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The On-Line Category Killer

The On-Line Category Killer

Robert Scally

In Internet commerce, getting there first means a lot. Launched on the World Wide Web Oct. 1, 1997, privately held eToys managed to stake the claim as the first Web-based toy retailer offering a wide selection of merchandise that couldn’t be found in any one brick-and-mortar toy store. eToys is the first cyberspace category killer for toys.

“They were the first to even attempt to do toys in category killer fashion on the Internet,” said Nicole Vanderbilt, analyst in the digital commerce group of Jupiter Communications in New York. Toys “R” Us didn’t go live with on-line transactions until two months ago.

eToys is also a leg up on becoming the dominate toy retailer on the Internet because it has no clear major rival, said Maria LaTour Kadison, senior analyst in Forrester Research’s On-line Retail Strategies service.

Toy “R” Us entered Internet commerce late and has a site that’s not as reachable as eToys. Other on-line toy retailers, including FAO Schwartz, don’t match what eToys offers.

“There’s a lot of other people out there selling toys on line, including Wal-Mart and FAO,” LaTour Kadison said. “But many of these retailers consider the on-line business like the ugly stepchild. It’s given a lot of lip service, but not much is really put behind it.”

eToys was founded in March 1997 by Toby Lenk, a former Walt Disney Co. corporate vp for strategic planning. The company describes itself as “the only on-line toy retailer to provide a comprehensive selection of nationally advertised and specialty toy brands.”

Whether this potential killer concept will ultimately survive and prosper depends in part on how eToys does during this holiday season, the first selling season in which the site has been supported by heavy amounts of advertising.

“The fourth quarter is big for everyone, but it’s going to be especially telling for eToys,” Vanderbilt said.

The early signs are that eToys has a good shot at becoming the hot spot on the Web for toys, according to industry observers. Company officials have been quiet about how well eToys has actually been performing, Vanderbilt said. Some estimates have placed the company’s revenue growth at 40% per month.

eToys has several strong alliances and has been working hard to build a brand name.

In addition to its own site, which is located at www.etoys.com, eToys has aligned itself with some of the biggest names in on-line commerce. eToys is currently located on the America Online Shopping Channel, available to the on-line service’s 14 million members. eToys also has virtual storefronts on the Infoseek Shopping Channel and the WebCrawler Shopping Channel.

In addition, Visa is promoting eToys and electronic commerce through nationwide broadcast and print advertisements that illustrate the ease and convenience of on-line shopping. eToys is currently featured in Visa’s national television spot with leading on-line portal Yahoo!, which is co-branded with Visa.

The campaign with Visa will help to build credibility for both eToys and on-line commerce payment by credit card.

In addition to AOL and Yahoo!, eToys has affiliations with Excite, Lycos, AT&T WorldNet and GTE.

But the Internet’s endless shelf space, combined with an excellent search engine, may provide eToys with its biggest advantage in the Internet toy retailing race.

“I think they have one of best search functions [of any site] on the Web,” LaTour Kadison said.

Using the motto “We bring the toy store to you,” eToys carries more than 8,000 skus at prices designed to meet or beat those of traditional bricks-and-mortar toy retailers.

As a hedge on competitive pricing, eToys also employs a Low-Price Guarantee that offers a 110% refund if a buyer finds the identical item for less at any “land-based” retail store in the United States.

Merchandise categories include toys, video games, children’s software, videos, music and books from more than 500 manufacturers. Products from Mattel, Fisher-Price and Hasbro are marketed alongside specialty items from suppliers such as BRIO, Learning Curve and Wild Planet.

Just as in real world retailing, brands are an important part of eToys’ merchandising.

In October, eToys signed an agreement with Children’s Television Workshop Online to develop “eToys Presents The Sesame Street Boutique,” a one-stop on-line shopping location for CTW-licensed toys, hooks, software titles, videos, and audio products. The new on-line store features a comprehensive selection of over 250 Sesame Street-licensed products.

