently owned toy
makers. Entry barriers were low: minimal initial capital investments, low level technology, and
constant demand for specialty toys. According to the S&P Census, over 4,000 establishments
manufactured toys as their primary activity in 1997, about 70 percent employed less than five people.
About 65 percent of toy manufacturers generate annual revenues of less than $250,000.
The toy industry rapidly consolidated during the last ten to fifteen years. As a result, the top four -Mattel, Hasbro, Little Tikes, and the Hallmark Group -- have roughly 50 percent market share, up
from about one-third for the top four players two decades ago. The top two, Mattel and Hasbro,
expect to continue gaining market share via internal growth or acquisition.
There is still room, however, for a smaller player with a creative product to achieve blockbuster toy
status. Beanie Babies, manufactured by the unknown Ty Toys, for example, revived the whole
stuffed toy category. The most serious challenge for small manufacturers is accessing retail
distribution; often, the specialty market is the most viable route for a new manufacturer.
Manufacturing processes in the toy industry vary from outsourcing only to in-house only, with many
companies combining both. For example, about 70 percent of Mattel toys are produced in companyowned plants and the remaining 30 percent are subcontracted from third parties. The rise in toy
manufacturer subcontracting is driven by ever-increasing labor costs, short product life cycles, and
dependence on fads.
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Toy production is labor intensive. U.S. costs are often very high, especially considering that labor
and social benefit costs per employee have risen steadily with the American standard of living. As a
result, since the early 1950s, American manufacturers have combined high value-added domestic
operations with overseas production in developing countries (where labor rates are low), in an effort
to decrease costs. About 90 percent of toys sold in the U.S. are manufactured, either wholly or in
part, overseas. Most toys are imported from China, followed by Japan and Mexico. Other leading
suppliers are Taiwan, Malaysia, Thailand, Canada, Hong Kong, Indonesia, and Germany.
Distributors and Retailers
Most toy manufacturers distribute directly to large retailers and, to a limited extent, to wholesalers.
Major wholesale buying groups supply the independent toyshops and usually import directly from
foreign suppliers. Stores that only sell toys range from small, independent shops or specialty toy
retailers to large, national toy supermarket chains. Other retail outlets that sell toys include discount
stores; department, drug, food and variety stores; gift and novelty shops; price clubs; bookstores;
home supply stores; mail order catalogs; and most recently, online toy stores.
Toys carried in toy chain stores number from 8,000 to 13,000 SKUs; the average store size varies
from 8,000 to 30,000 square feet. In recent years, large specialty toy stores, such as Toys R US, K-B
Toys, and discount retailers have increased their overall share of the retail market. There are five
large toy retailers: Wal-Mart, Toys R Us, Kmart, Target, and Consolidated Stores (including K-B
Toys and Toy Works). They accounted for 54 percent of industry sales in 1998. Wal-Mart,
accounting for 17.4 percent of the market share, replaced Toys R Us (noted at 16.8 %) as the
number one toy retailer in the U.S. during 1998.
Independent specialty toy marketers continue to create an expanding niche in the marketplace.
Smaller toy stores can’t access hot best selling toys; if they can, they’re priced substantially higher
than chain stores. Small store survival depends on product uniqueness and customer service. In
1996, retail sales at specialty toy stores grew 10 percent, compared with growth of no more than
four percent for the total toy industry. Specialty stores attract an increasing number of customers
wanting toys not available elsewhere and toys that enhance child development. The specialty store
segment accounts for more than five percent of total toy sales, but industry observers believe market
share can rise to 15 percent via promotional efforts. Examples of specialty products include
nostalgia and retro toys, do-it-yourself toys, and exotic toys.
Customer Characteristics
Buyer characteristics encompass seasonal purchases, planned purchases (regardless of where and
when consumers shop), and high brand consciousness. More than 50 percent of annual sales
consistently occur during the busy holiday season. The Toy Market Index of the NPD Group, in
1998, noted that consumers planned 42 percent of their toy purchases or 52 percent of the dollars
spent for toys. Market studies show that the toy category is one of the most brand conscious
consumer goods categories. Roughly 70 percent of consumers say they look for a particular brand
when shopping for toys. As a result, toy manufacturers are among the largest ad spending industries
in the U.S. In 1998 doll and stuffed toy manufacturers spent 15 percent of their sales or 28 percent
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of their margins on advertising. Advertising spending for this category is expected to grow at 10
percent per year. Consumers most often seek the Mattel brand, but children want a variety of toys
regardless of manufacturer. Consumers usually seek a select group of toys and will shop around if
one retailer doesn't have what they want.
Supply Chain Management
Traditionally, the toy industry was characterized by a relatively long supply chain, with a high level of
fragmentation at some of its links. Players along the supply chain include raw material suppliers,
product designers, test laboratories, toy manufacturers, toy shippers, wholesalers and distributors,
and retailers. Toy manufacturers face many challenges when supplying “overnight success” products
(e.g., Tyco's Tickle-Me Elmo and Playmates' Teenage Mutant Ninja Turtles). Manufacturers face
different challenges when toys suddenly go out of fashion (e.g., virtual pets).
The toy industry also requires specific inventory management skills, since quantities are large and
tooling is costly and time-consuming. In addition, most products have a short life and must be sold
in the critical fourth quarter. Very few products last for two seasons and most experience significant
markdowns at the end of product life. Finally, Asia-based manufacturing implies long transit times
and complicated information exchanges between suppliers and retailers. These challenges make
demand management a critical success factor in the industry.
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Part II. Comparing Big Picture Pieces:
Online Toy Market Competition
Online toy sales increased in 1999 by nearly 1,000 percent to $425 million, from $45 million the year
before; while overall toy sales grew by just 8.6 percent. The e-Visory Report by NPD Group Inc.
and Media Metrix predicted online toy sales of $1.6 billion by 2002. They noted a 95 percent
satisfaction rate among toy e-shoppers in 1999, despite glitches that hampered e-shopping during
the busy holiday period. In the same survey by NPD Group Inc., 46 percent said (in September) that
they preferred in-person toy shopping, compared to 29 percent in January. There were 13.7 million
unique visitors to dedicated toy merchandising sites in December of 1999, up from 7.6 million a year
earlier. eToys.com led, in visits, with 5.8 million, followed by toysrus.com and KBkids.com.
