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 / Second Quarter 2000 / Issue 19(originally published by Booz & Company)


Toys "R" Us Battles Back

Mr. Barbour showed that trait as the founder of OddzOn Products Inc., the maker of Koosh balls, among other novelty items. Hasbro Inc. eventually bought OddzOn, and Mr. Barbour continued to run the unit as a separate part of the overall business, even with its own Web site.

Publicly, Mr. Barbour has been vague about his plans for, and he declined to be interviewed for this article. But his discussions with analysts and e-commerce experts, as well as some of the initiatives announced so far, reveal a lot about his strategy. Perhaps most importantly, they've made former critics actually bullish about's prospects. " has strong enough assets that now that it's finally found religion, it should be one of a small number of long-term winners in Internet toy retailing," says Benchmark's Mr. Kagle.

Two moves since last summer set the tone for how much Toys "R" Us has changed its attitude toward e-commerce. In November 1999, announced a two-year agreement with America Online to become the anchor store of AOL's "Kids, Toys, and Babies" mall. As part of the agreement, which analysts estimate will cost upward of $5 million, the retailer says it will offer sales promotions with prices below those of real-world stores — one of the very strategies rejected at the May 1999 meeting in Silicon Valley.

Just as big a turnabout is's new relationship with the Japanese venture capitalist Softbank Corp., a large stakeholder in Yahoo and E-Trade, among others. Although Toys "R" Us resisted Benchmark's request for about 10 percent of the online unit last year because it didn't want to cede that much control, signed an agreement in February that gave Softbank 20 percent of the operation for $57 million, as well as a prominent place on the board and consulting responsibilities. The premium attached to's brand and experience is reflected in that deal; by contrast, in 1996, Silicon Valley venture capitalist Idealab took a 15 percent stake in eToys, and became its biggest backer for just $91,600.

Mr. Barbour has told associates that this is a prelude to taking public, perhaps as soon as this summer. Based on the valuation of the Softbank investment, this offering could generate anywhere from $100 million to $200 million, possibly more, depending on how large a stake the parent company keeps. After the IPO, it's likely that will move to Silicon Valley. When all of this happens, to placate the company's traditional retailers on the East Coast, options and shares in the new venture are expected to be given to executives overseeing the real-world stores.

The most visionary part of Mr. Barbour's plan — and the one that excites analysts the most — is the way he wants to use the retailer's huge bricks-and-mortar advantages to trump its online competition. Chiefly, Mr. Barbour intends to merge the enormous warehouse and logistics systems that Toys "R" Us already has with new overnight distribution sites to be built around the country. In this way,, with its infinite "shelf" space, will have a much larger inventory than the physical stores, which, as even 10-year-old Luke Armour figured out, is what people expect on the Web. Additionally, this setup will ensure that has vastly more items than anyone else online, and it can use its already existing volume-buying relationships with suppliers to get the best prices and on-time inventory replenishment.

On top of this, Mr. Barbour intends to use the busy in-store traffic to move more business to the Internet. Kiosks throughout the stores will let people access and order items that are out of stock or unavailable in the retail locations. This is a model that has worked well for any number of retailers in other industries. There will also be Web promotions such as coupons at the cash register that offer discounts on Internet purchases.

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  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.: 
  3. Barnard's Retail Trend Report, Upper Montclair, N.J.:
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