The “Sesame Street Boutique by eToys” will be located on the eToys’ site and accessible via a link from the CTW Family Worksop.

eToys, naturally; has been big on software AND video games for children. With more than 550 software titles for children ages 12 and under eToys’ software department features a variety of well-known, high-quality brands, including Broderbund, Disney Interactive, Purple Moon, Microsoft’s Magic School Bus and the JumpStart series by Knowledge Adventure.

eToys’ video game department carries more than 350 best-selling titles, with more than 130 games for the Sony PlayStation and Nintendo 64 game platforms.

To help parents choose the appropriate titles for their children, eToys includes the official ratings from the Entertainment Software Ratings Board [ESRB] on all of the games it sells, and also provides its own ratings on titles that the ESRB deems suitable for “Teen” or “Mature” audiences.

eToys’ software and video game departments allow customers to search for titles by any combination of age, educational category, game or software platforms.

Customers can also consult the “eToys Recommends” section to browse in departments such as New Releases, Bestsellers, Picks of the Month and Family PC Award Winners.

Lenk has built a solid management team and has hired experienced buyers to build relationships with vendors.

The eToys management team includes Frank Han, coo, former vp and manager of the interactive markets department of Union Bank of California; Phil Polishook, vp of marketing, former director of marketing at Disney; Jane Saltzman, vp of merchandising and former merchandise manager of Imaginarium; and Randy Villa, an expert in catalog fulfillment operations who has worked with Gymboree, The Territory Ahead and Tzabaco.

Lenk originally funded eToys with some friends and business associates as a well as Internet business incubator, idealab. The company has since had two rounds of venture capital financing, one for $3 million from Dynafund Ventures, Intel Ventures and Idealab Capital Partner. A second, “more substantial” round of funding came in June from Highland Capital, Partners, Sequoia Capital and Bessemer Venture Partners.

Although a private company, Internet industry observers expect that eToys will go public if its concept takes off. The company is presumably well-capitalized enough to ride out potentially turbulent development of on-line retailing during the next few years.

eTOYS FACTS

Headquarters: Santa Monica, Calif.

Number of stores: Site on the World Wide Web at www.etoys.com.

’97 sales: N/A. Privately held company was founded in March 1997.

Projected ’98 sales: Estimates vary from $50 million to $100 million.

Corporate strategy: To establish itself as the on-line category killer retailer of toys and related children’s merchandise.

COMPETITION NONEXISTENT IN CYBERSPACE HAVEN

eToys isn’t exactly a threat to the Big Three discount retailers–yet.

As a virtual retailer that’s been selling products for slightly more than 18 months, eToys isn’t ready to put a big crimp in toy sales at Wal-Mart, Target or Kmart.

But taken from the viewpoint that the Internet is not yet a competing market for real-world retailers but a new retail channel altogether, then eToys becomes a significant threat, some industry analysts say.

The reality remains that only about 45% of households in the United States own a personal computer. The people who do log onto the Internet, America Online or other on-line services are still getting used to the idea of buying things on the World Wide Web.

Traditional brands and assets don’t always translate to the on-line world, said Nicole Vanderbilt, Internet retail analyst with Jupiter Communications.

“I think they have a shot at shaking up the traditional toy retailers,” Vanderbilt said of eToys.

“I don’t think they’re a serious threat in the next couple of years,” said Ed Roth president of NPD Group’s Leisure Activities Tracking Services, a market research firm that tracks the toy industry. “I just think the vast majority or people are still going to be shopping in traditional stores, but longer term it’s unclear.

“Obviously the advantage eToys has is that it has fairly limitless shelf space and it can provide information and services that traditional retailers probably cannot provide,” he said.

The potential of on-line marketing is hard to gauge because it is so early in its life span.

COPYRIGHT 1998 Lebhar-Friedman, Inc.

COPYRIGHT 2000 Gale Group