| BUSINESSWEEK ONLINE : JUNE 28, 1999 ISSUE | ||||||||
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| COVER STORY
Toys 'R' Us' Nakasone: 'We Needed to Move Quickly' How does Toys 'R' Us plan to fight back against upstart cyber-rivals like eToys? CEO Robert C. Nakasone has some answers. He's in the midst of revamping his Web venture, recently creating a separate unit to be run with his new partners, Silicon Valley venture capitalists Benchmark Capital. Nakasone spoke with Business Week Department Editor Nanette Byrnes at Toys 'R' Us' New Jersey offices about the $80 million he's putting into the Web -- and what he expects to get for it. Here are edited excerpts of their conversation: Q: Why did you decide to change your approach to the Internet? A: The entire move was to underscore our commitment to being the leader in E-commerce in childrens and toys in the fourth quarter of '99. How do you get that done? One thing was the move to take our toysrus.com site and make it a totally separate operating subsidiary and move it to Northern California, the heart of Silicon Valley. In reviewing and studying this whole Internet ecommerce we really felt that that truly is the tech capital of the world if not the universe. It was important for giving us focus, of really being able to attract world-class talent to drive an organization like this. You're going to need the option to offer [employees] much more lucrative stock incentive plans. Q: Why partner with Benchmark Capital? A: Even prior to deciding on them, when we had philosophic discussions on where the Internet was going, they really believe when done correctly, brick and mortar has the advantage. E-commerce when done right has the clear advantage long term to be the winning strategy. Q: But the Internet is not the same as your land-based business. A: We purchased a 500,000-square-foot fully automated state-of-the-art distribution center. We really felt that was critical. We have great distribution and logistics capability, but it's primarily as a retailer. We're very good at taking from manufacturer to store, but to ship directly to customer, we really didn't have the kind of capacity we needed to. Q: Why should brick-and-mortar companies have the advantage? A: Toys 'R' Us has been in business over 50 years, We've invested millions of dollars in advertising, thousands of pages of newspaper ads, millions of dollars invested in television. We now have the preeminent brand among children and families. We do Q rating scores, which measure popularity, and our Q score among children is 77 for a toy retailer. To give you an idea, Disney's Q score is 78 for entertainment, and McDonald's is 76 for fast food. That's the kind of brand power we have, and we really think we can leverage. Another reason is just sheer customer convenience. Imagine being able to buy on the Internet and just return in the store. Right now E-retailers have a lot of difficulty making a convenient return policy. You have to wrap it up, go down to the mail station, return it, whatever, and pay the freight going both ways. Very soon we believe we're going to be able to develop a capacity to have the instant gratification of buying on the Internet at 2 in the morning and then picking it up in the store and get the gratification a land-based retailer can deliver. We have much bulkier product than others. The cost of shipping can be much higher relative to the cost of the product, than say CDs. Q: Aren't you afraid toysrus.com will end up cannibalizing your own store sales? A: I would rather take my own sales than have someone else take it. That's the way we look at it. If we don't take it from ourselves, someone else will. That's a tough one for brick-and-mortar retailers to really look at. I honestly believe it will be additive. It's not just a matter of cannibalization by the Internet, but it's the idea of added sales because of added convenience to our customers. Q: Why do you have to launch so quickly? A: In my working career this is as revolutionary an event as I've seen. I'd equate it to something close to the Industrial Revolution. It is very important to move quickly. You can talk to the Internet experts, and they'll talk about first-mover advantage, and I think there's some truth to that. But more importantly, the benefit of being first to establish a relationship is very key. Q: Why was it important to have this as a separate business? A: The small-company, entrepreneurial culture. It's moving in Internet time, the 24-by-7 clock. Q: Could you have done it yourself? A: While I've got a great deal of faith in our people, we have some of the most talented retail executives in the world, this type of retailing requires a tech bent that's a bit different from what we're used to. Over time we could have gotten it right, but we don't have the time. We didn't have the time to wait. We needed to move quickly. Q: What about Internet companies like eToys' high stock price. Some Net companies are now using their stock to buy up real-world assets and companies. Is that fear another reason for separating toysrus.com? A: We have now the flexibility to spin our online company off and use that same currency to do the same thing. If anything, that is at best an equalization of what we've got, and more likely the brick and mortar have the advantage because they can use this bubble to finance entry into the Internet space. Q: How will you measure the return on your Internet investment? A: I'm just a retailer, I'm not a prognosticator. I've heard people like Bill Gates say E-commerce could be as high as 50% [of all retail commerce]. I think that's a bit high. But it can be at least what catalogs are -- 10% to 15% -- and maybe even a little bit more. So it's an important piece of E-commerce. I don't think anybody knows exactly how much it will be or could be, but it's very important that we carry over the leadership we have in land-based to the Internet as well. Q: How will you know how much crossover you have between online and land-based sales? It seems it will be tough to measure your long-term return on your Internet investments. A: It's no different from trying to measure how effective advertising is. We actually believe the Internet can be a springboard for us. Which will help our land-based stores as well as our Internet sales. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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