Although eToys.com pioneered online toy retailing, other toy retailers rapidly addressed the ecommerce challenge, and it was only a matter of one holiday season before eToys was hit with
competition in online sales. Attacking from the street as well as from cyberspace are the classic
bricks-and-mortar retailers like Toys R Us and KB Toys (after spinning off their Web sites as
separate companies). Other toy retailers and manufacturers such as Noodle-Kiddoodle, Fisher-Price,
Hasbro, FAO Schwartz, Zany-Brainy, and Mattel promptly followed their lead by launching their
own online stores. Big box retailers (Wal-Mart, Costco, Sears, Kmart, JC Penny, and Target) are
poised to carve slices of the online toy market. Cutthroat competition in online toy retailing has
inspired creation of specialty online stores (SmartKids.com, HardToFindToys.com) and special
features (e.g., online animated, step-by-step instructions for assembling toys provided by
Netoy.com). But the biggest challenge from the competition against eToys.com came in summer
1999 when Amazon.com, the Internet guru of the book world, began selling toys through its toy
section (looking like it was modeled after eToys.com).
Toysrus.com
Toys R Us established toyrus.com as a separate subsidiary in April 1999. The venture, initially to
have been supported with a significant investment from Benchmark Capital, a Silicon Valley venture
capital firm, got off to a rocky start when the deal collapsed (from cultural differences). In 2000
Toys R Us found new partners, Softbank Venture Capital and Softbank Capital Partners, to
contribute first-class e-commerce expertise and $57 million to toysrus.com.
Unlike eToys.com, toysrus.com started with good brand recognition inherited from the parent
company. Many consumers made first online purchases at toysrus.com because they knew the name.
In 1999 toysrus.com generated estimated sales of $49 million and was the third most visited site on
the Web during 1999 holiday season. However, this very advantage turned against toysrus.com
when, in early November, high volume caused a slowdown and blocked customer access to the site.
In addition, the company fell short of its obligation to deliver orders placed before December 10 by
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December 24 (with standard shipping). Since most consumers do not separate toysrus.com from the
brick-and-mortar retailer, negative media badly damaged the Toys R Us brand. The company tried to
save face by providing frustrated customers with $100 gift certificates for future purchases (severely
impacting its bottom line), but the damage was irreparable. As one analyst put it: "We know you can
beat an adult, but the worst thing you can do is take away a kid's toy for Christmas." Roughly 42
percent of Toysrus.com customers polled in a recent survey said they would not return to the site
next year. In addition, consumers filed a class-action lawsuit against toysrus.com claiming that the
company knowingly accepted orders for presents it knew it could not deliver.
KBkids.com
KBkids.com was formed in July 1999 when Consolidated Stores (a closeout retailer also operating
over 1,300 K-B Toys stores) combined its online toy operations with those of BrainPlay.com.
Consolidated Stores owns 80 percent of KBkids.com; BrainPlay.com's investors (including Sequel
Ventures and Sevin Rosen Funds) own 20 percent. In January 2000 KBkids.com Inc. filed a
Registration Statement with the SEC for a proposed $210 million initial public offering that could
make KBkids stock available by mid-April.
KBkids.com carries toys (73% of revenues), videos (15%), software (7%), and video games (5%).
The company carries about 10,000 SKUs, representing over 100 traditional and specialty brands.
The company has supply and marketing agreements with KB Toys, the second largest specialty toy
retailer in the U.S., operating over 1,300 stores across the nation. In the five weeks of the holiday
season ending December 26, 1999, Media Matrix ranked KBkids.com as the twelfth most highly
trafficked online retail site in respect to unique visitors. Since its launch in July 1999, KBkids.com
was ranked the Best Overall Toy Web Site by the Wall Street Journal. KBkids.com was also ranked
number one for customer confidence and overall cost by Gomez Advisors, number one for cost by
Forrester Research, and was named one of the "Ten Best Online Software Stores of 1999" by
Softletter. However, after a troubled 1999 holiday, a stunning 44 percent of shoppers surveyed said
they were unlikely to shop again on the online toy retailer KBKids.com, according to the RS report.
Toysmart.com
CEO David Lord formed toysmart.com in 1998 as a spin-off from The Holt Co., a retailer of school
supplies. The company received private funding from Walt Disney's Buena Vista Internet division
(which holds roughly a 60 percent stake) and Zero Stage Capital. As of April 2000, the company has
not announced any future plans to make its stock available to the public.
When founded in December 1998, toysmart.com realized that it couldn't be yet another online toy
company in a rapidly overpopulated segment. The company, instead, created a niche by providing
harder-to-find educational items. As its name suggests, toysmart.com specializes in "good toys"
described by its site as "educational, fun and open-ended, offering the substance not found in the
fad-driven Furbies or fashioned-focused Barbies." The company offers more than 75,000 toys from
manufacturers including Alex, Brio, Gamewright, K'nex Industries, Playmobil, and Rokenbok.
Disney links to toysmart.com from its Web sites, while toysmart.com sells Disney goods. In addition
to educational, non-violent toys, toysmart.com offers online articles and information for parents and
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educators, including such special features as curriculum guides, teacher resources, classroom
decorations, and art supplies. The company markets heavily to grandparents by advertising in
publications geared toward the elderly and throughout popular retirement areas such as Florida and
Arizona.
During the busy holiday season of 1999, toysmart.com never suffered a site outage, even when
hitting a peak of 60 million hits per day, had no reported significant slowdowns, and delivered
orders placed as late as December 23 in time for Christmas. The company maintained its on-time
delivery index score of 98 percent during the holiday season and was ranked as the 24th-most visited
Internet shopping site during the Christmas rush. About 55 percent of its customers are repeat. By
the end of 1999, one in two consumers recognized the toysmart.com and its "good toys" brand.
