Upstarts: New-Biz Watch
Toy seller plays Internet hardball
With early-bird Web-site and portal deals, former Disney executive seeks to preempt Toys 'R' Us
When Toby Lenk quit his job as a corporate vice-president at the Walt Disney Co. in the summer of 1996, he knew little about toys. He did know about the Internet; in fact, he wanted to use it to sell products--he just didn't know which ones. Lenk's search for the right products to sell ended at a toy store just before Christmas. "I saw long lines and screaming kids," recalls Lenk, who was hoping to find a gift for his niece, Anna, "and I figured there had to be a better way."
So in March 1997 Lenk created what he considered to be a better way, eToys.com. He meant the company to do for toys what trailblazer Amazon.com Inc. was already doing for books. Based in Santa Monica, Calif., eToys.com is one of dozens of Amazon.com-like start-ups hawking wares (everything from couches to body lotion) on-line. "The activity on-line is just mind-boggling," says Richard Zandi, an electronic-commerce analyst in the New York City office of Salomon Smith Barney. Many of the Web upstarts are rushing to be first to define their own brand as the on-line source for a particular product. Lenk explains his strategy this way: "It was critical that we enter a market where we could have first-mover advantage."
Lenk, in other words, aims to emulate Amazon.com, which Jeff Bezos launched in 1995 when Internet commerce was still embryonic. Amazon.com, of course, is the phenomenally successful on-line bookseller that generates revenues of more than $460 million a year. (See "Amazon.com: a moving target," below.) The model that Bezos developed--a Web site where customers could search among millions of items, order on-line, pay by credit card, and receive delivery in just a few days--is widely accepted as an explosive force in worldwide commerce.
It was Lenk's excitement about the potential of Internet commerce that prompted him to leave Disney, where he had climbed to a coveted slot in the company's strategic-planning unit. "I could have stayed at Disney and had a nice, safe business career," says Lenk, who has a Harvard M.B.A. "But that's not what I wanted."
Once he had fired up his Web site and had the $22-billion toy market in his sights, Lenk calculated that retailing behemoths such as Toys 'R' Us would wait only a month or two before creating on-line toy stores of their own. As it turned out, Toys 'R' Us delayed 10 months before contesting eToys with on-line offerings. In that window, eToys quickly inked advantageous deals with portal sites AOL and Yahoo!, among others. Lenk reckons that such sites--popular gateways to the Web--will channel consumers to his Web store.
The deals are costly, typically as much as 10% to 25% of sales in the electronic-commerce industry. But Lenk can afford it, at least for now. In his corner he has Bill Gross, president of Idealab, a hothouse for Internet start-ups that is based in Pasadena, Calif. (See " The Start-up Factory," February 1997.) Gross has invested about $250,000 in seed capital and joined eToys as a board member. In addition, Lenk has raised more than $10 million from a variety of venture-capital firms and former Disney chums. Much of that cash financed a Web site ( www.etoys.com) that offers more than 3,000 toys, combining the breadth of a superstore retailer and the quirkiness of a specialty toy shop.
Not surprisingly, the $11-billion Toys 'R' Us is rising to the challenge. It's splurging on portal deals, too, and can afford to spend heavily on advertising. Its size confers a competitive edge too: Toys 'R' Us enjoys volume discounts from manufacturers like Hasbro and Mattel. But eToys has a secret weapon: without brick-and-mortar outlets, the company carries a relatively light load. Still, Lenk holds inventory: eToys purchases from more than 350 manufacturers, storing the stock in its California warehouse.
Even if Lenk's company winds up at number two behind Toys 'R' Us, he insists it still has a bright future. "We take two days of shopping and compress it into 15 minutes," he says. "That must be worth something."
If you were searching for a best-selling book on-line, you'd probably know where to go. You'd head for a place like Amazon.com. But what if you wanted to buy an item that doesn't immediately suggest a Web-site address? You'd be searching blind--or, in my case, searching for blinds.
Because I'd just gotten married and moved into a new condo, I needed window blinds. To see what I could find, I leaped blindly into cyberspace. I knew enough to type www.yahoo.com into my browser and, when a search menu appeared, to punch in the word blinds. That led to a number of dead ends, including the Foundation for the Blind. Off to a creaky start.
I returned to the Yahoo! home page and clicked on companies, which took me to home and garden. And so on through a hyperlink maze. By and by, I reached Window Visions--a window-treatment company!
The search took about an hour, and, yes, ultimately I could have purchased blinds without leaving my chair. Somehow, though, I couldn't get myself to enter my credit-card number and actually order the blinds. Give me a break; I just got married. One leap at a time. --J.M.
