Not Playing Nice

Former partners Amazon and Toys R Us go head-to-head in the increasingly profitableand competitiveonline toy market

A new brawl has broken out in Toyland. On July 5, e-tailing giant (AMZN) expanded its toy offerings to take on former partner Toys “R” Us, which had launched its online operation days earlier.

Thanks to partnerships with retailers such as Target (TGT) and Babystyle, Amazon says it will offer tens of thousands of toy and baby items—double the number of products it stocked on its virtual shelves when it was partnered with Toy “R” Us.


  Amazon's renewed efforts in the toy and baby products segments follows a nasty split with Toys “R” Us. When the retailers were partnered, logging on to or brought customers to Amazon's megasite. But in 2004 Toys “R” Us filed to leave the partnership on the grounds that Amazon was selling goods provided by third parties that Toys “R” Us had the exclusive right to sell through Amazon.

In March, a judge ruled in favor of Toys “R” Us. Amazon is appealing the decision and says the break could hit operating profits by up to $50 million in 2006, most of it “due to's failure to pay fees for the second quarter,” according to a recent SEC filing by the company.

On July 1, Toys “R” Us launched its own toy and baby product Web sites. The company says its combination of stores and Web sites offer customers a “more fully integrated online/offline experience,” according to spokeswoman Kathleen Waugh. For example, says Waugh, a mother-to-be would be able to see a stroller in a store before requesting it on the baby registry.

Amazon counters that thousands of people already have signed up for its competing baby registry in its first days. The company pooh-poohs the notion that customers want to visit a store and says its customer reviews offer shoppers a greater advantage. “As a prospective purchaser you can see [by reading Amazon's reviews] if this mobile will get your kid to sleep,” says Patty Smith, an Amazon spokeswoman.


 Analysts say the toy category is worth the fight. Despite the legendary flameout of the dot-com era's eToys, (now owned by eToy Direct, an Amazon partner), online toy sales are taking a greater percentage of overall sales in this category. According to Sucharita Mulpuru, a senior analyst at Forrester Research, online retail will account for 18% of the $32.22 billion toys and video games market in 2006. That's up from 14% of sales in 2005.

Mulpuru believes “Amazon has some entrenched characteristics” like a streamlined supply chain and a bigger selection that give it the early edge. But she doesn't discount Toys “R” Us either. “They'll be fine because they have a strong brand.” Even so, these former allies shouldn't stare each other down too hard. Wal-Mart, which has been stepping up its toy sales online and off in recent years, could throw them both out of the sandbox.

Before it's here, it's on the Bloomberg Terminal.