Judge Grants Divorce in Amazon/Toys R Us Case
By George Anderson
Like most unions, it started out with a sense of unity and optimism but, as oftentimes happens, the marriage between Amazon.com and Toys R Us was not meant to be.
Yesterday, a Superior Court judge in New Jersey ruled that Amazon had failed to honor its part of the relationship and Toys R Us would be allowed to sever its deal with the online retailer. Discounting an unlikely reconciliation between the parties, Toys R Us will no longer have its web site on an Amazon.com storefront after 90 days.
The dispute between the parties, as with most relationships, grew out of widely divergent expectations. Amazon.com was looking for Toys R Us to stock every toy under the sun and, for its part, Toys R Us wanted absolute exclusivity on everything it sold on the Amazon site.
The question becomes, what will happen now?
While on Amazon, Toys R Us has become the largest online seller of toys. Within 90 days, it will have its toysrus.com URL and customers who only care about whether they can find the toys they want and have them delivered without incident.
Toys R Us spokesperson Kathleen Waugh told the Seattle Post-Intelligencer that the company is committed to maintaining its position as the top online toy seller but that it was premature to discuss what partner or partners the company would be working with once the divorce from Amazon.com was final.
Amazon, for its part, also has decisions to make. Company spokesperson Patty Smith said the company had existing partners, such as eToys and the Discovery Channel, that it could work with.
“They could either go to Target or try to find another toy retailer like K-B Toys,” said Jim Silver, editor in chief of Toy Wishes magazine. “You would think Target first, since it is already their partner, but the one problem with that is Target has its own Web site where it sells toys — and how much will Target want to give up?”
Harry Chevan, the managing director of the investment bank Gruppo, Levey & Co., said, “From a timing standpoint, Amazon is in a good position. To have this happen in March, seven to eight months before the important holiday toy season, gives them time now to get themselves ready, and they have probably already done so … either to develop another relationship or to do it themselves.”
Mr. Silver thinks it unlikely that Amazon would go it alone based on the investment it would require to fit the very same expectations the company had of Toys R Us.
Moderator’s Comment: What does the Amazon and Toys R Us split mean for the respective parties? What impact, if any, do you think this will have on the
online toy retailing market in 2006? –
George Anderson – Moderator
Brand equity was forgotten when TRU got into this with the rising “star” AMZ. The fundamentals of ownership and Brand were forgotten in pursuit of “Sales.”
This strategy is only the beginning of the disintegration for AMZ.
Brands and Companies should learn a lesson from this example.
Companies are responsible for the marketing and distribution of their products and anyone who flirts with any deviation from vigorously controlling brands and distribution is flirting with disaster, and a huge recovery at great expense. Ask TRU if they could do it all over again — would they do what they did? I think not.
Bernice is right. Its a lose – lose situation for both. However, Amazon will likely roll on by and recover. This was, in the end, an upside for Toys R Us who has had its struggles. They will now have to seek new and innovative ways to accomplish reaching the market — ways yet unimagined. The toy market and shopper is leaving them behind.
Partnerships are successful only as long as both side wins – depending upon what “win” means to each side. The devil is in the details. Amazon and TRU didn’t pay attention to the details, didn’t understand the deal the same way, and didn’t have their expectations met. Amazon needs to focus on what win/win means to any new partner in the toy category. TRU, on the other hand, has a bigger challenge. First, they need to focus on creating a better understanding of expectations to be successful with a new partner. Second, and even more important in the short run, is that they have 90 days to get a system in place that functions as effectively as Amazon.com. This is no small challenge for them. The reason they partnered with Amazon in the first place is because their distribution system for online sales completed disintegrated during the busy holiday season in 1999. Now they have 90 days to replicate a smooth running system. They do, indeed, have a lot to lose.
This could be a simple lose lose scenario. The strength of amazon.com (over amazon.co.uk for example) is the breadth of its partners and the ease of one stop shopping. Unless they find another partner with a similar selection and price range, they will not benefit from the split. Toys R Us, for their part, will lose an awful lot of customers who prefer the one stop shop approach and can’t be bothered to go looking for them or shop around. That said, I think they’re both pretty grown up companies and neither will lose out much. They will inevitably bounce back and recover their market share.
