BUSINESSWEEK ONLINE : OCTOBER 23, 2000 ISSUE
BUSINESS WEEK E.BIZ -- COVER STORY ONLINE EXTRA: Q&A with Toysrus.com CEO John Barbour "Amazon's toy business and Toysrus.com put together -- it's going to be a bigger business" In August, Toysrus.com, the Internet unit of the toy retailing giant, announced a pioneering alliance with former rival Amazon.com. The companies decided to partner up and make the most of their respective strengths, instead of continuing to struggle with selling toys online. Amazon will handle all orders -- including shipping and customer service -- for Toysrus.com, which sends its customers to a joint store on Amazon's Web site. Toysrus.com CEO John Barbour spoke with Business Week's Heather Green about the alliance. Q: So does this mean that Toysrus.com is retrenching from the Web? A: There are some questions out there about whether Toys 'R' Us is serious about the Internet, whether Toys 'R' Us is selling out to Amazon. I don't know where they are coming from, they couldn't be further from reality. What everyone forgets is the seasonality of the toy business. That's profound, and I am not sure everyone gets that. When you're running a business that's fairly seasonal, the question is: How do you get the long-term leverage out of your investment? Leveraging assets is how you get to be profitable in the long term. Q: How did this notion of working with Amazon come to you? A: It's interesting. The initial idea happened 12 months ago. Just being a shopper and being out there, I could see how good Amazon was. I went to Bob Nakasone in my transition period and said we should be talking to Amazon.com. In the turmoil after Nakasone left...there wasn't any time to get focused on that. After the dust settled, after the holidays, and we had more time to strategize about the business, I contacted [Amazon's] Jeff Bezos and said, "Hey, I would love to come there and sit down and talk with you." Right from our first meeting we understood there was a lot of mutual respect. I think they were surprised we came from nowhere to be the No. 3 site. It demonstrated the power of the brand. What happened was [that] what started as an interesting dialogue just grew, as we became more and more aware of the complementary natures of the businesses and the potential for synergy. The ability to shop the Toys 'R' Us products and events on a world-class e-commerce platform that Amazon has, is very compelling for customers. Q: Are you giving up your brand by working this closely with Amazon? A: We're both helping building up each other's brand. Both of us have slightly different customer bases. We have access to 62 million customers' names in the customers database and access to just under a million baby registries from Babies 'R' Us. During the holiday period, there are about 1.8 million people who walk through the stores. On the other side, Amazon has 23 million online customers. There isn't another company in the marketplace that's positioned like we are right now to build a business. For pure-plays, the cost of acquisition and communication to customers will be paramount in the long-term drive to be profitable. There is no one in this space that has access to a broad-based customer base who can talk to avid online purchasers on the one hand but can get to the newbies who are coming online on the other. Q: What are your marketing costs, relative to a pure-play? A: Our cost was about a quarter of the pure-plays. That should be no surprise. The programs we ran, the Big Toy Book program, the in-store activity we ran, the $10 coupons and free shipping -- many of these business models, inherently in the medium term, are profitable, but a lot of the cost relates to the infrastructure investment for the future. What it comes down to is how much companies are spending to service the customer and to build infrastructure to further growth. That's the difficult balance a lot of the more compelling Web businesses are balancing today: the need to have a path to profitability and the land-grab mentality. Q: What does Toysrus.com do in this alliance? A: Toysrus.com is going to continue to do the things it does very well. That's the selection of the product, working with the vendors, planning of the business, creating the shopping events, the understanding of the dynamic of the people shopping on the site, the development of long-term content where content is required. All the traditional marketing and merchandising Toys 'R' Us is going to continue to do. In each of those areas the understanding of the Web dynamic is really important. Q: Will the success of this alliance depend on how much you market the alliance? A: It's not how much money you spend, it's how effectively you spend your money. We spend a lot less than anyone else in our space. The world doesn't look at how much you spend. The world looks at: What did you get for your money and how did you grow your business? I think one of the attributes of this...is the opportunity to more effectively spend money. That's what Wall Street and everyone else is going to look at. I don't think you can look at the success of this business based on how much money we spent. I think what people will be looking at in January is: How much sales did we do? How much did we spend to generate those sales? What are the long-term benefits that come from this business? Q: So what do you have to do on an ongoing basis with this alliance? What happens to the executives you hired from American Express, Reebok, Gap, and Toys 'R' Us Inc. to handle logistics, finance, technology, and customer service? A: We still have to manage. There are loads of Web businesses that subcontract key attributes and that's what we have done. The difference for us is we just happened to have subcontracted to the best in the business...[and] to one company. We still need those executives, and we still have to work with Amazon. This is a very fast-growing business. All of those key executives, and many of their team, are still heavily involved. Q: What happens to the fulfillment centers you built up? A: We will keep Memphis. We will run Babiesrus.com until next year, and then Amazon takes it over. Chambersberg and Mira Loma we are looking to sell -- and we have a whole pile of people interested. Properly designed and properly laid-out fulfillment centers for e-commerce are few and far between, so we're looking to offload those. A number of people who were there are working for Toys 'R' Us and those we couldn't find jobs for, we're giving very generous packages. Q: Do you plan to stay with the company? A: My viewpoint is, you take Amazon's toy business and Toysrus.com put together -- it's going to be a bigger business. This isn't "Slam dunk, game over!" There is still a lot of work to be done. We're still very early in the evolution of this business. I am really energized about this. Q: Why is it important to Toys 'R' Us to sell online? A: Toys 'R' Us Inc. gains in selling online because it has an investment in what is going to be a very good asset long-term. There are a lot of assets in being online: servicing customers, better being able to understand the marketplace long term and what's happening with products. There are multiple benefits with having a relationship with a player online. Long term, other people will see that as well. That's why other companies are still chasing to make Web business happen -- Wal-Mart, etc. It's all about building a good long-term business. Twelve months ago, everyone had written off Toysrus.com. No one writes it off in the slightest now. I think most people out there see this alliance as a breakthrough. I think it takes our business to a totally new level. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS EBIZ Contents for issue dated Oct. 23, 2000 Cliff-Hanger Christmas TABLE: Building the Perfect E-Tailer TABLE: Breakeven or Bust TABLE: E-Tailers vs. Retailers Double Play TABLE: Toys `R' Both of Us Service, Please TABLE: Profile of the Online Shopper ONLINE EXTRA: Q&A with Toysrus.com CEO John Barbour ONLINE EXTRA: Q&A with Amazon CEO Jeffrey Bezos ONLINE EXTRA: Q&A with Toys 'R' Us CEO John Eyler INTERACT E-Mail to Business Week Online

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