Amazon-Toysrus.com deal signals strategy shift

The e-tail giant today formed a 10-year partnership with Toysrus.com to develop a new co-branded e-commerce site for toys and video games. Amazon, which sells toys as well as books, CDs and kitchenware on its site, said it also plans to create a co-branded baby-products site with Toysrus.com

As part of the agreement, Toysrus.com, in conjunction with its majority shareholder, Paramus, N.J.-based Toys "R" Us, will handle the buying and management of inventory. Amazon will handle Web site development, order fulfillment and customer service for the new site.

Both companies said they intend to house each other's inventory in Amazon's U.S. distribution centers.

Today's agreement represents a fundamental shift in Amazon's strategy, with the e-tailing giant handing off much of the inventory risk to Toysrus.com while continuing to focus on its strength in drawing customers.

"It is certainly the case that while we aspire to have the merchandising skills of a Toys 'R' Us, it would be foolish to believe we have them today," Amazon chief executive Jeff Bezos said at a news conference in New York.

"As we enter new product categories, there's a learning curve--not a bad thing--but it can be very expensive," Bezos added.

He also said his Seattle-based company is open to similar alliances for other product categories. "The great opportunity here for us is that we get to skip the learning curve for the toys business."

Just yesterday, a report by Sanford C. Bernstein analyst Faye Landes noted that Amazon customers continue to see the company as a retailer of media products--books, videos and CDs--rather than of a wider array of merchandise. Amazon first began as a Net bookseller, adding music, video and toy sales over time. The company now also sells kitchenware, garden furniture, hardware tools, and health and beauty products.

"Amazon is basically conceding that they couldn't be the leader in the toy space," said Ken Cassar, a research analyst at Jupiter Communications. "If they aren't going to be able to do it in the toy space, there is no way they are going to be able to do it in lawn and garden and any other category outside of the core media."

Meta Group e-commerce analyst Gene Alvarez said today's agreement indicates the online giant may have spread itself across too many product areas too fast.

"This (move) is a signal that Amazon stepped into the toy market a little bit too early," he said. "Though they needed to expand beyond books and CDs and move into areas with greater margins?they kind of oversold themselves."

Amazon stock has been battered in the past several months, as a steady stream of analysts have downgraded the stock because of growth concerns. Two weeks ago, Amazon's strongest booster, Merrill Lynch analyst Henry Blodget, lowered his short-term rating on the company to "accumulate" from "buy."

The company recently lost president and chief operating officer Joseph Galli, renowned for his operational acumen. Galli joined VerticalNet as chief executive.

Today's agreement comes after Toysrus.com's recent settlement with the Federal Trade Commission on complaints about the company's inability to fulfill orders last Christmas.

Last month, seven e-tailers, including Toysrus.com, agreed to pay a total of $1.5 million in fines related to FTC charges over shipping delays last holiday season. The FTC alleges that the online stores did not give shoppers enough notice of impending shipping delays or that they continued to promise deliveries they could not make during the holiday season.

The deal with Amazon could help alleviate some shoppers' concerns, as Toysrus.com will be handing off those fulfillment responsibilities with the co-branded site.

Shoppers will be able to access the co-branded site via Amazon's home page as well as through Toysrus.com. Orders will be completed and shipped by Amazon's order fulfillment department.

Under the terms of the deal, Amazon will be compensated periodically through a combination of fixed payments and single-digit percentages of revenue. The payments are designed to cover Amazon's order fulfillment expenses. In addition, Amazon said it will receive warrants entitling it to acquire 5 percent of Toysrus.com.

Amazon and Toysrus.com, as well as Toys "R" Us, intend to market the store to their respective customers. The toys and video-game site is slated to launch this fall, and the baby-products store is set to launch in the first half of next year.