Tough Play

Toy sector stalls in sleep mode

The old saying, "he who has the most toys wins," is certainly not true among Internet retailers struggling to make a profit in a difficult market. The saying on the Internet is: The online toy store that attracts the most customers and delivers packages profitability wins.

So far, few Web-based toy retailers have been able to make it work. Last year, online toy stores looked like a string of toy soldiers toppling over in a chain reaction: Viacoms;, the Walt Disney Co.-backed online toy store; and privately-held all closed shop.

Now eToys, once an Internet retailing darling, is struggling, laying off 700 of its 1,000 workers, shuttering its European operations and working with investment bankers to explore ways to salvage the business.

But rather than face less competition in the year ahead, the dynamic duo of Toys "R" Us and are likely to face more, says Forrester Research analyst Seema Williams. Traditional toy retailers such as Kmart, Target, Wal-Mart Stores and others have emerged to fill consumers shopping baskets with Barbies, Legos, Razor scooters and whatever other hot-selling toy comes onto the scene.

Wal-Mart, the nations No. 1 toy retailer, and Kmart revamped their Web sites before the holidays, and both and Kmarts posted dramatic increases in the number of visitors they attracted daily. Both sites ended up in the top 20 most visited Internet sites during the holiday season, according to Media Metrix, which tracks Internet traffic. This was despite the fact that Wal-Marts site had numerous problems. certainly came out of the holiday season looking a lot stronger than it did a year ago. It was among a group of seven e-tailers, including, that were charged with violating federal mail-order rules during the 1999 holiday shopping season. This time, aided by Amazons logistics experience, claims it delivered 99 percent of its toys on time. Sales more than tripled from the previous years holiday season, to $124 million from $39 million.

The growth is impressive, but less than some analysts had projected. Merrill Lynch & Co.s Henry Blodget says that while and Amazon gained market share during the holidays at the expense of eToys and others, the growth of the overall online toy market in the fourth quarter — 40 percent — was lower than expected. For 2001, Blodget sees a solid but unspectacular year for and Amazon, with 30 percent to 40 percent growth, and online toy retailing growing overall at 20 percent to 30 percent.

And even if the big brick-and-mortar retailers grab a larger piece of toy sales, a market still exists for specialty toy retailers such as

Zany, which offers high-quality toys, games and books, saw its Internet sales increase 5 percent over last year, says Thomas G. Vellios, the companys president and acting chief executive. That growth was achieved without heavy discounts, free shipping and the more than $6 million spent on marketing during the previous years holiday season, he says.