ZanyBrainy.com
ZanyBrainy.com, an e-commerce venture of Zany Brainy, Inc. and Online Retail Partners, LLC, was
launched in November 1999; the media called it a "new twist" in online toy retailing. Called Trade-aToy, the first-ever online toy trade-in program was aimed at turning children's "war chests back into
toy chests" and encouraging non-violent, educational play. For those online customers trading-in a
"violent" toy, ZanyBrainy.com sent back a free toy promoting creative play. The company collected
nearly 3,000 violent toys, and created a peace sculpture unveiled in January 2000 at the Capital
Children's Museum in Washington, DC.
ZanyBrainy.com (www.ZanyBrainy.com) is dedicated to offering products that entertain and educate
children while instilling a sense of wonder and a lifelong passion for learning. Setting a precedent for
e-commerce today, ZanyBrainy.com brings the magic of Zany Brainy 's unique in-store experience
to the Web to create an innovative toy shopping experience. It provides online shoppers with
guidance and recommendations from real-life KIDsultants (TM), allows users to virtually try a
product with its exclusive "Try Me" feature, and permits consumers to shop as they want -- by age,
category, brand, and more.
SmarterKids.com
SmarterKids.com started with hopes that feeding the brain gives online toy sales muscle. The
company sells games, software, hands-on activities, and other educational products. Its Web site's
evaluation system matches products to children's individual needs and learning styles. Founded in
1994, the firm has been involved in software development and children's intelligence tests under the
names Virtual Entertainment and Virtual Knowledge. Its largest investors -- North Bridge Venture
Partners, Commonwealth Capital Ventures, and Canadian publisher Torstar -- own a combined 34
percent of its stock. Partner National Computer Systems, a standardized test scorer, recommends
items from SmarterKids.com based on exam results.
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Part III. Studying a Critical Piece in the Big Picture:
eToys.com
In Internet commerce, getting there first is crucial. eToys.com became the first cyberspace category killer
for toys by offering a wide selection of merchandise not found in any one brick-and-mortar toy
store.
When and How it Began: Historical Timeline from 1997 to 1999
While fighting crowds to buy Christmas gifts for his nieces and nephews, former Walt Disney theme
park executive Edward "Toby" Lenk envisioned an online toy store that eliminated shopping
hassles. Lenk discussed the idea with several potential partners including IBM Corp., but felt as a
small start-up company, eToys would not get the attention needed to succeed.
Lenk earned his MBA from Harvard; he was a former Corporate Vice President with the Walt
Disney Company in the Strategic Planning Group. As he formed eToys.com, he assembled a stellar
team around him. He would eventually draw people from such organizations as PepsiCo; Union
Bank of California; Hollywood Entertainment, Inc.; Times Mirror Company; L.L. Bean, Inc.; and
The Boston Consulting Group.
In March 1997 he founded the venture with entrepreneur Bill Gross, founder of Knowledge
Adventure, a leading children's software company, and chairman of idealab!, an Internet startup
incubator. idealab! suggested that eToys connect with another young start-up, Digital Boardwalk. In
1997, eToys successfully completed two rounds of venture capital financing: the first earned $3
million from Dynafund Ventures, Intel Ventures, and Idealab Capital Partner; the second, more
substantial round came in June from Highland Capital Partners, Sequoia Capital, and Bessemer
Venture Partners.
In February 1999 eToys filed for an initial public offering (IPO) valued at $115 million and
underwritten by Goldman, Sachs & Co.; BancBoston Robertson Stephens; Donaldson, Lufkin &
Jenrette; and Merrill Lynch & Co. The company intended the funds for marketing and sales,
advertising, IT capital expenditures, and expansion of fulfillment operations and executive offices.
The shares were listed on the Nasdaq Stock Market under the symbol ETYS. However, eToys
delayed the IPO due to the acquisition of BabyCenter Inc., announced in April 1999.
On May 20, 1999, eToys opened the sale of stock to the public. In one of the year's most eagerly
awaited initial public offerings, eToys sold eight per cent of the company for $20 a share, thus
raising $166 million. Under the IPO plan, Bill Gross' idealab! retained control of 25 percent of the
stock, worth more than $500 million -- making him one of the country's richest entrepreneurs.
eToys founder Toby Lenk retained ownership of seven per cent of the company, worth $150
million. Other large shareholders included Intel and investors Highland Capital, Sequoia Capital, and
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DynaFund Ventures -- each with about eight percent of the company, worth more than $150
million.
On the first day of trading after the IPO, eToys Inc. stock jumped from $20 to as high as $85,
before settling at $76.56. That gave eToys a market capitalization of more than $7.7 billion -- about
35 percent greater than that of Toys R Us, although eToys’ annual sales of just $30 million
constituted less than one percent of Toys R Us' sales. Toys R Us shares fell 3/16 to $22.68,
resulting in a market value of $5.6 billion. The stunning post-IPO performance increased Toby
Lenk's share to $574 million, while the value of the 25 percent controlled by Bill Gross' idealab!
jumped to $1.9 billion.
eToys.com, in 19 months of operation, attracted 365,000 customers and boasted the heaviest web
site traffic of any e-commerce company during Christmas 1998. Encouraged by success in the U.S.
market, eToys launched its UK retail web site in October 1999 and announced plans to launch a
second European site the following year. The UK site, www.etoys.co.uk, features more than 5,000
products from specifically British toys to a wide range of international brands such as Lego. The
company recruited a 40-strong team to run the operation, with orders filled from a 25,000 square
foot warehouse in Swindon, west of London. Customers received orders within three to six business
days.
However, increasingly intense competition required additional funds for marketing, thus keeping
eToys.com in the red longer than expected. And the news wasn’t well received on Wall Street.
Shares dropped substantially in October 28, 1999, when eToys.com announced that a holiday
marketing blitz cost 30 percent more than planned. For the second quarter ended September 30, the
company posted a net loss of $44.9 million (38 cents per diluted share), compared with a net loss of
$3 million (4 cents) for the like period a year ago. In October 1999, Goldman Sachs & Co.
downgraded its eToys rating from "trading buy" to "market outperform," and several other agencies
downgraded its ranking from "buy" to "neutral" or "long-term attractive."
The hotly anticipated Christmas selling season turned out to be a disaster for most Internet retailers.
