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The great toy experiment
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December 18, 2000: 6:23 a.m. ET
Can play partners Toysrus.com and Amazon.com beat the competition?
By Staff Writer John Chartier
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FORT LEE, N.J. (CNNfn) - High up in a nondescript office building just across the Hudson River from New York City, a group of people is under a tremendous amount of pressure over a bunch of toys.
But judging by their good humor and the playthings on their desks, you'd never know the men and women of Toysrus.com were sweating to prove last year's difficulty fulfilling holiday orders was a one-time fluke.
Toysrus.com was one of the highest rated toy sites in terms of traffic and sales last holiday season, but the company found itself the focus of unwanted negative media attention after it was overwhelmed trying to handle a last-minute crush of orders.
 This year, all eyes are watching to see whether Toysrus.com's new alliance with Amazon.com to provide a co-branded Web site will do the trick, particularly as consumers and investors have become more discriminating now that the novelty of online shopping has worn off.
Toy retailing on the Internet -- one thought to be an especially good fit in the e-commerce world -- has been especially hard hit by the dot.com shakeout. The main competitor to Toysrus.com/Amazon.com, Los Angeles-based eToys.com, warned last week that sales for the current quarter -- the holiday season -- will be only about 50 to 60 percent what was anticipated, and that it is looking for an investor to keep it going past March 31. Another major competitor last season, Toysmart.com, folded up in May.
"We're in a position right now where we are stuck in between Toys 'R' Us and its expertise and all its assets, and being No. 1 in many countries around the world," CEO John Barbour said in an interview with CNNfn.com at the company's Fort Lee, N.J., offices. "And on the other side we have Amazon, No. 1 on the Web, and we have access to their customers. And we are just scratching the surface on the stuff that we can do. There's no one in a position like we are at the moment."
What a concept!– having fun selling toys
The place exudes confidence. Everyone seems relaxed yet intense. At each sleek cubicle in the online division of the giant toy retailer's new headquarters, employees proudly display their favorite toys alongside high school-style gym lockers that hold their gear while they work. A Scooby Doo Mystery Machine van here, a large toy airplane there, and scooters scattered pretty much everywhere.
A big part of that relaxed atmosphere stems from Barbour himself. The 41-year-old Scotsman is a ball of energy who pops up unexpectedly with a quick joke or a disarming smile. A group of toy execs gathered to view television spots bursts out in smiles as Barbour suddenly appears in the doorway with a giant tray full of aromatic seafood -- his lunch. "Look at this, isn't that beautiful?"
At another cubicle he chats with employees about multi-colored holiday candy as he picks out his favorites.
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He takes fun very seriously
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Jeanne Meyer
Spokeswoman, Toysrus.com
Talking about CEO John Barbour |
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The gym lockers beside employee cubicles were his idea.
"To me, if you've got to work a lot of long hours, and if you want to go running, you want to listen to music while you work, you want somewhere safe to put your stuff," Barbour said. "I think that's really important."
While talking to a reporter in his office, Greg Ahearn, the company's vice president of marketing and business development, suddenly wrinkles his brow and stares at something out in the hall. It's Barbour, peering out from behind a wall, pretending to spy on him.
"He takes fun very seriously," Toysrus.com Spokeswoman Jeanne Meyer said. "He's never walking around without a toy in his hand.
When he first got the CEO job at Toysrus.com in 1999, the former Hasbro (HAS: Research, Estimates) executive, who oversaw development and marketing of such hits as the Koosh ball and the Super Soaker, would shop at Toys 'R' Us stores as well as competitors' stores and call the customer service number for Toysrus.com pretending to be an irate customer just to gauge its performance.
But don't mistake his manner for cavalierness. He's laser-focused when it comes to the business of selling toys. He breezes into the office with a laugh and a smile, but soon, he's all business.
He chalks up last year's fulfillment issues to the newness of online retailing, noting that most retailers suffered problems. But where he believes his company made the difference is in being up front with customer, acknowledging the problems and telling people their orders would not make it in time to put under the tree. The company also sent disgruntled consumers $100 coupons and Barbour personally got on the phone with angry moms to listen to their concerns.
