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The Amazon.com - Toys’R’Us Alliance (A) On July 29, 2000, Jeff Bezos, 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; North America 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 Mattel (Barbie, Hot (people born between 1945 and 1963) entered Wheels, Fisher-Price, Cabbage Patch Kids, their peak earning years. Between 1996 and Sesame Street toys, …), Hasbro (Tiger 1999, the average annual expenditure per Electronics, Monopoly, Scrabble, 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.