The .com - Toys’R’Us Alliance (A)

On July 29, 2000, , consider joining forces in what had turned out Amazon.com’s CEO, and John Eyler, Toys ‘R’ being an attractive but difficult to crack market. Us’ CEO, met in Seattle to formally agree on the principle of an alliance between their two firms, and launch the last round of negotiations 1. THE TOY INDUSTRY as to the detailed arrangements of this joint venture. Both firms had tried to extend the In the late 1990s, the worldwide toy internet frenzy to online toy sales during the industry generated annual sales of about $70 previous Christmas season, and both had billion; accounted for a little faced significant problems, leading them to over 40%, Europe for 25%, and the rest of the world for about 35% (see table below).

Sales (Million US $) 1996 1997 1998 1999 World 61445 66012 67760 71095 North America 23355 26697 27633 31291 Europe 16012 16578 16876 17018 Asia 16783 17040 17550 17179 Latin & South America 2614 2890 2808 2755 Middle East 1022 1024 1039 1045 Oceania 1319 1404 1430 1457 Africa 340 379 424 350

Over 55% of annual sales occurred in the purchases at stores where they could interact fourth quarter in the US. In Europe, the with toys. percentage was slightly higher. According to industry analysts, growth in the late 90s was In the US, toys were designed, produced due to the 1990-1994 “baby-boomlet” in and sold by more than 1,000 manufacturers, conjunction with the fact that baby-boomers including giants like (, Hot (people born between 1945 and 1963) entered Wheels, Fisher-Price, Cabbage Patch Kids, their peak earning years. Between 1996 and Sesame Street toys, …), (Tiger 1999, the average annual expenditure per Electronics, Monopoly, , Trivial child rose from $305 to $372 in the US, and Pursuit, Star Wars toys, G.I. Joe, …), Lego, from $140 to 147 in Europe (including Eastern Brio (Tomy, Märklin, …), … A general trend Europe). Although adults purchased the toward foreign manufacturing was observed: majority of toys, children also had a strong by the mid-nineties, about three quarters of all buying power. Surveys showed that about two- toys sold in the US were manufactured thirds of all parents thought that the overseas, and, in 1999, China produced more educational value of a toy was the most than 70% of the toys sold in the world. This important factor when buying a toy. Children, trend was mainly due to traditional toy on the other hand, tended to be very price- producers outsourcing manufacturing to sensitive, and they were more likely to make subcontractors in China, while retaining control

This case was developed by Professors Pierre Dussauge, Will Mitchell and Miguel Rivera as a basis for class discussion and is not intended to illustrate either effective or uneffective handling of a business situation. Some of the data in this case have been altered for both educational purposes and confidentiality reasons. Amazon-Toys’R’Us(A) 2 of toy design and branding. In parallel, the products to distributors, and sales agents, industry underwent significant consolidation all every year. Manufacturers usually granted through the 90s. exclusivity for some of the most popular toys to mass retailers such as Toys ‘R’ Us or Wal- Toys were selected by retailers for the Mart, which could account for up to one fifth of entire year (including the following holiday their total sales. season) in January/February at toy fairs organized by trade associations. At the The evolution of toy retailing among the American International Toy Fair, organized by various channels in the US and the major toy the Toy Manufacturers of America, toy retailers are presented in the tables below: manufacturers and importers showcased their

Dollar Share (%) Outlet Type 1995 1996 1997 1998 1999 Discount Stores 41.2 40.7 41.6 41.5 39.4 National Toy Store Chains 23.6 23.6 23.2 21.7 20.2 Mail Order 4.4 4.8 4.6 5.3 4.9 Card / Gift / Stationary 0.9 1.2 1.9 3.1 4.1 Food / Drug Stores 3.4 3.4 3.5 3.6 3.4 Department Stores 4.1 3.8 3.4 4.1 3.3 e-Tailers - - - - 2.9 Hobby / Craft Stores 2.9 3.1 3.2 2.7 2.8 All Other Outlets 19.5 19.4 18.6 18.0 19.0