The biggest loser in this situation is Amazon. As a former manager in Amazon’s Supply Chain group at the time they signed the deal with Toys R Us, I believe this has seriously wounded Amazon’s credibility as a partner. I suspect that if you asked some of Amazon’s current partners, they would not be surprised at this development with Toys R Us. A previous comment from a BrainTrust panelist pointed out that partnerships are developed to create a win-win situation for both parties. The behavior I witnessed while at Amazon (I did not work directly on the Toys R Us deal) was one of hubris when dealing with vendors and partners. Amazon usually structured vendor agreements and partnerships in a way that would tip the cards to its advantage, creating an adversarial relationship from the start. While this strategy may provide a short-term monetary benefit, I believe it will seriously wound Amazon in the long-term, continuing to erode its credibility with potential partners and new vendors. As someone who witnessed Amazon’s heyday first-hand and participated in the fun part of building a revolutionary new company, I seriously hope I’m wrong. But I would not be surprised if other partners begin to fall by the wayside as contract terms end.
You have to go back to the genesis of this deal to gain a complete understanding. This was the infancy of eCommerce when there was a “gold rush” mentality, where costs were no object and profits were irrelevant. For those of you who remember, Toys R Us struggled mightily with the implementation of their website with many peak period outages, poor response times, etc., not to mention losing money. It was during this crazy time when eToys went public and had a market cap higher than Toys R Us with less than 1% of Toys R Us’s sales.
The deal with Amazon was more out of necessity than strategy. Toys could no longer afford the distraction of a “problem division” when the main business was declining. Outsourcing the management of a growing distribution channel, not to mention the brand, was a move of desperation. Today’s retail model is rapidly becoming a synergistic multi-channel model (think Best Buy). For Toys R Us to achieve its potential, it needs to control the eCommerce channel and use that channel to drive business both online and in stores. If they can do it right this time, this should be a winning move for Toys R Us.
The final paragraph by mmuoio above should be one of the Ten Commandments of Retailing. TRU made a huge strategic error from the moment they signed the deal with Amazon. Ditto for other firms such as Borders, who still hasn’t learned the lesson.
I’m amazed that their respective shareholders haven’t sued those companies for neglecting their primary responsibilities.
It is no surprise that this deal ended badly, and Borders will eventually find the same fate as well. Even if there isn’t an ugly “divorce” as in this case, they are grossly mismanaging their brand and cross-channel assets by refusing to take control by themselves.
Seems to me that this break-up hurts Amazon a little and TRU a lot. Amazon loses a merchandising source that is replaceable in whole or in part by its existing partners Target, Discovery and eToys. Toys R Us keeps its URL, but loses its Web engine and fulfillment system, which will require a technological “heart transplant” in a matter of months.
Seems like this untidy ending results from the naive way that the original agreement was designed. Maybe it couldn’t be helped. TRU has every reason to avoid stocking items that turn too slowly to be profitable. Amazon has ambitions of selling everything to everyone. The disconnect is fundamental.
Like many other retailers, Toys R Us’ first web site (the non-Amazon site) had many technical problems hurting customers. Amazon’s deal helped Toys because their technology was more reliable and the Amazon audience gave Toys sales it probably wouldn’t have made on its own. Of course, Toys R Us customers also gave sales to other Amazon categories. The real shame is that both companies currently don’t have strongly profitable models and both could still help each other! Toys R Us could still drive more business to Amazon’s other categories and vice-versa. Undoubtedly, this isn’t a fatal blow to either company, but it’s a squandered opportunity. Amazon will grow another toy retailer who will compete against Toys and Toys will have to spend big bucks to attract online customers. I suspect that the root cause of the relationship problems is that there isn’t enough margin in discounted toys to pay for Amazon’s overhead. So how will anyone taking Toys’ place at the Amazon site make a profit?