Toys R Us deals new blow to Amazon

In the world of Internet commerce, King of Prussia doesn't exactly register as a hot spot. But it's one that has caught the attention of online retail giant Amazon.com.

GSI Commerce, based in that small Pennsylvania town near Philadelphia, said Wednesday it would power all of the toy- and baby-product sites for Toys R Us, in lieu of longtime partner Amazon.

While GSI plans to provide technology and customer service, Excel (owned by Deutsche Post World Net) will hold inventory and ship orders from its distribution centers.

The deals is a blow to Amazon, which has gone to court to try to reinstate the Toys R Us partnership and stands to lose tens of millions in profits if a judge rules against it.

Toysrus.com, the online arm of the Wayne, N.J.-based toy retailer, sued Amazon in May 2004, charging it violated their exclusivity agreement by allowing other retailers to sell toys. Amazon countersued.

Toys R Us won the right in February to sever its 10-year agreement with Amazon, though neither company won monetary damages.

While the February ruling put into motion a 90-day separation agreement between the companies, Amazon appealed the decision in April.

In announcing the deal Wednesday, Toys R Us signaled it expected to win the appeal. It also plans to relaunch its Toysrus.com and Babiesrus.com Web sites July 1, with a new look and additional product information.

"They don't think Amazon's legal maneuverings will be successful," said Internet analyst David Garrity of New York-based Dinosaur Securities.

Amazon's 1 million third-party sellers accounted for nearly a third of its first-quarter sales. But it competes with GSI for the largest third-party retailers, ones that wish to outsource their e-commerce operations.

These deals are critical to Amazon. They allow it to leverage its sophisticated e-commerce technology ( in which it has invested tens of millions) and to increase selection to its site.

These deals also carry higher profit margins because, in most instances, Amazon doesn't assume the financial risk of holding inventory and physically shipping products.

While Amazon has announced some recent retail partnerships, from Timex and Benefit Cosmetics to Sears.ca, GSI has amassed a roster of 60 in eight categories, including Burberry, Polo.com, Major League Baseball, NASCAR, kate spade and now Toys R Us.

Forrester Research analyst Carrie Johnson said GSI can usually offer better terms because it has signed on more retailers. "[Amazon] hasn't reached that kind of scale yet where they can be very competitive," she said.

The broader, unspoken implication of the Toys R Us suit is Amazon may partner with you today and compete against you tomorrow.

But Amazon spokeswoman Patty Smith said the company's role as a retailer hasn't been a problem for partners. "I wouldn't make that leap at all," she said.

If Amazon doesn't prevail in court and loses the contract, its operating profit could shrink by as much as $25 million in the current quarter and $50 million for the fiscal year.

Still, there's more business to be had. Johnson, the analyst, said more clothing manufacturers are beginning to sell directly to consumers online, including Tommy Hilfiger. "The business is everyone's to lose," she said.

Monica Soto Ouchi: 206-515-5632 or msoto@seattletimes.com