Playing in a bigger sandbox Like a classic toy rediscovered, eToys has gone from dot-com bust to new toy-selling powerhouse Publication TBD, Date TBD By Paul Demery Snuffed out of business three years ago by the bust of the early dot-com euphoria, eToys has re-emerged as a formidable player in the toy business. Operating since last May as eToys Direct Inc., it`s on course to do $100 million in revenue for the first full year in its reincarnation as both an innovative retailer and a toy-selling services provider to some of the best-known names in retail-Sears.com, Macy`s and QVC, to name just three. EToys is no longer the brash upstart of its early dot-com days, when it spent lavishly on advertising and a state-of-the-art warehouse without securing a critical mass of customers. Armed now with a deep-pocketed parent, an experienced team of toy industry managers and multiple revenue streams, it`s primed to grow in a market that offers opportunities along with challenges, says CEO Mike Wagner, a veteran of former eToys owner KB Toys Inc. "We believe this will our first profitable year," he says. "We`re bringing people back into the toy business." Extremely competitive Yet the new eToys faces large challenges in an industry that has not been kind to several toy retailers in recent years. Noodle Kidoodle is no longer around; FAO Schwarz went into bankruptcy in late 2003; KB Toys slashed its number of stores in the past year to 600 from 1,300; toy sections have become scarce in large department stores; and all retailers face tough price and volume competition from Wal-Mart Stores Inc. and eBay Inc.`s eBay.com. And the once-dominant player, Toys R Us Inc.-whose CEO and chairman John Eyler referred in a financial statement last month to a 5% year-over-year industrywide decline in traditional toy sales in 2004--is considering a sale of its toy business, while its online operation is squabbling over contract terms regarding exclusivity in toy merchandising with its partner and platform provider Amazon.com Inc. "The toy business is extremely competitive," says Kent Anderson, president of Macys.com, which introduced toy sales through eToys Direct just before Thanksgiving. "When Toys R Us says they can`t compete--and they`re the category killer--obviously it`s a very challenging market." Online toy retailers face extra challenges. For one, effective online displays of toys often require bandwidth-absorbing rich-media, still a turn-off to many consumers on dial-up web connections that result in painfully slow loading of graphic-rich web pages. New opportunities But in challenges lie new opportunities, Wagner says. "As more stores close, more consumers will buy toys online," he says. The steady move by consumers to broadband web access, he adds, will make it easier for online toy merchants to set their sites apart with progressive merchandising. Indeed, eToys is taking an aggressive approach to both its own direct retail operations and its services business. It has made several improvements to its own two retail web sites, eToys.com and MyTwinn.com, while increasing circulation of their complementary catalogs; it has landed deals to license the retail operations of KBtoys.com and the Sears Wish Book toy catalog; and it has continued to add big-name retailers to its stable of toy-selling clients. Since starting with Sears.com and Kmart.com in 2002, it has added services clients each year and now handles online toy-selling operations for QVC.com, Circuit City.com, FAO.com, Buy.com and SmartBargains.com in addition to Sears, Kmart and Macy`s. Patti Freeman Evans, retail industry analyst for Jupiter Research, says eToys is making a smart move in expanding its market reach in association with other established retailers even if they`re competitors--a strategy that could go a long way toward helping it reach a broader base of consumers. "Partnering with competing retailers is an emerging trend online and it`s what eToys can do to reach customers they wouldn`t normally reach themselves," she says. "It`s like a beefed-up affiliate program." And by landing big-name clients for its services business, Freeman Evans adds, eToys is gaining valuable reference points for expanding multiple revenue streams with additional retailer partners, some of whom may still need to overcome the early dot-com image of eToys as a failed retailer. "There is still some hesitancy in the market regarding some of the early demises in online retail," she says. "So partnering with solid retailers like Macy`s adds the endorsement that they`re still going to be around and be a trustworthy partner." The flow of events So how did a company, whose name still conjures up memories in the retail industry of the excesses and failures of the early dot-com days, become a rising star of retailing that some of the biggest names in the industry have latched onto? The answer lies in several turns of events, starting with the acquisition of the eToys brand by retail chain KB Toys Inc. in 2001. KB Toys` online business, KBtoys.com, launched for the 1999 holiday season through a joint venture with BrainPlay.com, an early educational toy e-retailer. Two years later KB Toys acquired most of the assets, including the brand name, of eToys.com, which like BrainPlay had catered to the market for higher-end toys. KB Toys sold its online operations and the eToys trademarks last May to New York investment firm D. E. Shaw & Co. LP, with a large minority interest held by Wagner and three other former executives of the former KB Online Holdings LLC. The new owners renamed the old KB online operation as eToys Direct. With a $20 million line of credit from the Shaw organization, eToys Direct didn`t take long to make a new place for itself in the online toy business. It quickly formed an agreement with KB Toys to license the operation of KBtoys.com as a general toy site, and relaunched eToys.com as an upscale site with more expensive and educational toys. In April, eToys Direct acquired the assets of the struggling My Twinn Doll Co., and launched MyTwinn.com as a unique shopping destination where children use My Virtual Model technology to design dolls that look like them. 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. Close Window |