Instead of differentiating their brands, online retailers merely drowned in a sea of frenetic
advertising, wasting buckets of money along the way. eToys.com spent $66 million on marketing
and sales alone to generate revenue of $107 million. Moreover, e-tailers attracting numerous orders
often exposed the inadequacy of their fulfillment systems.
What’s for Sale: The Product Line
At its opening in 1997, eToys.com offered 1,000 products from about 100 manufacturers, planning
to increase to over 5,000 items shortly after opening. As of February 2000, eToys carried over
100,000 SKUs from more than 750 manufacturers, representing such merchandise categories as
toys, video games, children's software, videos, music, and books.
Larger toy retailers predominantly sell toys from major manufacturers; eToys offers a wide selection
of specialty toys. In addition to global brands like Mattel, Fisher-Price, Hasbro, Little Tikes, and
K'nex, eToys.com has less commonly known brands like Brio, Wild Planet, Learning Curve, and
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more than 50 other specialty manufacturers. Some toy brands are exclusive to eToys.com. For
example, in October 1999, specialty toy manufacturer Discovery Toys had chosen eToys.com as its
exclusive online distributor. Under the agreement, eToys.com now sells Discovery Toys' educational
products through a feature shop on the eToys Web site. Just as in traditional retailing, brands are an
important part of eToys.com's merchandising.
In October 1999, eToys.com signed an agreement with Children's Television Workshop Online to
develop "eToys Presents The Sesame Street Boutique," a one-stop online shopping location for
CTW-licensed toys, software titles, videos, and audio products. The online store features a
comprehensive selection of over 250 Sesame Street-licensed products accessible via a link from the
CTW Family Workshop.
The company places much emphasis on software and video games for children. With more than 550
software titles for children ages 12 and under, eToys ' software department features a variety of wellknown brands, including Broderbund, Disney Interactive, Purple Moon, Microsoft's Magic School
Bus, and the JumpStart series by Knowledge Adventure. To help parents choose the appropriate
titles for their children, eToys.com includes official ratings from the Entertainment Software Ratings
Board (ESRB) on all games, and also provides its own ratings on titles that the ESRB deems suitable
for "Teen" or "Mature" audiences. eToys.com's software and video game departments allow
customers to search for titles by any combination of age, educational category, game, or software
platforms. Customers can also consult the "eToys Recommends" section to browse in departments
such as New Releases, Bestsellers, Picks of the Month, and Family PC Award Winners.
A new addition to the product line: BabyCenter.com. BabyCenter.com started as a content-only
site offering its 395,000 registered members personalized information from an editorial team
including health professionals and family doctors. The company received more than $13 million
from investors such as Bessemer Venture Partners and Intel. In August 1998, the site started selling
baby and early-childhood products. BabyCenter.com estimates that 95 percent of the women in its
community are either pregnant or have a child under the age of three. President and co-founder,
Mark Selcow: "We have an advantage because we form deep, trusted relationships with them for
months before they need to buy anything from us. By the time they are ready to buy, we can suggest
products that make sense and complete the transaction -- all from one site."
BabyCenter was acquired by online eToys.com in July 1999 for 18.7 million shares, or approximately
14 percent of its outstanding shares, for all the shares of BabyCenter.com, becoming a wholly
owned subsidiary. Although eToys.com has a baby section and a children’s bookstore in its online
store, it believed that the two brands could coexist. eToys.com and BabyCenter.com are separate
entities: each pursues its own brand strategy. Before the 1999 holiday season, eToys.com and
BabyCenter.com added links directing shoppers to the other's site. Even though it is a fully
integrated subsidiary, BabyCenter.com has its own distribution center, merchandising, and online
content. BabyCenter.com ships from a single national distribution center in Northern California. In
October 1999, BabyCenter.com launched a television advertising campaign to support its print and
direct-mail advertising. In addition to revenue from sales, BabyCenter.com hopes to make money in
sponsorships from companies such as Johnson & Johnson, Pampers, and Beech Nut Naturals.
BabyCenter.com competes with traditional merchants such as The Right Start and Gap
(Babygap.com), hoping to leverage its existing reputation online and among an increasing number of
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other online retailers building exclusive relationships with manufacturers and fashionable offline
media. For instance, only Babystyle.com carries DKNYbaby, Amy Coe Linens, and Hanna
Andersson clothes online. Meanwhile, rival iBaby.com has an exclusive e-commerce partnership to
link its Web site with Dan Howard Industries, one of the largest manufacturers and retailers of
maternity apparel. iBaby is part of iVillage.com, which can potentially drive about 7.3 million unique
visitors a month to iBaby and the other properties in its baby area: iMaternity, Parent Soup, and
Parent's Place.
How Customers Feel: The Shopping Experience
Founded as a substitute to the toy superstores, eToys.com tried to capture the market by offering
product information, value-added services, and innovative merchandising through an intuitive and
easy-to-use interface. Shopping with eToys.com is easier than the in-store experience and more
comprehensive than catalog shopping. "Big toy stores offer no service and are crowded on
weekends and holidays," says Toby Lenk, "Parents, who make 20 trips a year to toy stores, need a
better way to shop. Relatives also have a hard time buying gifts for children, particularly when they
live in a different city than the child. We'll help them find a good product, gift-wrap it, include a card
with a custom message, and ship the gift for them."
Consumers can get top picks from parenting magazines, access information on award winning
products, and learn about which products help a child's physical, emotional, and intellectual
development. Articles from child experts as well as parents provide ideas on toys, play, and fun.
eToys.com’s simple interface allows customers to build their own custom store and to easily find
products by age, brand, category, development criteria, and price. Children can create their own wish
lists and e-mail them to grandparents, aunts, uncles, and other promising prospects. The site also
offers gift registries and timely reminders of birthdays and holidays.
All orders are confirmed via email, and because eToys.com maintains its own warehousing and
fulfillment operation, in-stock orders are shipped within 24 hours of receipt. eToys.com immediately
informs the customer if a product is in stock. The items arrive via UPS within three to eight days of
ordering. Unlike other non-store merchants, the company ships its goodies in plain boxes, a practice
requested by parents not wanting their children alerted to toy deliveries.
eToys.com's prices are designed to meet or beat those of traditional bricks-and-mortar toy retailers.
