Is Toys "R" Us headed for e-commerce sidelines?

Heavyweight brick-and-mortar retailers, with their deep pockets, stand the best chance of weathering the current e-tail purge, but some of them could discover it's not worth the trouble.

Greg Sandoval
Greg Sandoval Former Staff writer
Greg Sandoval covers media and digital entertainment for CNET News. Based in New York, Sandoval is a former reporter for The Washington Post and the Los Angeles Times. E-mail Greg, or follow him on Twitter at @sandoCNET.
3 min read
Heavyweight brick-and-mortar retailers, with their deep pockets, stand the best chance of weathering the current e-tail purge, but some of them could discover it's not worth the trouble.

Powerhouses such as Walt Disney, Hollywood Entertainment and Levi Strauss have eased themselves out of the e-tail game after their online stores foundered. Stalwart retailers such as Wal-Mart, Staples and Sears, Roebuck have invested big money in their Net divisions, and all have yet to show a profit.

The latest example of a large, traditional retailer marching toward the e-commerce sidelines is Toys "R" Us. The nation's largest toy merchant turned over most of its Web operations to Amazon.com when the two companies agreed to create a co-branded Web site, they announced last week.

"Nobody has come up with the absolute perfect formula to sell online," said Toys "R" Us spokeswoman Rebecca Caruso. "But we are committed to selling online. Toys 'R' Us and Amazon will be everywhere our customers are."

With pure online companies driven out of business daily during the ongoing shakeout and large retailers struggling to sell goods online, some analysts say that it appears the Internet has fallen far short of the blockbuster buying tool investors and analysts once predicted it would be.

In Toys "R" Us' case, the nation's leading toy retailer abruptly halted beefing up its Web operations just three months before the holiday season and handed them over to Amazon for the next decade.

"What it came down to is that they weren't seeing the kind of buying online that they had anticipated," said a source close to Softbank, the venture capital firm that invested $57 million in Toys "R" Us in February.

"They found that people were using the Net to browse or to buy small-ticket gifts for other people's children," the source said. "When it came to buying for their own kids, which is when most big-ticket toys are bought, most people chose to shop in land-based stores."

After crunching the numbers, Toys "R" Us also discovered that the cost of dominating the online toy business may not be worth the trouble.

"They figured (their expansion plan) would take too long to pay for itself," the source said.

Controlling costs has become paramount at Toys "R" Us, as the company struggles to retake the top spot in toy sales from Wal-Mart. On Monday, the Paramus, N.J.-based company released second-quarter earnings and said that fiscal second-quarter profit fell 75 percent on declining sales in its U.S. stores and losses at its Internet division.

Toysrus.com chief executive John Barbour said during an exclusive interview Monday with CNET News.com that the partnership with Amazon was formed because it made sense.

"We've looked at Amazon as a role model since I came here," Barbour said. "There is no one that runs a tighter, more organized online business. What we've done is matched the world's best e-commerce store with the world's best toy store."

Under the terms of the 10-year agreement, the companies will create a Web site for toys and video games. The deal calls for each company to play to its strengths. Amazon will oversee site development, order fulfillment and customer service for the new site, while Toysrus.com will manage merchandising and inventory.

Toys "R" Us steamed into the new year saying it would spend big to ensure that the mistakes of last holiday season were not repeated.

Over and over again, Toysrus.com appeared to trip over its feet as it stepped online. The company's costliest gaffe came when it informed customers days before Christmas that it wouldn't be able to deliver some goods until after the holiday.

Some customers affected by the shipping delays filed a class-action lawsuit and as a result, the Federal Trade Commission fined Toysrus.com more than $300,000 last month.

A week before the deal with Amazon was announced, Toysrus.com was hit with a new class-action lawsuit that alleges the company shared customer data obtained from its Web site with market researchers, something it promised in a written statement never to do. Toysrus.com has denied the charges.

Barbour said the recent controversies have nothing to do with the decision to partner with Amazon. He also rejected the idea that Toys "R" Us has given up on its Net operations or that its role has diminished.

"We have the expertise in buying and, together with Amazon's Web expertise, we have the opportunity to create the world's best online shopping experience."