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Christmas Gift Guide
Tech Industry

Toys "R" Us, Home Depot hit snags on the Net

Some late-to-the-party e-tailers may collect little more than lumps of coal in the cyber cash register this Christmas.

Some late-to-the-party e-tailers may collect little more than lumps of coal in the cyber cash register this Christmas.

The latest brick-and-mortar retailers to find themselves in danger of falling off of Santa's list are Home Depot and Toys "R" Us, both of which announced setbacks or delays in their online strategies this week. The two retail giants join such laggards as Banana Republic, The Limited, Best Buy, and Target, which have built little more than placeholder sites or are selling a skimpy lot of wares online. Starbucks also recently scaled back its Internet sales plans, pressured by investors to stick to its profitable offline coffee sales.

The setbacks at Home Depot and Toys "R" Us come as analysts have been emphasizing the opportunity for offline giants moving online. Analysts purport that the future of business belongs to those that can best meld their on- and offline sales. A recent study by Jupiter Communications found that sales made to online players such as eToys are coming at the expense of sales to offline stores such as Toys "R" Us.

To be sure, Home Depot is moving toward expanding Web-based sales, but it's online strategy won't be in place until after the New Year. The company initially planned to launch a limited e-commerce site this fall, but cut those plans to focus on the larger launch, a company spokesman said. He added that unlike other companies, Home Depot doesn't see a big spike in sales during the holiday season and the company will offer gift certificates online this fall.

Home Depot's Web strategy has been closely watched by customers eager to buy online.

Some traditional retailers, however, including the Gap and KB Toys, seem to understand how to integrate their virtual and real-world businesses. These companies are creating Web sites that complement their offline stores and are not allowing the fear of stealing sales from their offline stores affect their strategies.

Meanwhile, Toys "R" Us is quickly becoming a cautionary tale in how not to build a business online.

The latest setback for the giant toy retailer came Monday, when the company announced it had broken off its relationship with Benchmark Capital, an investor in its Toysrus.com Web site. The announcement came one month after Bob Moog, the chief executive picked to run Toysrus.com, backed out of joining the company. Moog's replacement, John Barbour, won't start until the end of the month.

Toys "R" Us' troubles come at a time when retailers are running out of time to gear up for holiday sales, analysts say. After being trounced in Internet sales by eToys last Christmas, Toys "R" Us had hoped to start early this year, announcing its partnership with Benchmark in April.

But the recent setbacks--coupled with increased competition in the toy market from Amazon.com, KB Toys, and BrainPlay.com--could stymie Toysrus.com's online efforts for another year. And analysts say the setback could hit the company's wallet.

Toys "R" Us will have a hard time snatching online consumers away from players such as eToys, which have begun to build customer loyalty, said Mainspring e-commerce analyst Andy Schwartz.

Today, eToys stock was up nearly 5 percent, closing at 45.19.

"It's important that Toys "R" Us gets its act together before the Christmas season," Schwartz said.

The Toys "R" Us' deal with Benchmark called for the two companies to invest roughly $80 million and $14 million, respectively, to create Toysrus.com. But the deal never moved to a formal contract, according to Benchmark founder Bob Kagle. Instead, Toys "R" Us and Benchmark ran into irreconcilable differences concerning "structural and governance issues," Kagle said.

Despite the differences and the recent turmoil at Toysrus.com, Kagle said he thinks Toys "R" Us' offline strength will help it succeed online.

"I think that [Toys "R" Us] has a tremendous asset base in building an online business," Kagle said. "The challenge remains for them to execute crisply against that opportunity. I think they are in a position to do that."