Estimated Dollar Share of US Toy Industry Rank Retailer Type 1998 1999 1 Wal-Mart Discount 17.1% 17.4% 2 Toys ‘R’ Us Toy 16.5% 15.6% 3 Kmart Discount 7.9% 7.2% 4 Target Discount 6.7% 6.8% 5 KB Toys/Toy Works Toy 4.8% 5.1% 6 Ames Discount 1.2% 1.6% 7 J.C. Penney Department 1.5% 1.2% 8 Hallmark Card 1.0% 1.1% 9 Meijer Discount 1.2% 1.0% 10 Shopko Discount 0.9% 0.8%

2. THE ONLINE TOY INDUSTRY The Christmas season is crucial in the From 1995 to 1999, the number and value online toy industry, as it is in the toy industry in of toys sold online grew exponentially. Online general. For the 1999 Christmas season, the toy sales increased from almost nothing in toy industry spent an estimated $200 million on 1996 to $45 million in 1998 and to $425 million advertising to support online sales. However, in 1999. In 1999, an overwhelming proportion online retailers soon found out that getting of online sales were made in the US, where customers to buy toys online was not the they accounted for 2% of the total American toughest challenge they faced. Much more toy market. In 2000, online toy sales in the US difficult, as it turned out, was delivering the were expected to rise to 6% of total toy sales. goods on time. This led to numerous delays In the rest of the world, online toy sales were and angered customers, as illustrated by the expected to follow a pattern similar to that of following posting found on the Wall Street the US with a two to three year lag. Therefore, Journal Interactive website: the information provided from now on in this case refers to the US market.

Amazon-Toys’R’Us(A) 3

I am normally a fairly relaxed fulfillment. They have stopped shopper—but my experience answering their phones—nice with Toysrus.com has been customer service! simply horrible. I ordered one day after Thanksgiving, and still have not received my order (on The Federal Trade Commission fined Dec. 17th), though I was eight online stores for failing to deliver goods originally promised that I would within the guaranteed time frame. Following receive it in five days. Toysrus.com is obviously so ill- the 1999 holiday season, three sites prepared for this holiday (Redrocket.com, ToyTime.com, and Disney- season, that I have no backed ToySmart.com) went out of business. confidence that my children will Nevertheless, customers seemed to be ready actually receive their gifts in to buy online again for the 2000 Christmas time. Needless to say, season. An NPD Group research report Toysrus.com immediately showed that the top 10 web sites from which charged my credit card upon internet users planned to buy goods during the ordering. I wish they were so 2000 holidays were, respectively: prompt and concerned with

Rank Website Product lines 1 amazon.com Books, CDs, videos, toys, … 2 BarnesandNoble.com Books, music, videos 3 eBay.com Auction site 4 toysrus.com Toys 5 JCPenney.com Mainly clothing 6 CDNow.com Music, video 7 eToys.com Toys 8 LandsEnd.com Mainly clothing 9 Buy.com Computers, software, electronics, … 10 Yahoo.com Portal, general shopping

In this list, amazon.com, toysrus.com, and online toy purchases the previous year. In eToys.com sold toys, thus proving customers 1999, the major competitors in the online toy had not been scared away by the widely industry were: publicized delivery problems that affected

Market Online sales as % of Company share total toy sales amazon.com 1 22% 100% eToys.com 19% 100% toysrus.com 17% 0.4% (Toys ‘R’ Us, Inc.) KBKids.com 9% 1.5% (K.B Toys) 1 – Amazon initiated toy sales in July 1999

• eToys.com saw its stock prices even, which was not expected to plummet more than 90% in 1999, happen before 2003. and the 2000 holiday season was • K.B Toys’ KBKids.com was crucial for the firm’s survival. struggling. In spring 2000, they Analysts predicted that, unless withdrew a planned IPO. In June, eToys’ last quarter sales were the founder and CEO was fired, satisfactory, they might find it hard along with 30% of the workforce. to raise the $100 million needed to In addition, in July 2000, the FTC continue operating before breaking imposed a $350,000 fine on KBKids.com for their failure to