As a hedge on competitive pricing, eToys.com employs a Low-Price Guarantee that offers a 110
percent refund if a buyer finds the identical item for less at any "land-based" retail store in the
United States. Consumers pay a delivery charge for their goods: typically between $4.95 and $10.95,
depending on order size and value. After conducting an extensive research on returns, the company
found that product return inconvenience is more of a negative than the associated costs of making a
return; eToys thus differentiated itself from competitors. When customers return an item, they
simply pack it, attach the enclosed return label, and drop it off at the post office or a UPS drop-off
without waiting in line. Customers can call immediately for exchange or refund processing, and
eToys.com reconciles it later when the return arrives.
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The company's call staff is divided into 15 or 20 specialties, and calls are automatically routed to
those with a caller's needed expertise. The advantages of building a single call center make ecommerce more efficient than catalog or brick-and-mortar retailing. While about 120 phone calls are
required for every 100 catalog sales, at eToys.com the ratio is 40 calls for every 100 sales.
The eToys.com site has an enviable demographic: 70 percent female (unusually high for the Web),
25 percent with graduate degrees, and average household income of $70,000. The average order size
for the last quarter of 1999 was $67, compared to $33 to attract each new customer, less than most
of its online toy retailing rivals.
Expansion: Brand Building and Promotion
eToys.com entered the market with aggressive promotion and distribution plans, quickly making it a
household name among Internet users. From the first day the company worked hard to build a
brand name by aligning with some of the biggest names in online commerce. In October 1997, the
company entered a marketing agreement with America Online Inc. (AOL), establishing eToys.com
as a preferred AOL provider of children's toy products through an eToys.com content area on the
AOL Network and AOL's Web site. In addition, AOL agreed to promote and advertise eToys.com
on a preferred basis in certain online areas controlled by AOL and to deliver a specified number of
annual page views to the online areas promoting eToys.com. Over the 26-month term of the
agreement, eToys.com paid AOL the minimum payment totaling $3.1 million. eToys.com also
established advertising and promotion relationships with Yahoo, Infoseek, Lycos, Hearst HomeArts,
Parenthoodweb, and Moms Online.
In March 1998, eToys bought for an undisclosed amount one of its rivals, Toys.com, owned by Web
Magic Inc., gaining Toys.com's Web Rite address (www.toys.com), inventory, and customer
database. The deal gave eToys.com the Toys.com distribution agreement with Yahoo, including the
Merchant Spotlight on the Yahoo! Visa Shopping Guide's toys page. In 1998 eToys.com became the
first online merchant to appear in Visa's 15-year-old "It's everywhere you want to be" campaign.
eToys.com also partnered with Visa in a charitable promotion allowing consumers to buy toys
online at a 50 percent discount, thus donating to the charity holiday drive. That promotion was
backed by print ads from BBDO.
In addition, Visa promoted eToys.com and electronic commerce through nationwide broadcast and
print advertisements illustrating the ease and convenience of online shopping. eToys.com was
featured in Visa's national television spot aimed at building credibility for both eToys.com and
online commerce payment by credit card.
In fall 1998, eToys.com launched its first national TV campaign, with billings estimated at $7 to $10
million. Developed by agency Kalis & Savage, the campaign depicted a regular toy store as a war
zone. A TV spot, titled "Toys of the Valkyries," featured a mom in full camouflage gear battling
other parents for toys. Then the scene shifts to show a mom at home on her computer, peacefully
shopping on eToys.com. (The spot was supported by print ads in consumer magazines and
newspapers.) "Shopping for toys shouldn't be a battle," informs the voice-over. The eToys.com Web
site address appears, along with the tag line: "We bring the toy store to you." The agency listened to
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women in focus groups who "talked about battling their way through toy shopping, with unruly kids
and fistfights over toys."
eToys.com has affiliation agreements with over 250 sites that link to eToys.com in exchange for 25
percent of any products sold -- probably the highest percentage any online merchant offers. But the
company believes that it's well worth it and still a cheaper cost per order than paying up front for
advertising. In April 1999, eToys.com, together with other online retailers including Amazon.com,
Beyond.com, Internet Shopping, KidsOnline, and PCFlowers, signed on as a charter advertiser
integrated into the desktop environment of the first 10,000 free computers shipped by Pasadena,
California-based Free-PC. Ads appear as rotating, targeted banners and fixed, direct access buttons.
For the 1999 holiday season, eToys.com created a lavish TV and print ad campaign designed to set it
apart from rivals in an increasingly competitive market. The price for the ad campaign, estimated at
$20 million, came to almost 70 percent of the firm's total revenue for 1998, and about 16 percent of
its estimated 1999 revenue. Publicist Hal Riney, of San Francisco, produced the ads, focusing on the
parent and child as they share a special moment, and striving to communicate what differentiates
eToys.com as a brand. For example, in the TV ad dubbed Fish, Mom takes her son to the beach,
where he explores fish-filled tidal pools formed in the rocks. But the little guy can't get up close and
personal until Mom finds the "perfect gift:" a scuba mask, from eToys.com.
In November, the company rolled out a nationwide children's literacy initiative to promote kids'
interest in books. Created in partnership with television talk-show host Rosie O'Donnell, the
program, dubbed Rosie's Readers, served as a fundraising platform for O'Donnell's charitable "For
All Kids" Foundation. The project became a regular feature on Rosie's show and the eToys.com
Web site. In conjunction with the program's launch, eToys.com unveiled a new section of its online
bookstore devoted entirely to Rosie's Readers. The new area features book selections provided
exclusively by O'Donnell, key author interviews, interactive dialogue, and a reading reward program.
At the same time, eToys.com partnered with San Francisco-based Gap, which agreed to promote
eToys.com in its GapKids and babyGap stores. Under the agreement, both companies displayed
each other’s products on their Web sites. Customers spending $75 at GapKids or BabyGap were
offered a $10 gift certificate to eToys, and customers spending $75 at eToys.com received a $10 gift
certificate to GapKids or BabyGap.
