Dueling Fools
eToys Will be eToys
August 11, 1999
Bull Argument
By
Ebeneezer lurks -- just a click away -- so let's get the important stuff out in a hurry. I love toys. I do. I like playing board games with my family and friends. I'm a video game junkie with a warm N64 and PlayStation who is drooling over the prospects of adding a Sega Dreamcast to my collection next month. I don't think I'm alone in the online world.
As the leading plaything e-tailer, eToys is in an envious position. The demographics of the typical Internet user -- young and well-educated with plenty of disposable income -- play right into eToys' master plan. We love toys. We do. If we're not kids at heart, odds are we have young children or anxious nieces and nephews who crave them. If that net doesn't quite fit you, then I trust you are either a generous grandparent or you're my opponent, Jeff.
The thing is, I don't need to spoon feed you a fairy tale. eToys has numbers that speak way louder than my own words. Quarterly sales just grew 1990%. That's right. 1990%. On a sequential basis, quarterly sales rose 23% in June -- and this is for the typically sleepy spring season. Can you see the momentum building as we near this year's holiday shopping season? Last December, eToys was one of the five most popular e-commerce sites on the Internet.
Ho, ho, ho, which way is Jeff going to go? He'll stumble like a weak-kneed Rudolph on a rooftop if he goes for the "critical mass" argument since eToys has 467,000 unique customer accounts. He will freeze up like a picketing elf if he claims that eToys is simply a novelty. Last quarter 40% of the sales were to repeat customers.
Where will he take target practice with that slingshot of his (because, I'm sure, Jeff loves toys, too)? Competition? Probably. But let's consider the scene here. There are only two real threats right now to eToys, Toys "R" Us <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOY)") else Response.Write("(NYSE: TOY)") end if %> and Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>. The answer to one is actually the other. What I'm trying to say is, consider what happened when bricks-and-mortar giant Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> figured it could stomp out Amazon. It had the brand name -- like Toys "R" Us. It had a global network of stores to go along with fulfillment experience -- like Toys "R" Us. It failed.
Brand, power and capital didn't help. Today barnesandnoble.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BNBN)") else Response.Write("(Nasdaq: BNBN)") end if %>, despite having spent $20 million more than the $80 million Toys "R" Us is committing to its online venture, is ringing up about a fifth of Amazon's take. So, in the words of Parker Brothers, "Sorry!" Toys "R" Us will make out okay offline, the physical stores are looking good in the latest makeover, but in the online world it will always be a Volvo -- boxy, safe, and as edgy as an anti-rhombus.
That leaves Amazon. Last month eToys and Amazon became direct competitors. eToys started selling children's books. Amazon announced it would begin listing toys. Break out the deck of cards folks, we've got a game of War.
But, wait a minute. Even the mighty Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>, which many would consider Amazon's offline equal, couldn't swallow a segment whole. While Sam Walton's company is now the country's largest toy retailer, 80% of industry sales take place elsewhere. So, okay, Amazon will be able to claim a piece of the $23 billion domestic toy market in a vanilla bean generic storefront. Take it. There's plenty to go around.
eToys, with the proprietary content and niche dedication, will probably win the more lucrative and loyal customer base. This is important because everything that eToys has done to broaden its reach, from adding music, books, and videos to buying out BabyCenter.com, serves the same niche. It will retain its brand name relevance.
Right now, in a tricky Internet stock market, eToys is in a win-win situation. If the sentiment continues to sour, it will be hard-pressed for competitors to raise capital to come on board. Meanwhile, eToys is living debt-free with $176 million in cash on the balance sheet. It will continue to build up its cyberbrand while everyone else is on the sidelines. If optimism pulls a boomerang and online companies return to earlier highs, you have an easy double here. So, where is Ebeneezer going to "Bah Humbug" this time?
In the end, I know where my buddy Jeff can get a Clue. Do you?
Next: The Bear Argument