Toys R Us To Create Separate E-Commerce Unit

Seeking to capitalize on an expanding online toy market and gain ground on online leader eToys, Toys R Us announced yesterday the overhaul and repositioning of its e-commerce site as a separate subsidiary and the purchase of a distribution center formerly operated by cataloger Genesis Direct.

The toy retailer has received an investment in of a reported $10 million from Benchmark Capital, Menlo Park, CA, a venture capital firm that has backed eBay and other Web sites, and plans to locate the subsidiary in Silicon Valley, CA.

Online toy sales are expected to grow from $52 million in 1999 to $555 million by 2002, according to Jupiter Communications, New York.

Toys R Us, Paramus, NJ, is pumping $80 million into the venture, according to the Wall Street Journal, and paying $30 million for a 500,000-square foot automated distribution center in Memphis, TN. Genesis Direct has changed its name to and narrowed its focus to sports merchandise thus eliminating the need for such a large facility. Toys R Us claims the center can process over $1 billion in annual orders and is strategically located in the overnight delivery “sweet spot” of the country. will eventually be spun off in an initial public offering.

The revamped Web site will launch in the second quarter that ends July 31. It will incorporate the Kids R Us and Babies R Us clothing and accessory businesses with the existing online toy business. The site will be easier to navigate and have more intuitive search features, said spokesperson Rebecca Caruso. If the name of a toy like Lego is spelled wrong, for instance, the search engine will look for like matches.

CIBC Oppenheimer analyst Dorothy Leckner doubts a shiny new Web site can prop up a foundering retail operation that gave way last year to Wal-Mart as the top toy seller in the country.

“This puts an Internet spin on the stock but the online business is insignificant compared to its store problems,” Leckner said.

Poor inventory management, store presentation and a lack of customer service have plagued the chain’s 1,488 stores and its first online effort last fall was not particularly successful either, Leckner said. Toys R Us is also being hurt by the growing commodization of the toy business. Besides eToys, there are at least 20 other online locations to purchase toys, she said.

Leckner is encouraged by the company’s decision to sever ties with the retail operation and work with a Web-savvy partner in Benchmark Capital. Toys R Us is conducting a search for a CEO to head up the online subsidiary.

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