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


Toys "R" Us Battles Back

Whether it remains a separate e-commerce site or morphs into a portal, eToys may not stay independent. With its stock price so weak, its market capitalization is only $1.8 billion, a low figure considering that it's the top toy seller on the Web. That could make it a takeover candidate for giant retailers with much bigger market caps, like Kmart, Wal-Mart, or Target, which already sell toys in their real-world stores and are expanding those operations onto the Web.

Consolidated Stores, which owns KB Toys, already hinted at this approach for established real-world retailers when it paid $80 million for Internet toy site last year and relaunched it as "It's likely that the aggressive bricks-and-mortar companies will do more of this — especially picking off low-hanging fruit," says Forrester's Ms. Williams.

What can we learn from the tale of If it closes with the happy ending (happy for Toys "R" Us, anyway) that most e-commerce and industry observers expect, we learn above all how difficult it is for companies born on the Web to maintain their lead in the way has. In retailing, so much of the customer relationship and customer satisfaction depends on giving people a place to return items, a person to talk to about products, and individual attention. It's possible to recreate this on the Net, by making an e-commerce site into a personalized, virtual community, but as the balance sheets of, Yahoo, and E-Trade show, it's an expensive way to lure customers.

That, combined with the incredibly complex logistics involved in keeping inventory stocked and shipments flowing to customers quickly and efficiently, makes cutting costs associated with customer acquisition and attraction even more important. For that reason, retail experts increasingly feel that the hybrid approach — stores that promote Web sites and Web sites that drive people to stores — is the one that will be the most lucrative and the model used by the eventual Internet retailing top guns.

Toys "R" Us finally seems ready to take the Web plunge after learning that even in the world of toys, where so much is left to the imagination, the shopping experience can't be.

Playing the E Game: Six Rules Toys "R" Us Learned

1. Established retailers have significant advantages that are crucial for Web success: just-in-time distribution systems; logistics expertise; relationships with suppliers; a well-known brand; cash flow for marketing and inventory; and cross-selling opportunities.

2. Cannibalization's dangers are overstated. A thriving Web business doesn't have to hurt real-world sales and instead can attract additional revenue from existing and new customers.

3. Retailers constantly have to reinvent their business model to respond to change but retain the core values that customers identify with the brand.

4. While cross-pollination is important between the online and offline operations, "e" units of retailers should be independent, usually with their own management at separate locations, so they can be free to extend the brand and not be held back by traditional retailing ideas.

5. To encourage support from management of traditional units in Web operations, top executives from the store side of the business should be given options in the new venture.

6. It's critical not to shrink from sharing equity and control with a venture partner in exchange for the partner's expertise in e-tailing.

Reprint No. 00208

Jeffrey Rothfeder, [email protected]
Jeffrey Rothfeder writes frequently for strategy+business and other leading business publications. His most recent book is Every Drop for Sale: Our Desperate Battle Over Water in a World About to Run Out (Penguin Putnam Inc., Jeremy P. Tarcher, 2001).
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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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