FEATURE-Goofs of Christmas past haunt e-tailers
By Sarah Rose
NEW YORK, Nov 3 (Reuters) - Internet toy stores played the Grinch last Christmas when holiday tidings included empty stockings and broken promises as orders went unfilled, packages came late and Web sites crashed.
This year, Internet retailers hope to put behind them the disastrous 1999 season, when one out of 20 children failed to get presents in time for Christmas from Toys R Us Inc. <TOY.N>, the nation's largest toy retailing chain.
"There is no doubt we dropped the ball," said Toysrus.com chief executive John Barbour. The Toys R Us site buckled under the volume of holiday traffic, and it was forced to send $100 gift certificates with apologies to disappointed consumers.
Industry surveys show that online consumers are reluctant to return to sites where they have had a bad experience. Consumers, investors and company executives are all wondering if disgruntled customers will shy away from this holiday's Internet marketplace. "Our consumer research says they won't," Barbour said.
Toysrus.com was not alone in flubbing the fiercely contested race to gain market leadership last year, when sales doubled from the previous year.
Since last season, two players have emerged as dominant in the $820 million online toy market: eToys <ETYS.O>, and joint Web site partners Amazon.com Inc. <AMZN.O> and Toyrus.com. Each retailer is hoping to repair the failures of 1999. EMBATTLED LEADER
"I'm glad the arms race is over," said Chief Executive Toby Lenk of eToys, the No. 1 Internet toy seller. "It tarnished all of us."
Santa Monica, Calif.-based eToys also suffered in the flurry of bad press surrounding last year's holiday season. Thousands of orders were mishandled and not delivered by Christmas.
EToys blamed its subcontractor, Fingerhut, a unit of Federated Department Stores Inc. <FD.N>, which looked after some of its shipping, warehousing and order filling.
Industry analysts expect the company to capture $300 million in online toy sales this year. EToys is trying to meet the demand with a new fully automated in-house distribution center in Danville, Va., in addition to its existing warehouse in the West.
Customers will be served by the nearest location to decrease the number of packages sent to each customer. Last year, multiple-item orders often were sent separately. "We're shipping complete," Lenk said.
Under Wall Street pressure to turn a profit, the company hopes the new distribution system will help bring it into the black by cutting down on shipping costs.
Without a strong holiday season, eToys may have a hard time raising the cash it needs to keep going. Melissa Williams, analyst with investment banking firm Gerard Klauer Mattison & Co., said the company will need new financing by mid-2001. PARTNER WITH AMAZON
Amazon.com and Toysrus.com announced their joint partnership in August, combining their toy retailing Web sites in a bid to resolve last year's problems.
"It doubles the upside," said Harrison Miller, general manager of Amazon.com toys.
Seattle-based Amazon.com got into the toy market on the eve of last year's holiday season only to discover that toy inventories were unlike its familiar terrain of books.
While books are made in the U.S. and can be ordered on short notice, then returned to the publisher if unsold, toys are typically produced in Asia and must be ordered months in advance. The company ran out of many popular items long before the holiday season was in full swing.
Toysrus.com, though backed by the 40 years experience of its parent, Paramus, N.J.-based Toys R Us, badly bungled the operational side of creating a Web site able to handle large traffic and shipping orders.
Yet Toysrus.com had the advantage of not needing to spend money on advertising, unlike almost all of its Internet rivals. With such an identifiable "bricks and mortar" brand, the company could focus on the costs of doing business, rather than on drumming it up.
Together, Amazon.com and Toysrus.com complement each other, analysts said.
"The two can leverage off the other's customer bases and relative market strengths," said Williams.
The marriage comes with it's peculiarities, however. Because of Internet tax guidelines, a customer can't return a product bought on the Web to a bricks-and-mortar store.
((New York Newsdesk +212 859-1700))
REUTERS
Rtr 11:21 11-03-00
