NEW YORK (CNNfn) - Amazon.com and Toysrus.com joined forces Thursday to launch a co-branded toy site, capitalizing on each others strengths while at the same time filling in gaps associated with their sites.
The ten-year agreement between the two retailers also calls for Amazon to receive warrants to take a 5 percent stake in Toysrus.com. While specific financial details were not released, Amazon said it will receive annual fixed payments, per unit payments and single-digit percentage of revenue from the new site.
Jeff Bezos, Amazon's founder and chief executive officer, told CNNfn's Moneyline that the union between the companies could be a model for future alliances. (543KB AIFF)(543KB WAV)
"This is a long-term contractual alliance," Bezos said. "This is quite different from a merger. We don't know anything about running physical stores, our strategies are different and we are focused on a broad array of products, not just one."
The as-yet-unnamed toy and video game site will launch in the fall, just in time for retailers' biggest season, Christmas. Users can access the site by typing in the Web address, go through the Toyrsrus.com URL or click on the toys tab on Amazon's site.
The companies also plan to roll out a co-branded baby products site in early 2001, featuring products from Toyrus.com's Babiesrus.com.
At the news conference, both Bezos and Toysrus.com CEO John Eyler stressed that the new site will feature the complementary strengths in which each company specializes.
Eyers cited the importance of the Toys R Us name as one of the most recognized brands in the world, and the company also brings to the table exclusive products, such as its Imaginarium line, which will add 20 percent more products to the site's offerings.
Toysrus.com is also charged with selecting, buying and managing the new site's inventory, while Amazon will store the inventory within its seven distribution centers.
Since both the new site's inventory and Amazon.com's are stored in the same distribution centers, online shoppers will be able to purchase a Furby from the co-branded site, buy an Oasis CD or Harry Potter book from the Amazon site, and have it all delivered in the same package, saving shipping costs for customers.
Amazon will also oversee customer service and order fulfillment, in which it specializes, a talent that has so far eluded Toysrus.com. The site was hit with several outages during last Christmas' busy buying season because it underestimated the amount of site traffic it received and did not adequately plan for it. Adding to its woes, customers complained that holiday orders either arrived late or not at all.
Toysrus.com was hit with a class-action lawsuit last January alleging that the retailer accepted orders for Christmas delivery that it knew it couldn't deliver.
Deal is step in Toys R Us makeover
Toysrus.com's Eyler also said the deal allows the company a straight line to earlier profitability. He estimated the co-branded site will breakeven by 2001 and achieve profitability by 2002. Currently to achieve profits, the Toysrus.com site would need to see a sales increase of 300 to 400 percent, Eyler said.
Eyler spoke of the deal as a step in a series of makeovers for parent Toys R Us, which has been lagging since its heyday in the '70s, according to Eyler. The added Amazon muscle for the site is just one move to bolster the company's image, as well as the renovation of all its physical stores during the next 30 months and the opening of its flagship store in New York City. Eyler said the new site would not negatively impact sales at its bricks-and mortar stores, but rather would act as a sales engine.
At least one analyst feels that Toysrus.com capitulated to Amazon, given its weak sales, which did not match Amazon's toy sales, and while Toysrus.com reaps many benefits of the alliance, Amazon will receive payments, more traffic and Toysrus.com's product expertise.
"While we aspire to have much of the skills Toysrus.com has, it would be foolish of us to say we have it now," Bezos said. "We're very good in books, but as we enter into new categories there is a learning curve, which gets expensive."
In afternoon trading, Amazon (AMZN: Research, Estimates) shares slipped 5/8 to 30-1/4.