Amazon-Toys’R’Us(A) 4

deliver thousands of goods at Selection, along with online auctions and free Christmas time. electronic greeting cards. Amazon.com seeks • Kmart (with bluelight.com) and to be the world’s most customer-centric Wal-Mart Stores were expected to company, where customers can find and re-launch their web sites in discover anything they might want to buy November 2000, with toys offered online. on both sites. Overall, Wal- Mart.com’s clicks had fallen from Amazon.com lists more than 18 million 1.6 million in January 2000 to 1.3 unique items in categories including books, million in June 2000. By contrast, CDs, toys, electronics, videos, DVDs, tools and Bluelight.com’s clicks had hardware, lawn and patio items, kitchen increased from 600,000 to 1.8 products, software, and video games. Through million during the same period. Amazon.com zShops, any business or • FAO Schwartz was expected to individual can sell virtually anything to launch its web site by the end of Amazon.com’s more than 23 million August, 2000, in anticipation of the customers, and with Amazon.com Payments, coming holiday shopping. The site, sellers can accept credit card transactions, like the company’s stores, would avoiding the hassles of offline payments. The offer high-end toys, therefore company also participates in posing more potential threat to sothebys.amazon.com, the leading auction site high-end sites such as for guaranteed art, jewelry and collectibles. ZainyBrainy.com and Amazon.com operates two international Web Imaginarium.com than to sites: amazon.co.uk and amazon.de. It also Toysrus.com or Wal-Mart.com. operates the Internet Movie Database Unlike most players, the online site (imdb.com), the Web’s comprehensive and had already proven profitable. The authoritative source of information on more site would offer under 10% of the than 220,000 movies and entertainment 15,000 products available at the programs and 800,000 cast and crew Fifth Avenue FAO Schwartz store. members dating from the birth of film in 1892. • Toysmart.com, backed by Amazon Anywhere is the leader in mobile e- Disney, closed in May 2000, amid commerce, providing access from anywhere in claims of conflicting goals with the world to Amazon.com, Amazon.co.uk and Disney’s own disneystore.com Amazon.de on personal digital assistants web site. Toysmart.com’s (PDAs) and through handheld wireless Internet subsequent attempt to sell its devices. Amazon.com has invested in leading customer list led to consumer Internet retailers that are improving the lives of complaints and a decision by customers by making shopping easier and Disney to purchase the list and more convenient: Greenlight.com, the only then destroy it. company that offers car buyers the control of • Toytime.com, founded in 1997 auto purchasing online with ongoing service and operating since fall 1999, went and support from local dealerships; living.com, out of business in June 2000. the leading online home products and services • Redrocket.com (founded in retailer; drugstore.com, an online retail and 1997), which was affiliated with information source for health, beauty, wellness, Simon & Schuster publishers and personal care and pharmacy; Pets.com, the the Nickelodeon cable channel’s online leader for pet products, expert web site, went out of business in information, and services; HomeGrocer.com, mid- 2000. the first fully integrated Internet grocery- shopping and home-delivery service—with operations in Seattle; Portland, Oregon; and 3. AMAZON.COM Southern California; Gear.com, which offers brand-name sporting goods at prices from 20 As the company itself stated in August, to 90 percent off retail; Ashford.com, the 2000: “Amazon.com (Amazon.com, Inc., and leading Internet retailer of luxury and premium its subsidiaries) is the Internet’s No. 1 music, products and the Web’s No. 1 retailer of No. 1 DVD and video, and No. 1 book retailer. watches and jewelry; Audible, Inc., the leader Amazon.com (Nasdaq: AMZN) opened its in Internet-delivered spoken audio for PC- virtual doors on the World Wide Web in July based listening or playback on AudibleReady 1995 and today offers Earth’s Biggest