 "The Internet business lost last year because of the number of companies that just couldn't keep up with demand," Barbour said. "...We got really slammed, and you know, we did, fact of life. But there are very few people out there who aren't saying 'You know something? Those people did the right thing for the long term.' It may have cost them money. It may have been painful. It may have been written all up in the press. But you know something, everyone who had a satisfied experience said we dealt with things correctly."
Now, the company is banking on its new partnership with Amazon to make them the online toy juggernaut they have longed to be since the site launched in 1998.
"I think they're in a much better place from an operational standpoint versus where they were last year," said Jill Frankle, director of retail e-commerce for research firm Gomez Inc.
Dot.com partners
The site is much easier to navigate, providing customer reviews and clear photos of each toy. Customer service and search options are readily available within easy view, and nearly all of the hottest items are plentiful in stock.
That's a far cry from last year's debacle.
Back then, the company averaged two million customers through September, 1999, but as the holiday season hit, the number jumped to 49 million between October and the end of the year.
Toysrus.com just didn't have the people-power or the infrastructure to handle it.
The same held true for most Internet retailers, but Toysrus.com, with its established brand name and reputation, was thrust to the center of attention.
However, while other online retailers spent the year investing millions in infrastructure, distribution centers and outsourced contracts with "fulfillment" companies, Toysrus.com quickly and quietly entered a partnership with Amazon.com (AMZN: Research, Estimates), the biggest online retailer.
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 DOT.COM DUO
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Toysrus.com and Amazon.com have entered a 10-year agreement to provide a co-branded retail toy Web site. Many are waiting to see whether the partnership means an end to customers' unfulfilled holiday gift-giving nightmares. Some features of the new site include:
Large selection
Exclusive toys and deals
e-mailable wish list
Order tracking
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The two companies agreed to launch a co-branded site back in August. It's basically simple. Toysrus.com provides the toys, takes the orders. Amazon processes the orders and handles all the shipping and returns.
The 10-year agreement between the two companies calls for Amazon to receive warrants to take a 5 percent stake in Toysrus.com. The retailers also plan to roll out a co-branded baby products site in 2001 featuring items from Toysrus.com's Babiesrus.com.
So far, the combined Toys/Amazon site has received mostly high marks. Gomez Inc.'s Frankle said the joint site ranks No. 2 behind pure play competitor eToys in terms of customer ease of use and overall experience.
"It is an easy site to navigate. The site offers tools and consumer reviews that help you find features," Frankle said.
Drawbacks? Items bought online cannot be returned to bricks-and-mortar Toys 'R' Us stores. All returns are handled by mail via Amazon.com. And Frankle and her researchers were kept on hold too long waiting for customer service.
Toysrus.com's Meyer acknowledged concerns about physical store returns and said the company is looking at the issue, but she said the company would have to charge sales tax if items could be returned to stores.
"We asked consumers in focus groups, 'Would you rather return things to stores and have to pay sales tax?' and they chose no sales tax," Meyer said.
Another criticism of the company came Thursday when Mark Rowen, a retail analyst with Prudential Securities, issued a research note saying he found the site was out of stock on 48 percent of the items he and his assistants tested compared with rivals such as the Web site of Wal-Mart Stores Inc. (WMT: Research, Estimates) and KBKids.com. But he noted that even those sites had high out-of-stock rates only slightly behind Toysrus.com.
"The higher out-of-stock position suggests that either Toys 'R' Us is not allocating additional product to its online store, or that sales at both the online and physical stores are significantly higher than plan and Toys 'R' Us does not have available inventory," Rowen wrote. "We believe it calls into question one of the key benefits of the Amazon/Toys 'R' Us alliance, and suggests a possible lack of alignment between the partners."
But Rowen acknowledged the ultimate test of the alliance will come at the end of the season, when it is determined how much market share the combined companies captured.
Meyer dismissed the report as inaccurate, saying she does not know what items Prudential based its research on, and pointed out that the site is running at 85 percent in-stock on the top 1,500 items it sells.
"Clearly they're calling into question a lot of things that are absolutely untrue (sic)," Meyer said. "The alliance is working well. We are enjoying the advantage of being able to get inventory from Toys 'R' Us Inc."
Whether the Toysrus.com/Amazon.com alliance ultimately succeeds remains to be seen, but one thing is apparent, everyone is having a lot of fun giving it a try. 
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Toysrus.com/Amazon.com
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