Online Toy Retailers Close Shop

SAN FRANCISCO (05/24/2000) - Educational-toy retailer Toysmart.com Inc. officially closed its doors yesterday, though its site remains online. Bought by Disney last August, Toysmart is the latest online toy retailer to bite the dust in recent weeks, following Nickelodeon's RedRocket.com on May 5 and KBkids.com, which fired 45 of its 145 employees two weeks ago.

Toysmart's demise is a major blow to Disney, which leapt into the Internet toy business last summer by taking a majority stake in the company. While Disney never released the terms of the deal, its investment in Toysmart was rumored to be between $40 and $50 million.

Toy executives attribute the shakeout to a range of factors, the most obvious being a lukewarm stock market that has left venture capitalists skittish about forking over more dollars to sites that shed cash faster than they take it in - a problem afflicting companies across the Internet.

Other online toy retailers have been struggling recently, as well. EToys's stock has plummeted to US$6 from its high of $86 last October, and SmarterKids.com, a direct competitor of Toysmart which went public last November, only briefly rose above its offering price of $14 a share and now hovers around $2 a share. What's most curious about the toy troubles is that the companies hardest hit were those backed by the biggest brands, Disney and Nickelodeon.

"I always thought the industry would pare down," says Toysmart CEO David Lord.

"I just never believed it would be us."

E-commerce analysts suspect that the old-economy heavyweights were quicker to grow impatient with companies that consistently lost money and that they backed out sooner rather than later in an effort to cut their losses.

"Anytime that a traditional, legacy business who's used to a model that involves profits and earnings ... anytime they get involved in the Internet, [it] doesn't take long before they start to get a little nervous," says David Blohm, CEO of SmarterKids.com. "They see heavy losses and a big burn rate, and they all wonder where it's going to end."

While Michael Wagner, CFO of KBkids.com, denies that the company's majority owner, brick-and-mortar retailer KBtoys, had such sentiments, he acknowledges that the decision to fire employees was made largely by the Kbkids board in order to step up profitability.

In contrast with Disney and Nickelodeon, "KBtoys is in the toy business" and can make great use of the Internet, says Wagner. "They need that outlet and that additional way of getting to the customer." In an ironic twist, Toysmart's efforts to attract customers and keep them coming back might be the very thing that hastened its demise. The company continually offered deep discounts and coupons on its site, and they often shipped by Federal Express to please customers, even when buyers requested regular shipping.

Chuck Davis, a former Disney executive who oversaw the company's online properties at the time it invested in Toysmart, said the site has consistently been one of the top-ranked sites on BizRate.com, of which he is now president and CEO. Davis points out that the company had a loyal following. He says he was impressed when his son received a gift certificate for Toysmart, ordered nine items on the site late Thursday night and received them all by Monday.

Despite their consequences, Lord continues to tout such above-and-beyond efforts. "I sit here today, a very proud CEO of people who executed almost flawlessly," he says. "We won all the technology awards, all the customer service awards. Our customers are as happy as can be."

Unfortunately for Toysmart and other online toy-retailer casualties, the rules that govern e-commerce have changed, and investors no longer focus exclusively on top-line revenue and traffic. Sites that slashed prices to attract customers have learned they cannot support such a model indefinitely, and the Internet toy stores that remain in business are quietly wondering who will be the next to fall.

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