Technological Solution
A Web site going down for eToys.com in December would be equivalent to KMart not just losing its registers but locking the doors to all of its stores at 10 a.m.
the Friday after Thanksgiving.
John Hnanicek, CIO of eToys.com
Before eToys.com became a major e-business player, it put its future in the hands of VAR Digital
Boardwalk Inc., which had already developed commerce sites for Spelling Entertainment and The
Highlander television series. The companies began work in July 1997 and just two months later, a
retail Web site was up and running, just in time for the coming holiday season. Shoppers could
locate toys based on age, price range, kind of toy, and brand name. After a successful holiday debut
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for eToys.com and extensive new venture capital funding to expand its business model, eToys.com
decided to forgo Digital Boardwalk's off-the-shelf solution and develop its e-commerce application
internally. Anticipating the explosion of online shopping, the company set out to retool its
infrastructure to handle ten times the sales volume of only a year ago. "The goal was building a
strong foundation to get us ready, not just for this holiday season but for the future," says Kayne
Grau, Director of Technical Services for eToys. "We had to put major pieces into place to make the
Web site a lot more reliable and scalable and turn it into the ultimate experience for the customer."
How, When, and Where: The Fulfillment Operations
Providing fast, reliable product shipments to customers is a key component of the eToys.com
strategy (due to the time-sensitive nature of gifts for children's birthdays and holidays). "Failure for a
pure-play e-commerce retailer to properly plan system capacity is 100 times more important than it
would be for a click-and-mortar company," says John Hnanicek, CIO of eToys. "For a big click-andmortar retailer, the Web site may represent only a small fraction of total sales. They can survive
without it. But pure-plays like us live and die by Web-site sales."
What's more, the Web has raised customer expectations of speed and service, making a difficult task
even more challenging. Internet customers expect the order faster than regular mail catalog
shoppers. Good fulfillment -- taking the right product, putting it in the right box, shipping it, and
gaining the customer's approval on arrival -- became a major challenge for eToys.com and other etailers. No matter how effectively the product is sold on the Web, it must get to the customer.
The ongoing debate in the industry is about pros and cons of outsource versus in-house fulfillment.
Many managers doubt the wisdom of outsourcing fulfillment operations to third parties, such as
Fingerhut, that may have dozens of clients vying for services at crunch time.
John Hnanicek, CIO of eToys.com says, "The downside with outsourcing is that you surrender
some control, which can be especially worrisome when you're dealing with the process that most
directly touches your customer. It's crucial to have a partner you feel comfortable entrusting with the
responsibility of your customers' satisfaction." But at the same time, as online retailers' sales expand
and they become more challenged by the management of their own logistics, outsourcing becomes a
more attractive option.
Stage I: In-house fulfillment. eToys.com started with its own 80,000 –square foot warehouse in
California from which it shipped all orders. It did not have drop-ship arrangements with suppliers
and manufacturers. The eToys.com operations behind its virtual portal were as unglamorous as any
Toys R Us superstore. In a cement floored warehouse, guys at PCs printed out customer orders,
while pickers, armed with clipboards and shopping carts, rushed up and down the aisles, pulling
merchandise from a stock of 10,000 different items. A visitor described the warehouse as a
workshop: "For each order, a picker picks. A checker checks. A packer packs. A wrapper wraps."
Stage II. Outsourcing. After a rush Christmas of 1998, when eToys.com had trouble filling
numerous orders at Web sites, the company realized it had outgrown the low-tech warehouse
capacity used since its launch. "We had totally outgrown our existing facility last year and needed a
larger one," says Lou Zambello, Senior Vice President of Operations at eToys.com. The company
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also realized the need for a warehouse on the east coast because about three-quarters of its
consumer orders originated east of the Rockies. eToys.com looked for someone to handle the
warehouse, estimating that the chances of finding an appropriate partner were 50-50. The alternative
to outsourcing was to build the warehousing capacity, but that implied delayed operations for two
years. As a result, eToys.com turned to a third-party fulfillment solution. The decision was probably
not too difficult to make: while there are about 20 companies competing in the third-party
fulfillment business, many of them are small, only a handful have more than 500,000 square feet of
space, and none comes close to Fingerhut's nearly four million square feet of space.
In June 1999, eToys.com announced that it secured distribution capacity to support the company's
requirements for the busy 1999 and 2000 holiday seasons by entering into a warehouse and
distribution agreement with Fingerhut Business Services. Under the Fingerhut Business Services
agreement, eToys.com received access to Fingerhut's one –million –square foot, state-of-the-art
warehouse and distribution center in Provo, Utah, to expand its inventory capacity, reduce standard
shipping times, and more efficiently process orders. In addition to inventory and distribution, the
new fulfillment center handled gift-wrapping and other special customer services, such as adding
batteries on request for "batteries-not-included" toys and games. Also, eToys.com bought the source
code to Fingerhut's warehouse management system, for use in running its existing facilities and a
new 400,000 square foot fulfillment center the company opened in Danville, Virginia. eToys.com
began shipping from the Provo facility in the fall of 1999.
Fingerhut Business Services, Inc. is a division of Fingerhut Companies, Inc., a wholly owned
subsidiary of Federated Department Stores. Fingerhut Companies, Inc. is a leading database
marketing company selling a broad range of products and services through catalogs, direct
marketing, and the Internet. Fingerhut also owns Popular Club, a membership-based cataloger of
general merchandise, Arizona Mail Order and Bedford Fair, catalog apparel companies, and Figi's, a
food and gift catalog company. In addition, the company owns 40 percent of PC Flowers & Gifts,
Inc. and equity positions in The Zone Network, FreeShop.com, Roxy.com, Hand Technologies, and
1-800BIRTHDAY.com, leading Internet retailers.
Federated, with corporate offices in Cincinnati and New York, is one of the nation's leading
department store retailers, with annual sales of more than $17.3 billion. Federated currently operates
more than 400 department stores in 33 states under the names of Bloomingdale's, The Bon Marche,
Burdines, Goldsmith's, Lazarus, Macy's, Rich's and Stern's. Federated also operates the Fingerhut,
Bloomingdale's By Mail, Macy's By Mail and Macys.Com direct-to-consumer catalog and electronic
commerce subsidiaries.
