The story of Toys “R” Us and eToys offers an important lesson on the importance of fulfillment in any e-commerce business. Fulfillment starts after the sale is made, when the actual order gets processed – there are inventory systems, warehouses, loading docks and delivery companies through which the purchase must pass before finally arriving on the customer’s doorstep.

The Web site itself is just window dressing. EToys was widely regarding as having one of the easiest-to-use and convenient online stores around. This made it easy for customers to search for and buy toys. The consequence of sales, however, is that you then have to deliver it.

Shipping an item directly from the warehouse to the customer can be a costly proposition. Most retailers have a limited number of locations in any given market. Contrast that with an e-commerce business who has to deliver to a unique location for every customer.

Toys “R” Us fulfillment problem started during the 1999 holiday season. According to Corporate Board Member, “A combination of software glitches and mechanical foul-ups – the miles-long conveyer belt in the company’s Memphis distribution center went on the fritz, for example—on top of overwhelming consumer demand, caused massive delays in service four days before Christmas. When it was clear that the company was not going to be able to ship all its orders by the time Santa slid down the chimney, Barbour took the unusual step of breaking the bad news to his customers via e-mail. “Even with out fulfillment center working around the clock,” his missive started out, “we will not be able to deliver your order before December 25…..One behalf of everyone at Toysrus.com, we sincerely apologize for being unable to meet your expectations.”

They refunded 3% of the total orders and mailed $100 Toys “R” Us gift certificates to affected customers. The FTC also hit the company with a $350,000 fine for not notifying customers soon enough.

After this, Toys “R” Us realized they needed to find a better solution and they ended up in a partnership with Amazon.com, one of the few companies that had not fallen behind in the 1999 holiday season. The deal involved a fixed payment plus a single-digit commission on sales.

“Toys R Us CEO John Barbour, 41, says the deal lets each company concentrate on what it does best. Toys “R” Us knows how to select the goods; Amazon knows how to deliver them. ‘I wouldn’t say that the arrangement with Amazon was a necessity,” Barbour explains. “But we definitely felt that it would make Toysrus.com a much strong competitor in the online marketplace.’” (Corporate Board Member)

When you consider the fact that Toys “R” Us sales were only 1/3 of eToys sales that year, you get a sense for how important fulfillment was to eToys.

Much like Toys “R” Us, eToys experienced distribution troubles in the 1999 holiday season. According to the Wall Street Journal, “During the 1999 Christmas season, eToys saved money on packing and shipping by outsourcing the bulk of this work to Federated Department Stores Inc. Fingerhut Cos. But under this setup eToys failed to deliver 4% of its orders on time, and the resulting bad publicity gave the company its first major black eye.”

eToys took a different strategy than Toys “R” Us. Instead of partnering with someone, they decided to build a gigantic distribution center in Virginia. As a consequence, eToys would have to generate $750 million to $900 million per year in order to turn a profit. When they did this, they were only earning $200 million a year.

According to the Wall Street Journal, “eToys’ distribution and technology costs ended up climbing so high that many wonder whether any online-only retailer that isn’t selling multiple product categories to a broad market can survive. ‘If you’re trying to service a mass market you need to maintain an expensive Web site that costs around $50 million, whether you have $1 or $1 billion” in revenue, says Henry Blodget, an Internet analyst with Merrill Lynch.”

EToys spent $43 million on its Web site and technology in 1999 (Amazon.com Inc. spent a comparable $47 million the year before) and that’s a lot of money. When eToys build the new center, their costs for plant and equipment rose to over $120 million.

By December, 2000, eToys was gone, having been unable to find investors willing to provide additional funding.

The Toys “R” Us partnership with Amazon.com has worked out well. It could have easily gone the other way. Before contacting Amazon.com, Toys “R” Us first went to their competitor, eToys. The eToys CEO rejected the partnership offer without thought because he didn’t believe that “Bricks and Clicks” partnerships would work.

Sources:

Corporate Board Magazine, Winter 2000

Wall Street Journal (date unknown)