Toys R Us to Challenge EToys With New Web Unit

With sales and market share slipping, Toys R Us said Tuesday that it will take online retailer EToys head-on by creating a separate Internet subsidiary that will overhaul Toys R Us’ Web site, run its own automated distribution center and, most likely, sell stock.

Toys R Us Inc., which last year lost its position as the country’s top toy seller to Wal-Mart, said the new Silicon Valley company will be a partnership with Benchmark Capital, the venture capital firm that bankrolled auction site EBay, among others.

In addition to competitive pricing, Paramus, N.J.-based Toys R Us said customers will be able to return merchandise to the stores, rather than face the hassle of mail returns and exchanges--a benefit few Web sites have managed. Online customers will also be able to avoid shipping charges by having merchandise sent to a Toys R Us store.

“We have a lot of respect for the accomplishments that EToys has made, but the fact is that we are an $11-billion company with 700-plus stores in the U.S.,” said Toys R Us spokeswoman Rebecca Caruso. “We are very, very, very serious about online retailing.”

Toys R Us is contributing $80 million to the online venture, $30 million of which will be used to build a distribution center in Memphis, Tenn. Benchmark said its investment exceeds $10 million.

But as with the company’s remodeling of its stores, part of a $508-million charge in 1998, some observers wonder if the online initiative is too little and too late.

The toy retailer last year reported that crucial fourth-quarter earnings were off 15% from the year before, and it posted a $132-million loss for 1998. Executives blamed lower sales on a weakness in the toy industry as well as on strong 1997 numbers that reflected gangbuster sales from virtual pets, action figures and video games.

Toys R Us also watched its market share fall from 18.3% in 1997 to 16.8% in 1998, while Wal-Mart’s share of the toy market rose to 17.4% in 1998 from 16.3% a year earlier, according to NPD Group, a Port Washington, N.Y.-based market research firm.

Meanwhile, EToys Inc. of Santa Monica has become one of the best-known companies on the Web and the medium’s leading toy seller, with $24 million in sales for 1998. The company’s brand recognition came in spite of the fact that EToys posted losses of $16.4 million last year.

“I think it’s better for Toys R Us to go after it than to sit there and not participate, but it’s going to be a small percentage of the overall sales initially,” said Amy E. Ryan, a retail analyst who covers the company for Prudential Securities.

One problem is that EToys customers are likely among those who have been turned off by Toys R Us’ jumbled store layout and lack of in-store assistance in years past, analysts said. Analysts said that a good Web site might be exactly the way to rebuild confidence.

“Toys R Us is a very powerful name,” said Kurt Barnard, president of Barnard’s Retail Trend Report. “The disappointment with Toys R Us is traceable to the store environment and the store service--their online site is going to be free of those handicaps; they can make their Web site very beautiful and no salespeople are involved.”

Even if the new venture does well, it can only make up a small portion of the company’s recent ills, analysts said.

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