Looking to avoid last year's holiday-season mistakes, online toy retailers are busily beefing up their supply-chain capabilities in an effort to make this Christmas a merrier one from a business standpoint.
The nightmare before Christmas that took place a year ago is already legend in online retailing circles: Internet-based toy stores unable to fulfill orders, going broke, getting sued or fined, or purchasing too much or too little inventory.
"Toys is probably the toughest category to go after on [the Web]," said Paul Huppertz, an analyst at PricewaterhouseCoopers in New York. There are many problems specific to the toy business, he said, starting with the toys themselves, which vary greatly in size and packaging types.
What will count this year is the ability of an online toy seller to get accurate product data throughout its entire supply chain, from supplier to customer, said Kevin Silverman, an analyst at New York-based ABN Amro Inc. Illustrating his point, a survey of 62 retailers conducted this fall by Gomez Advisors Inc. in Lincoln, Massachusetts, found that 81% of the respondents planned to implement real-time inventory management this holiday season.
In the toy sector, the ball is primarily in one court: the one featuring head-to-head competition between eToys Inc. and Paramus, N.J.-based Toysrus.com Inc., which is now teaming up with Amazon.com Inc. on toy sales. Many other Internet-based toy peddlers, such as Toysmart Inc., RedRocket.com and ToyTime.com, went out of business earlier this year.
Toysrus.com is backed by the branding power of a brick-and-mortar retail chain and order fulfillment and customer service firepower of Seattle-based Amazon.com. with which it signed a partnering deal in August. Under that agreement, the two companies are selling toys through a co-branded Web site, with Amazon handling development of the site plus shipments to customers and Toysrus.com responsible for purchasing toys and managing product inventories.
The two companies declined to offer specifics on their supply-chain preparations, but analysts said their respective internal systems have been linked together to streamline replenishment as online shoppers place orders. A Toysrus.com spokesman did say that the goods bought by the company for the holiday season are already sitting in Amazon warehouses.
Los Angeles-based eToys claimed to have fulfilled 99% of its holiday orders on time last year. But it still experienced thousands of late deliveries, and the company's stock price has dropped by as much as 90% during the past year.
To ward off a repeat of the late shipments, eToys has turned inward, beefing up its warehousing capabilities and IT resources. The online retailer upgraded its Web site with new 64-bit Intel-based servers that it said can handle 1.6 million hits per day. On the back end, an eToys spokesman said, the company's Oracle Corp. database can now handle 1 million transactions daily.
The database system is capable of processing 200,000 orders and up to 250,000 inventory updates each day, enabling customers to view product availability information in real time, the spokesman said. EToys has also expanded from three to six call centers with e-mail capabilities and added new systems to enable buyers to track their orders.
In addition, eToys plans to handle all of its order fulfillment internally this year. A year ago, the company relied on Fingerhut Companies Inc., a Minnesota-based direct marketing firm, to fulfill roughly half its orders. To prepare for that, eToys added two new state-of-the-art distribution facilities, one of which is partially automated.
Even with such investments, it remains to be seen how the surviving online toy stores will fare this time around. But one thing is certain Huppertz said: if a buyer doesn't get his toy delivered in time for it to be opened Christmas morning, the retailer involved "has alienated a customer for life."