eToys Proves a Brand Isn't Everything
In early December, eToys was looking forward to the holidays as eagerly as any five-year old. CEO Toby Lenk proudly declared that Christmas packages were being shipped without snags from two brand-new warehouses. The company had just moved its headquarters to a sparkling new building in a trendy part of Los Angeles. And the airwaves were filled with heart-tugging ads depicting heroic parents finding the perfect gifts at eToys.
But on Feb. 1, it became clear that Lenk's propensity to spend -- even when Wall Street was telling him not to -- may have caught up with the company in the worst possible way. A committee of creditors, formed in early January to deal with angry vendors demanding payment, announced it would give the troubled e-tailer until Feb. 15 to make good on bills due. In effect, the creditors extended their initial deadline from Jan. 31. But eToys owes its creditors about $200 million, and as of Dec. 31, it had $62.8 million in cash left on its balance sheet.
The creditors hope the two-week reprieve will give eToys more time to find a buyer. Over the past two weeks, the stock has fluctuated wildly on rumors of a buyout, with Target and Wal-Mart being cited as the most likely suitors. But analysts say any offline retailer that might be interested wouldn't be likely to buy the entire company or preserve the brand. "A company might be interested in the state-of-the-art warehouses," says Kevin Silverman, an analyst for ABN Amro. "I doubt very much anybody will have the appetite to take on any other eToys assets and lose a bunch of money."
The increasing probability that the name eToys won't be part of the Internet vernacular for much longer is sobering, especially considering what went into building the eToys brand. Lenk, a veteran of Walt Disney Co., sometimes seemed more focused on making eToys the company that parents thought of first than on actually getting them to buy. In 1999 and 2000, he spent the bulk of his $56 million annual marketing budget on pricey mass-media ads that certainly built brand recognition. The spots garnered raves from the ad industry and may have even drawn parents to the site, but they didn't do much else: eToys' visitor-to-buyer conversion rate was just 6.6% in 2000.
Lenk was reluctant to use coupons and other promotional tools, even while competitors were handing them out left and right. In November, Toysrus.com offered free shipping on orders over $100. The response was so positive that Toysrus.com -- which formed a partnership last fall with Amazon.com to sell toys online -- extended the promotion into December. Result: Toysrus.com's 2000 holiday sales tripled over 1999's, to $124 million. Meanwhile, eToys' revenues for the entire quarter rose just 23%, to $131.2 million. The company had been expecting holiday sales of at least $210 million. "Everyone thought the TV ads were excellent, but they didn't translate into the immediate commerce that was needed," says Tom Wyman, formerly an analyst for J.P. Morgan Chase & Co.
As the name that was once as famous as Yahoo!, Amazon, and eBay inches closer to the Internet graveyard, the lesson for surviving e-tailers is clear: Brand-building on its own isn't enough to drive sales and profits.
By Arlene Weintraub in Los Angeles
Edited by Douglas Harbrecht