Toy story: Former partners Amazon, Toys R Us compete online

In its earliest days, Amazon.com asked job applicants rather peculiar interview questions, ones designed to test their ability to solve problems.

Among them was this jewel: If a gorilla and grizzly bear fought, which would win?

The answer: It depends on the terrain.

The same question might apply to Amazon and its longtime partner Toys R Us, who severed ties last year.

Toys R Us won the right in February to end early the 10-year partnership after a lengthy court battle over the terms of the original contract. By early July, both companies had opened separate toy and baby stores online.

The question revisited: If an online retail juggernaut and toy-industry icon fought for customers, which one would win on digital terrain?

The answer: We'll know soon enough.

Toys R Us on Wednesday said its U.S. toy division recorded the best holiday sales in many years, as customers flocked to it for hot toys, from T.M.X. Elmo to PlayStation 3, and stores kept more items in stock.

During the nine-week holiday-sales period, the company posted a healthy 4.1 percent jump in same-store sales. The key retail gauge measures the performance at stores open at least a year.

While the private company did not release online-sales numbers, it plans to report overall fourth-quarter and annual sales results before May 4.

Amazon, meanwhile, reports its fourth-quarter and annual financial results Feb. 1, giving Wall Street the first glimpse of Amazon as a standalone toy seller.

Already, the company reported its "best-ever" season, with more than 4 million orders flying through its system on its busiest day. While that indicates it sold more than it did a year ago, it says little about toys.

Amazon spokesman Craig Burman said that its strategy was to offer low prices, a deep selection and a convenient experience. "That's the goal of our toy store, as it is [for] all 34 categories that we have," he said.

Holiday challenge

Amazon's challenge this holiday season: to help its toy category stand out among 34 categories, such as music, books and jewelry, but without siphoning attention from other parts of its store.

Amazon had already doubled its previous toy selection by the time the companies parted ways in July — working with manufacturers such as Fisher-Price and Leap Frog and with distributors such as Target and eToys.

While Amazon had lost the power of the Toys R Us brand to lure shoppers, it bet customers would be enticed by another powerful draw: free shipping.

The online retailer for the first time extended its shipping promotions to shoppers who bought toys and baby products on its site, including its long-standing free-shipping offer on orders of $25 or more.

On a July earnings call, Amazon also assured analysts it would continue to lower prices and invest heavily in the toy category for the rest of the year, but at a cost.

Amazon's stock plunged to its lowest level in three years — by 22 percent in a single day — after the company said spending on technology, offering a deeper toy selection and aggressively cutting prices would reduce its annual operating profit by $80 million for the 2006 fiscal year.

Toy sales down

The company is also competing in a far more aggressive environment. Toy-industry sales have fallen each year for the past four years as rival discounters drive down prices and children favor electronics over toys at an increasingly earlier age.

Wal-Mart, the No. 1 toy seller, triggered a price war this holiday season with chief competitor Target, the second-largest seller of toys.

For the past several seasons, both have deeply discounted some of the most popular toys as a way to bring customers into stores to buy other, more profitable, items. Toy retailers don't have the same luxury, since all they sell is toys.

Cliff Annicelli, editor of toy-industry magazine Playthings, attributed the price pressure to discount retailers. "The toy business is one of the only market segments where, when demand for the products goes up, prices go down," he said.

Toy retail dollar sales fell 2.4 percent in the first 10 months of the year when compared with the same period a year ago, according to NPD Group, which conducts consumer and retail-market research.

November and December become all the more critical, since they make up roughly 40 percent of annual sales.

The toy industry also faces fiercer competition from the electronics and video-game industries as kids embrace electronic devices earlier. Kids ages 4 to 14 last year used electronics devices six months earlier than they did the year before, the NPD Group said in May.

Nintendo Wii and Sony PlayStation 3 debuted in time for the holiday season, while Apple introduced a new iPod Shuffle last year that sells for an affordable $79.

Toy manufacturers have responded in kind. Fisher-Price featured a "Kid-Tough" digital camera for $70 this holiday season. Another hot toy — Webkinz plush animals, which come with a secret code that lets users play with a virtual version of their pet online.

In lieu of Amazon

In September, Toys R Us got ready for the impending season by opening a new 574,000-square-foot distribution center in Ohio. In lieu of Amazon, the company hired GSI Commerce to power its Web site and logistics company Excel to pick, pack and ship items.

Jerry Storch, the Toys R Us chief executive, said the new site was designed with toys in mind, which makes it easy for customers to navigate — a point Amazon recently embraced in another retail category.

Amazon this month opened Endless.com, a shoe and handbag store and its first stand-alone U.S. retail site begun from scratch. The company said the separate store enables it to offer features most relevant to shopping for shoes and handbags.

Natural fit

While the company declined to say whether it would use the same approach in other categories, toys seem a natural fit.

Toys R Us in 2007 plans to give customers the ability to order items online for pickup in stores — a feature they couldn't offer before.

Even during the partnership, Storch said customers got to the site primarily by typing Toysrus.com into their Web browser. "We don't need anyone else's name to market our Web site," he said.

For the holiday season, Toys R Us drove customers to its Web site by featuring online deals in the 40 million newspaper circulars distributed every Sunday.

Five days before Christmas, the company introduced dozens of toys from its 2007 lineup, available for sale right then.

Storch, a former Target vice chairman, has already been credited with executing a turnaround.

Storch said his company appreciates the ability to test offers without worrying about how it affects a partner. "Businesses change all the time," he said. "This, for us, is a change whose time had arrived."

Busiest shopping day

Amazon had its busiest day on Dec. 11, when customers ordered more than 4 million items. While the company doesn't break out toy sales, it said the top sellers included the Laugh & Learn Cuddly Learning Puppy and Princess Genevieve Doll from Barbie from the 12 Dancing Princesses line.

Even so, Amazon has a ways to go before it becomes a toy destination, particularly year-round, said Annicelli of Playthings magazine. "I think Amazon is not the brand name that comes to mind when you think of toys," he said.

It's unclear how Amazon drove customers to its toy site. In lieu of advertising, the company funnels most of its marketing dollars toward offering customers deeper discounts and free-shipping promotions.

The company this holiday season introduced one promotion that featured toys among its other products.

"Amazon Customer Vote" featured four deals at aggressively low prices, allowing customers to collectively choose which discounts the site would offer during the holidays.

Toy promotion

The weekly choices always included toys, such as the Barbie Interactive Princess, a Mongoose bike and a $100 certificate to its Toys store, bundled with an Amazon Prime free-shipping membership.

"Lots of people have been taking advantage of great deals on Amazon.com this season, and that includes the toy store," Amazon's Burman said, declining to be more specific.

Storch, of Toys R Us, said the Internet is most powerful when aligned with a bricks-and-mortar retailer. He said Amazon is "a fine company with many capabilities" and the split is more about charting its own course.

As for luring customers, Storch said it's not hard for shoppers to find the company. "If they don't know Toys R Us, they've been sleeping under a rock for 50 years," he said.

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