Fingerhut handles Internet orders not only for eToys.com, but also for Wal-Mart, Levi Strauss &
Co., Intuit Inc., PC Flowers & Gifts, and Wet Seal Inc. Its customer list now includes more than 20
firms. John Buck, Fingerhut Business Service's President, projects that the company's annual
revenue will rise to $100 million in 2000, up from $40 million expected in 1999, and suggests it
could become a $1 billion operation within five years. FBSI client services are provided out of the
Provo facility, as well as facilities in Minnesota and Tennessee. These client services can include
some or all of the following functions: order management; web and phone order processing; order
fulfillment, which can encompass merchandise procurement; product receipt, warehousing and
shipment; payment processing; customer service; merchandise returns processing; telemarketing and
marketing support.
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Utah Distribution Center, which handles the majority of eToys.com orders, is a massive, unadorned
warehouse at the mouth of Spanish Fork Canyon. During the hectic holiday season the facility
employs 1,200 people, about 800 of them seasonal employees. The warehouse, although one of the
largest in the state, appears similar to other structures found near Interstate highways. Inside,
however, it is state of the art.
Orders, for instance, are consolidated, with workers picking full cases. The bar codes are scanned as
the individual toys are put on a tilt-tray conveyor belt, one toy to a tray. When the toy passes the bin
where the order is being filled, the tray tilts, dumping the toy down a chute. Each bin gathers the
toys for several orders. The toys are then put in a plastic container. From there, they are taken to a
gift-wrapping station, where they are wrapped with individual tags, right down to personalized
messages, or to a packing station, where they are packed with child-safe material made from
cornstarch. Such touches -- a personalized message on an Electronic Talking Rotten Egg shipped in
child-safe packaging material -- are examples of eToys.com's focus on customer service.
Stage III. In-house fulfillment (again!). During the busy holiday season of 1999, eToys.com
delivered only 96 percent of its merchandise in time for Christmas day. The company subsequently
announced its decision to reduce its dependence on unreliable third-party distributors by building its
own warehouses. In the beginning of 2000 Toby Lenk said the company would accelerate bringing
its distribution centers in-house, a move to decrease shipping costs and make order fulfillment more
efficient. etoys.com also decided to phase out its relationship with Fingerhut.
The announcement was consistent with eToys.com earlier decision (in May 1999) to lease over
400,000 –square feet of additional warehouse capacity to develop its own state-of-the-art fulfillment
center in Danville, Virginia. Danville was selected as the company's east coast fulfillment center due
to its strategic location and highly qualified and available workforce. A $14 million distribution
center in struggling Pittsylvania County is expected to employ 600 permanent workers. In 2000 the
company announced that it would double the warehouse space in Danville as compared to the initial
plans. etoys.com also plans to boost its capability by opening its first east coast shipping center in
2000, adding 400,000 to 500,000 square feet of inventory space to an existing base of 600,000 square
feet split between sites in California, Utah, and Minnesota. Although the company never announced
the cost of these moves, analysts expect the transition to impact earnings.
Meanwhile, order fulfillment costs for the last holiday season were higher than expected. The
reported inventory of $62 million is also higher than some analysts expected, although the company
claims that inventory consists of primarily fast-moving traditional toys, rather than trendy bestsellers
that may need to be written off later.
While investors are concerned about the higher than expected fulfillment costs, the actual expenses
might be higher than reported. In early 2000, the Securities and Exchange Commission initiated a
review of how eToys.com classifies its distribution and fulfillment costs. The items in question
mainly cover its costs for warehousing inventory, picking and packing customer orders, packaging
supplies, as well as equipment and supplies at distribution facilities, payroll and travel for people
who work in distribution, and also third-party fulfillment fees. eToys.com classifies these costs as
marketing and sales expenses, but SEC may decide that these items should be classified as cost –of
sales. If they were forced to reclassify these costs, their gross margins would be reduced.
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Part IV. Learning the Latest:
Recent News about eToys.com
As investors turned away from money-losing Internet retailers, eToy shares went down 92 percent
from an October 1999 high of $84.25. On May 5, 2000, shares of eToys closed at $7.09 on Nasdaq.
Analysts blamed the worse-than-average collapse of the company's stock price on intensifying
competition in online toy retailing, higher than expected order-fulfillment costs, and a flood of new
eToys shares on the market after the company's post-IPO lockup period. They also admitted that
the company was “punished” after doing a lot of things right during the crucial holiday season. It
bested its competitors, such as ToysRUs.com and KBKids.com, in number of customers, average
order size, and revenue. Also, eToys was rated number one among the top 50 commerce Web sites
in overall holiday performance. Independent research, conducted by Resource Marketing Inc. and
published in Fortune magazine, assessed 80 separate criteria, simulated more than 500 customer
transactions, and subjected sites to a minimum of 20 hours of testing.
Financial Performance
For the fiscal year ended March 31, 1999, eToys reported a loss of $189.6 million ($1.29 per share)
on $151 million in sales, which brings the total loss since starting operations in late 1997 to over
$220 million. About 71 percent of the company's annual sales ($107 million) were generated in the
third quarter ended December 31, 1999. The company accounted for $120.5 million in marketing
and sales expenses for the year with $56 million in advertising costs. Fulfillment, customer service,
and credit card fees were $50 million (or 33% of net sales for fiscal 1999). Other marketing and sales
expense, including personnel and general overhead, was $14 million, or nine percent of net sales.
New customer acquisition costs for the year amounted to $36 per customer, among the best in ecommerce. In the fourth quarter, customer acquisition cost was even lower: $24 per customer.
Orders from repeat customers accounted for 49 percent of purchases. The average order was $62,
up slightly from a year ago, and the customer base reached 1.9 million, up from 365,000.
The company expects to approach the break-even point by the holiday quarter of 2001 and should
reach profitability in 2002. However, a First Call/Thomson Financial survey of 11 analysts produced
a mean loss estimate of $1.46 a share for the company's fiscal 2001 period.