Amazon-Toys’R’Us(A) 5 portable digital audio devices; eZiba.com, a leading online retailer of handcrafted products 4. TOYS ‘R’ US, INC., AND from around the world; and WineShopper.com, the San Francisco- and Napa-based Internet TOYSRUS.COM start-up that will ultimately offer consumers online access to the largest selection of wines Toys ‘R’ Us, Inc.: “The world’s leading available anywhere. resource for kids, families and fun currently operates 1,552 stores; 707 toy stores in the Amazon.com also has a minority interest in , 469 international toy stores, WeddingChannel.com, which brings together including franchise stores, 201 Kids “R” Us leading retailers with gift registry, expert advice children’s clothing stores, 137 Babies “R” Us and personalized gift suggestions to help stores and 38 Imaginarium stores. The everyone give and receive the right wedding company also sells merchandise through its gifts; NextCard, Inc., considered the industry’s Internet sites at toyrsus.com, babiesrus.com leading issuer of consumer credit on the and imaginarium.com and through mail order Internet; and Kozmo.com, the world’s leading catalogs.” (Company press release, August, “e-mmediate” Internet-to-door delivery service”. 2000). (Company press release, August, 2000). Toysrus.com: “toysrus.com is a leading Despite amazon.com’s ambition of global Internet retailer for toys and children’s becoming a major retailer in consumer goods products. toysrus.com, an affiliate of Toys “R” as different as books, electronics, antiques, Us, Inc., combines one of the world’s most wine, health care products, and groceries, recognizable brands with unparalleled among others, amazon found entry into the toy expertise in the toy and children’s industry. business in 1999 to be much harder and less Earlier this year, Softbank, the No. 1 Internet successful than anticipated. Despite its huge investor in the world, became a minority customer base, amazon found its customers partner of toysrus.com by investing $57m in were not as easily transferred from one the operation. In July 2000, toysrus.com product category to another; though its toy launched babiesrus.com, an online e-resource sales made the company the No.1 online partnership with the No. 1 juvenile retailer in retailer in this category, amazon’s actual the world, Babies “R” Us. According to Media revenue from toys during the 1999 holiday Metrix, in 1999 toysrus.com became one of the season fell short of expectations. In addition, fastest-growing e-commerce sites on the amazon rapidly ran out of hot selling toys, and Internet and continues to consistently be was unable to fulfill orders for the more popular ranked as the No. 1 online toy site in visitor items, while they were left with huge unsold traffic (Media Metrix, May 2000).” (Company inventory in other toy categories. When the press release, August, 2000). 1999 Christmas season was over, amazon was left with $39 million worth of unsold toys. In the late 90s, Toys ‘R’ Us endured flat However, the general feeling among sales and seven consecutive quarters of bad customers was that amazon was the most earnings. From 1995 to 2000, Toys ‘R’ Us’ reliable online toy retailer by far: stock sank 65%, and the company's market share slipped from 25% in 1990 to just over I got the same excellent service 15% in 1999. In 1998, Wal-Mart overtook Toys and on time delivery amazon ‘R’ Us as the No. 1 toy retailer in the U.S., had accustomed me with for although Toys ‘R’ Us was expected to regain books, when I ordered toys its leading position during 2000. Toys ‘R’ Us from them for the first time last was announcing the opening of the ‘world’s Christmas. Unlike most other largest toy store’ in New York’s Time Square in people I know, I was able to 2001. have my kids’ presents under the Christmas tree on the 25th For the 1999 holiday shopping season, (of December). I actually toysrus.com had major problems delivering the would have liked to buy more goods purchased, because of delivery delays from them, rather than face the and site outages. It had to pay $350,000 in crowds at the local mall, but fines to the Federal Trade Commission for their selection lacked many of accepting orders knowing that the the toys my children wanted. merchandise would not be delivered in a timely fashion, without informing the customers of the

Amazon-Toys’R’Us(A) 6 delays. toysrus.com later issued $100 coupons to Internet customers who did not receive their orders on time. According to some industry analysts, the problem was that “many people did their first online purchase at toysrus.com because they knew the name. Although eToys—and many other toy e-tailers—had the same problems, Toys ‘R’ Us is likely to suffer more than eToys, because it may have an impact on their brick-and-mortar business”. In January, toysrus.com was reported to be looking for an online alliance partner.

