2HRS2GO: Even an e-tailing king needs helpers

3 min read

Amazon.com (Nasdaq: AMZN) building a Web store with someone else? That's a new one.

The best known e-tailer in the world has always believed it could build on its leading position in books and extend that to other product areas. Amazon.com CEO Jeff Bezos would be the Internet's Sam Walton, with a retail model that draws you in for one item and convinces you to buy others while you're there.

Part of the Amazon.com model included a fairly high degree of self-sufficiency. The company in the beginning built its own website, largely with its own internally-developed software, and never undertook a partnership unless it was clearly the dominant partner. Amazon uber alles.

Now the company has conceded that its name isn't big enough. At least in least some cases.

Amazon.com and Toysrus.com this morning unveiled an alliance to jointly develop co-branded websites for toys and baby products. It's the first time Amazon.com has joined with a comparable brand name.

(Drugstore.com runs Amazon.com's "Health and Beauty" department, but no one would say they're equivalent companies in terms of recognition)

Wall Street wasn't impressed. Shares of Amazon.com dipped slightly in the first few hours of trading today.

Some analysts have recently questioned Amazon.com's ability to profitably sell anything besides books, music and videos. Lehman Bros. analyst Holly Becker gave up on the company last month. Sanford C. Bernstein's Faye Landes began her AMZN coverage yesterday with an "underperform" rating.

Today's announcement stands as an implicit admission by Amazon.com that it needs help in toys, which was the company's first non-media business. The move really stands out when you consider that Amazon.com's previous approach has always been to compete against other well-known brick-and-mortar names (Barnes & Noble and Borders in books, Columbia House and Sam Goody's and anyone else in music, Home Depot in tools and hardware) rather than work with them.

Consider it further fuel for the theory that the Amazon.com name still lacks the power to convince shoppers to buy something besides Harry Potter books or Rush CDs.

Certainly Amazon.com doesn't care to highlight its toy business. Amazon.com's latest financial news release (not counting the boilerplate "About Amazon.com" description at the bottom) mentions the "Toys" only once, in connection with ratings of e-tail websites. If you relied solely on the company's second quarter report, you wouldn't know toys generate any revenue at all.

They're lumped in under "Non-Mature Businesses". You would think a division which generates 6-month revenue of $95 million -- as children's goods reportedly did in 1999 -- would be worth reporting separately, or at least in the "mature" section.

Today's Toysrus.com deal also points out Amazon.com's weaknesses. Toys 'R Us (NYSE: TOY) will oversee inventory, not Amazon.com, although all goods for the new business will be stored in Amazon.com's warehouses. If Toys 'R Us -- not exactly anyone's paragon of operational excellence in recent years -- is the superior inventory manager, what does that say about Amazon.com's ability to become more efficient in the rest of its businesses?

To be fair, keep in mind that the online toy market generally seems to be a less profitable field than some other Web businesses, which is why outfits like The Walt Disney Co. (NYSE: DIS) recently pulled out of the space. No e-tailer, Amazon.com or otherwise, can fight overall industry dynamics. Even the best known pure toy e-tailer, eToys (Nasdaq: ETYS), which posted revenue of $151 million in its latest fiscal year, has been plagued by Wall Street's doubts.

Taking down the perceived online toy leader has to provide at least some motivation for this get-together with Toysrus.com. Toys were the first business in which Amazon.com didn't immediately become the online leader.

This partnership might even work -- if there's one thing Amazon.com does well, it's run a quality retail website. But the admission that it needs help ought to make Amazon.com shareholders nervous.

They thought they were buying into a retailing visionary. Now they're just another company partnering with one of those bricks-and-mortar guys. And one that hasn't been impressive lately. 22GO>