Toys "R" Us' Storch: E-commerce growth limited by distribution hurdles

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PALM DESERT, CA -- Internet sales will probably top out at around 10 percent for most consumer categories, Toys "R" Us chairman/CEO Jerry Storch told attendees last week during a Q&A session at the eTail 2007 conference.

For items that can't be digitized, it is significantly more expensive to distribute products through the mail than for a customer to drive to a store to make a purchase. The Internet economic model for most categories is simply less efficient, Mr. Storch said.

There are exceptions, he said. Anything that can be digitized and distributed over the Internet can and should be. This is because it is cheaper and more convenient to distribute this material electronically.

"I don't believe record sections will be the same size at Wal-Mart in the future," Mr. Storch said.

Gifts are another exception. For consumers who would have to go to a store to buy a gift and then put it in the mail, the Internet offers a more convenient solution. Highly specialized, niche online retailers are another exception.

However, many of the advantages offered by the Internet are similar to those offered by catalogs "and in most cases, catalogs never crept up into double digit numbers," in terms of category volume, Mr. Storch said.

There will one day be a solution to the problem of how to efficiently distribute goods purchased over the Internet, he said: a transporter like seen in the TV series "Star Trek."

"I personally believe it will happen, but not in my lifetime," he said.

On the issue of Toys "R" Us, Mr. Storch cautioned others against making the same mistake that the retailer did and turning their brand into a commodity.

"If you allow your business to become commoditized, you will not make any money," he said.

The way around this is to sell something better or different than the competition instead of trying to compete on price. Toys "R" Us is addressing this by looking at the toy category in an entirely different way than it has in the past.

For example, Toys "R" Us is currently carrying a private-label wooden toy train with an RFID chip in it to set it apart from the branded toy trains the retailer carries.

"Toys are a fashion business," he said, pointing to the issues of limited supply and peaks and valleys in demand as examples of why the category meets this criterion.

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