While many online retailers ran out of cash, eToys claims the company has $139.6 million in cash,
enough to finance operations into next year. eToys also noted that it paid for $54 million of the $60
million for available inventory at the end of the fourth quarter. However, company executives
continue to look for additional financing, without revealing details of how much they need or when
they hope to obtain it. But Barron's forecasted that eToys would run out of money in 11 months if
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its quarterly sales and expenses continue at the present pace. Analysts suggested that, to be
profitable, eToys needs at least $200 million to grow annual sales above $750 million.
European Operations
eToys plans to enter a second European market in 2001 in addition to its UK operations, and is
exploring separate financing. In April 2000, eToys suggested it might spin off its newly born
European enterprise to dispel U.S. investor fears regarding the high cost of global development.
eToys' European division generated losses of $9.5 million and sales of only $2.5 million since going
public.
Growth Initiatives
As part of its efforts to increase sales and expedite profitability, eToys plans to add party goods and
hobby product categories, developing stores for both new segments in 2001. The company is also
exploring additional categories for next year. Analysts believe that sporting goods and apparel would
be natural extensions. In 2001 eToys is likely to begin selling private-label, or eToys-branded,
products, with profit margins as high as 70 percent. eToys also expects to eventually add advertising
to its site, though it may wait until it can claim more than its current 1.7 million customers.
The company plans to create new, distinct content focused on interests of parents and children,
more broadly serving an expanding customer base. "Our new content and commerce initiatives are a
key part of our mission to create the premier family-oriented site on the Internet," said Toby Lenk.
"Adding new stores to our category line-up and launching parent and kids content areas are designed
to solidify eToys ' position as the leading destination in the online children's market."
Costs Reduction Initiatives
eToys, responding to investor concerns about operating costs, claims that marketing and advertising
costs will be lower as a percentage of sales by 2002. eToys plans to reduce fulfillment, customer
service, and credit card fees as a percentage of net sales through increased productivity (from greater
automation and operating experience in fulfilling customer orders). eToys also plans some cost
savings through lower shipping costs. Its new warehouse in Danville, Virginia, will be operating by
July, saving the cost of shipping goods from west coast facilities to the east coast, where it does most
of its business. The company expects to improve gross margin through changes in product mix
(including higher margin private label products), additional non-fulfillment revenues such as
sponsorship fees, and improved purchasing terms with higher-volume purchasing. eToys also
announced it is scaling back its fees to other Web sites that refer paying customers.
Strategy
Some analysts and media criticize the company for "spreading too thin" rather than focusing on
toys. eToys management believes that the company, by concentrating on one target audience and
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servicing all their needs, has one of the most focused strategies on the Internet. The company
believes that focusing on every day needs of parents and children rather than holiday-specific needs
will establish eToys as a year round e-commerce player.
Overcoming Seasonality
As part of its efforts to position the company as a year-round resource for kids-oriented products
and ideas, eToys developed the first off-season initiative, titled as "Make a Splash," to launch its
online Summer Store. The store offers nearly 1,000 products, from traditional summer essentials to
unique and hard-to-find surprises, with featured items ranging from a firefly catcher to a $59.99
potato-sack-race kit.
"People think of summer and they think of kites and sand buckets and pools," says Paul Gainer,
Vice President of Merchandising. "We've really tried to dig deeper than that and think about the
different experiences people have during the summer." The company is taking advantage of its
online format to offer more products than land-based retailers fit in limited floor space, Mr. Gainer
noted. In addition to summer essentials like swimming pools (e.g., 38 models), the new summer
shop will feature accessories for summer activities not normally exploited by toy retailers. For
instance, the Summer Travel section will offer everything from car games and travel music to
suitcases, atlases, and cameras. A Summer Nights category will offer telescopes and camping gear.
Sidewalk and Driveway Play will feature everything from chalk for hopscotch to Snow Cone carts.
A new $8 million U.S. television and print marketing campaign will extend the company's successful
ad theme: "eToys. Where Great Ideas Come to You." The linchpin of the campaign is a 30-second
spot called "Firefly," celebrating the small but significant moments that help forge the bond between
parents and children (positioning eToys as the ultimate ally to parents).
A new TV program supports the summer campaign: Rosie's Readers "Summer Reading Adventure"
will promote children's literacy by encouraging kids to read from a special summer reading list
created by eToys and Ms. O'Donnell. This program extends an alliance eToys and Ms. O'Donnell
forged last year to help promote children's literacy.
"Make A Splash" will run as a cross-marketing initiative with GapKids and babyGap. Customers
who purchase $50 or more at GapKids or babyGap will receive a $10 eToys gift code; customers
who purchase $50 or more at eToys will receive a $10 gift code good online or in-store at GapKids
and babyGap. Both gapkids.com and babygap.com will feature the promotion throughout their sites.
And in-store, GapKids and babyGap will support the promotion with similar creative materials.
Advertising includes full-page newspaper ads throughout major U.S. cities.
The program might spread sales more evenly over the year, allowing eToys to better use its
customer service and distribution network. Currently eToys generates about 70 percent of revenue
during the Christmas holidays, higher than the 50 to 60 percent industry norm. The company hopes
to reduce that to less than half. Analysts think the approach just might work. "They'll be reaching
new customers when there isn't a lot of noise out there," says Lauren Cooks Levitan, Internet
analyst at BancBoston Robertson Stephens Inc.
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Part V. Discussion Questions
1. Evaluate the e-Toys business model vs. the KBkids model.
2. What is the right mix of channels for e-Toys – bricks and mortar, catalogs, and online?
3. Should e-Toys offer an e-mall with branded toys to maintain price margins and counteract the
specialty retailers emerging in the toy business?
4. Should e-Toys introduce a brand of toys? If so, which elements of the supply chain should be
owned by e-Toys and which outsourced?
5. Evaluate the advantages and disadvantages of a fully owned vs. collaborative fulfillment
operations.
6. How does the acquisition of BabyCenter impact the positioning of e-Toys?
7. In the retail business the survivors seem to be discounters and specialty stores. How do you see
the e-store model evolving?
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