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Published: April 1, 2000

 
 

Toys "R" Us Battles Back

Considering all of this, it's not surprising that eToys booked $107 million in revenue during its fiscal quarter that ended December 31, well ahead of the $39 million in sales posted by Toysrus.com during the holiday season.

No joy in Toyville, at least in Toysrus.com's corner of it? In fact, quite the opposite. The 1999 holiday numbers are probably a poor indicator of who will be on top next Christmas. Indeed, virtually everybody watching this story play out — people close to Toys "R" Us and eToys, industry analysts, and e-commerce experts — is convinced that Toysrus.com will beat out eToys, and soon. What's more, the drubbing could be ugly. The survival of eToys as an independent company or even as a thriving business is a huge uncertainty.

"Toysrus.com has finally moved beyond window dressing when it comes to facing the challenges of the Internet; they know they screwed up and are absolutely focused on fixing it," says Seema Williams, a senior analyst at Forrester Research Inc. "They've got a great opportunity to take out eToys."

This position echoes what's becoming a more and more widely held view: that the top retailing space on the Internet is going to increasingly resemble a real-world shopping strip, with names like Wal-Mart, Nordstrom's, Macy's, Best Buy, and Toys "R" Us anchoring cyber-commerce, and a few Amazons and eBays thrown in. This view also takes on the myth of the first-mover advantage. As e-commerce evolves, the idea that the pioneers on the Web are the certain winners, while it may hold true in a few cases, is being shaken by the broader view that their lack of a real-world presence will increasingly put the dot-coms at a disadvantage.

The reason: Despite the fumbling early Internet efforts of many of the established retailers, they've amassed significant benefits from their decades of storefront existence that are critical to success on the Web. Among these benefits are well-tuned just-in-time distribution systems and other logistics expertise; long-held relationships with suppliers; widely known brands; huge amounts of cash for marketing, inventory, and technology development; a thorough knowledge of their business lines and what customers want; and Web and real-world cross-selling opportunities.

"These retailers own the customers already," says Steve Weinstein, a retail analyst at Pacific Crest Securities in Portland, Ore. "People say they hate Wal-Mart and Toys 'R' Us, but that's to the tune of $132 billion and $11 billion of annual hatred respectively. Any online company would love to have this kind of a customer base."

What established retailers have lacked is a sense of urgency about the Web, which has allowed online startups to nab the lion's share of the initial e-business and publicity. And that's been deadly: The Internet is speeding up the need to constantly reinvent the business model and also exposing successful companies that have lost their edge because they rested on their laurels too long. "There's no bigger reason for failure than success," says Clayton M. Christensen, associate professor at the Harvard Business School and author of The Innovator's Dilemma.

In most cases, e-commerce resistance on the part of traditional retailers comes from a paralyzing but unfounded fear that a Web presence — with its impulse buying and constant price wars — would cannibalize real-world business, cutting into sales and commissions and upsetting the old-line retailing talent running its stores.

The painful outcome of that argument has become all too clear. Take the case of Barnes & Noble Inc. Ceding the Internet to Amazon.com for nearly four years hasn't hurt Barnes & Noble's store sales at all; they're still rising a healthy 9 percent a year. But it has put its latecomer Web venture, barnesandnoble.com LLC, in a position where it can't catch up to Amazon.com Inc., no matter how hard it tries. During the last quarter, barnesandnoble.com's market share of online book sales dropped about a percentage point to 16.7 percent, while Amazon.com's rose to about 62 percent, a more than 5 percent increase, according to Harris Interactive Inc.

 
 
 
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Resources

  1. Clayton M. Christensen and Richard S. Tedlow, "Patterns of Disruption in Retailing," Harvard Business Review, January-February 2000
  2. The NPD Group Inc., Port Washington, N.Y.: www.npd.com 
  3. Barnard's Retail Trend Report, Upper Montclair, N.J.: www.retailtrends.com
  4. www.toysrus.com
  5. www.etoys.com
 
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