Amazon.com and Toysrus.com will partner to operate Web sites selling toys, video games and baby products in a strategic alliance designed to help both companies compensate for their weaknesses.
Under the 10-year agreement, e-tailing giant Amazon, Seattle, will provide site development, order fulfillment and customer service for the co-branded sites. Toysrus, which is majority-owned by global bricks-and-mortar retailer Toys ‘R’ Us Inc., Paramus, NJ, will identify, buy and manage inventory. Amazon will house the inventory in its distribution centers. It operates seven such facilities in the United States.
One site offering toys and video games is expected to open this fall, and another site offering baby products is expected to open in the first half of next year. The agreement also allows for the global expansion of the partnership.
Analysts applauded the agreement and said it could be an indicator of the future direction of Amazon.
“I think that this deal could indeed set a precedent for other similar alliances with other retailers in other vertical [markets],” said Lisa Allen, an analyst at Forrester Research, Cambridge, MA. She cited Home Depot as an example of another bricks-and-mortar company that could benefit from Amazon’s fulfillment capabilities and Web expertise while providing category-specific merchandising know-how to Amazon.
The deal appears to provide remedies for the deficiencies of both Amazon, which suffered from poor inventory management during its last holiday season, and Toysrus, which blundered at providing customer service and fulfillment.
Heather Dougherty, an analyst specializing in digital commerce at Jupiter Communications, New York, said Amazon has struggled in the toy business because of the way the toy industry is structured. Unlike some of the product categories Amazon offers, such as books and music, toys tend not to be sold through distributors, so Amazon has to rely on its own knowledge and experience when estimating its inventory needs.
“What Toysrus.com brings to the table is their merchandising clout,” she said. “They are much better at merchandising toys than Amazon.com.”
During the 1999 holiday season, Amazon ran out of some popular Pokemon toys and had to unload excess inventory of other toys after the season ended.
The benefits for Toysrus are just as clear. After failing to deliver toys on time and struggling to provide customer care last year, the company this year will be able to use the highly regarded customer service and fulfillment infrastructure Amazon has developed.
Toysrus opened one fulfillment center last year and two others this year, but said it told analysts Aug. 10 that it would seek to sell or lease those facilities.
Bernard Elliott, a senior research analyst specializing in call centers at Gartner, Stamford, CT, said he expected other e-commerce companies to turn to established direct marketers for help in providing customer service and fulfillment.
“This is an example of how providing great customer service not only brings you customers, it brings you partners,” he said. “It isn’t just having a Web site and making a sale, it’s having good customer service that starts with the order and helps the customer all the way through to completion, and if they want a return as well.”
Returns, however, are one potential problem analysts foresee. Dougherty said the companies will have to overcome Toys ‘R’ Us’ plans not to accept in-store returns of merchandise bought online.
“That will definitely take some consumer education,” she said. “I think consumers are going to expect that if they buy toys from Toysrus.com they are going to be able to return them in the stores — that it’s all one company.”
A spokesman for Amazon said the company wanted the co-branded site to have the same system for returns that Amazon uses for the rest of its product categories.
Toysrus did not return phone calls seeking comment.
Amazon will be compensated through a series of fixed payments, per-unit payments and a single-digit percentage of revenues. It also will receive warrants entitling it to acquire 5 percent of Toysrus. The companies did not reveal more specific details about the deal’s financial terms.
Toysrus had $39 million in online sales during the 1999 holiday season, said Dougherty. Amazon does not break out the sales for its categories until they become profitable, she said.