5. THE AMAZON.COM – TOYSRUS.COM ALLIANCE PROJECT

The problems encountered by both amazon.com and toysrus.com during the 1999 holiday season led both companies to consider joining forces in online toy retailing. After a round of initial contacts, Jeff Bezos and John Eyler met and agreed to the formation of an alliance. They concluded their July 29 meeting by deciding that, in the next ten days, senior management of the two companies should define the precise objectives that would be pursued jointly and specify the basic principles on which this alliance should be based. A meeting on August 8 would finalize the terms of the agreement and, two days later, Bezos and Eyler would call a joint press conference to announce the alliance.

Toys’R’Us Financials (March 31 year end)

Income Statement ($ mln) Qtr End Annual . Apr-00 Jan-00 Oct-99 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991

Employees 76,000 70,000 116,000 107,000 111,000 111,000 107,000 87,000 78,000 73,000

Revenue 2,319 5,027 2,465 11,862 11,170 11,038 9,932 9,427 8,746 7,946 7,169 6,124 5,510 Cost of Goods Sold 1,673 3,665 1,775 Gross Profit 646 1362 690 Gross Profit Margin 27.9% 27.1% 28.0% SG&A Expense 599 976 641 Operating Income 47 386 49 Operating Margin 2.0% 7.7% 2.0% Total Net Income 215 235 15 279 -132 490 427 148 532 483 438 340 326 Net Profit Margin 9.3% 4.7% 0.6% 2.4% -1.2% 4.4% 4.3% 1.6% 6.1% 6.1% 6.1% 5.5% 5.9% Diluted EPS ($) 0.93 0.96 0.06

Balance Sheet Apr-00 Jan-00 Oct-99 Cash 439 584 297 Net Receivables 135 182 170 Inventories 2145 2027 3101 Total Current Assets 2786 2873 3700 Total Assets 7731 8353 9224

Short-Term Debt 529 278 1130 Total Current Liabilities 2445 2838 3969 Long-Term Debt 991 1230 1240 Total Liabilities 4085 4673 5747

Total Equity 3646 3680 3477 Shares Outstanding (mil.) 216.2 239.3 239.9

This case was developed by Professors Pierre Dussauge, Will Mitchell and Miguel Rivera as a basis for class discussion and is not intended to illustrate either effective or uneffective handling of a business situation. Some of the data in this case have been altered for both educational purposes and confidentiality reasons. Amazon-Toys’R’Us(A) 8

Amazon.com Financials (December 31 year end)

Income Statement Qtr. Qtr. Qtr. Annual All dollar amounts in million Ending Ending Ending results except per share amounts. Jun-00 Mar-00 Dec-99 1999 1998 1997 1996 1995 1994

Employees 7,600 2,100 614 151 33 -- Revenue 577.9 573.9676 1,640 610 147.8 15.7 0.5 0 Cost of Goods Sold 522.2 528.7 802.9 Gross Profit 55.7 45.2 -126.9 Gross Profit Margin 9.6% 7.9% -- SG&A Expense 233.5 241 246.6 Operating Income -177.8 -195.8 -373.5 Operating Margin ------Total Net Income -317.2 -308.4 -323.2 -720 -124.5 -27.6 -5.8 -0.3 -0.1 Net Profit Margin -55% -54% -48% -44% -20% -19% -37% -60% Diluted EPS ($) -0.91 -0.9 -0.97

Balance Sheet Jun-00 Mar-00 Dec-99 Cash 720 84117 Net Receivables 0 0 0 Inventories 172 172221 Total Current Assets 1167 1271 1012 Total Assets 2461 2730 2472

Short-Term Debt 18 16 14 Total Current Liabilities 608 567 739 Long-Term Debt 2132 2137 1466 Total Liabilities 2739 2704 2205

Total Equity -278 26 266

Shares Outstanding (mil.) 355 350 345