Amazon.com: a moving target
The inception of Amazon.com in 1995 marked the coming of a new era for many retailers and illustrated vividly an accepted truth: in on-line merchandising, what's for sale does not necessarily correspond to what's in stock. On opening day Jeff Bezos's on-line bookseller Amazon.com offered 1 million titles for sale, but the shelves in its lone Seattle storage facility contained a scant 2,000 volumes.
To fill most orders, the upstart merchant acquired the books swiftly from two large distributors. From Bezos's standpoint the system had the obvious advantage of saving his company the cost of maintaining inventory, enabling him to discount books as much as 40%.
In the fast-evolving world of on-line commerce, the day Bezos opened for business seems like light-years ago. Although Amazon.com still stocks only a fraction of the books it sells, its inventory has swelled to more than 1.4 million volumes housed in two giant warehouses.
Why is Amazon.com's game plan changing? The question is of utmost interest to the expanding universe of Web merchants, for whom Amazon.com represents a kind of acid test.
At least part of the answer is well known. Because of its jumbo sales, Amazon.com has the muscle to demand high discounts for bulk purchases directly from publishers. "Amazon can now control its own destiny and buy in on better prices," says Steve Lebow, chairman of Los Angeles-based venture-capital firm Global Retail Partners.
Bezos's strategy seems to be a preemptive strike against large book retailers who are developing Web sites of their own and who may have an edge over Amazon.com in shipping directly from their stores. "Bezos would need the flexibility to step up his own delivery service and not rely totally on third parties," observes Jay M. Tenenbaum, chairman of the trade association CommerceNet, which represents more than 500 on-line retailers. -- J.M.
Copycats: a sampler
Start-ups that are emulating Amazon.com
Headquarters: New York City
Headquarters: Pasadena, Calif.
Product: cookware and specialty foods
Headquarters: Cambridge, Mass.
Product: sporting goods
Headquarters: Moffett Field, Calif.
Product: business cards, letterhead
Headquarters: Rye, N.H.
Product: fresh flowers
Testing the Web's limits with Monet
Sure, books and cds sell on-line, but what about Monet paintings? That's the question Paul Tarnoff asked himself before he launched his Web store, ArtSelect LLC, in January 1998.
Tarnoff does not sell Monet originals but rather reproductions of such masterpieces as Picasso's Woman with a Hat and Monet's Le Jardin √ Giverny. With a few clicks of a mouse, buyers can log on to his site, search his illustrated catalog of 1,000 prints, and choose from more than 180 frames, ranging from metal to fine wood, at prices well below those of frame shops. "You'd be amazed by what folks will buy on-line," says Tarnoff, who reports that his Company is growing at 250% a month. "If you're smart about marketing and merchandising, you can make almost any niche work."
Tarnoff's optimism is yet to be justified. His venture, based in Fairfield, Iowa, is one of many that's testing the limits of what products are conducive to cyberspace commerce. So far, it's well established that books, music, and computer products are eminently marketable on the Web. Last year those items alone made up almost half the $2.4 billion of consumer goods purchased on-line, according to Forrester Research Inc., based in Cambridge, Mass., which studies Internet business trends.
But what about other products? Paul Saffo, a director of the Institute for the Future, based in Menlo Park, Calif., envisions that goods inspiring a passion for highly detailed information among a scattered community of buyers are good bets on-line--for example, tackle for fly fishermen and optical devices for bird watchers. "The Web is a license for obsession," says Saffo. "It's still a place for people who want to know every little thing before they purchase." More generally, Saffo, who writes and speaks about new technologies, postulates a rule of thumb: what works by mail order will work on the Web. Even shoes and custom shirts aren't out of the question, as he sees it. He explains, "Perhaps you go into the store once, get measured or sized, and then you just reorder from the Web site."
What, then, might not sell on-line? Certain health-care products, including over-the-counter drugs, that a customer might prefer to buy only after an intimate or complex consultation with a pharmacist, predicts Maria LaTour Kadison, an on-line retail analyst at Forrester. She says that "people still seem to rely heavily on their local pharmacist for those items."
For those who want to bet on the distant future, Lauren Freedman, president of E-Tailing Group, an electronic-commerce consulting and development firm based in Chicago, recommends products for women. As more women gain access to the Internet (women are still a minority on-line, making up slightly less than 50% of the viewers), Freedman expects that the on-line market for women's products, particularly clothes and fashion basics such as panty hose and cosmetics, will explode. "If you want to get rich on the Web," says Freedman, "you have to start targeting women." -- J.M.
What people buy on-line
Consumers spent $2.4 billion in 1997 via the Internet for the following goods and services:
Computer products 35%
Books & Music 7%
Gifts & Flowers 6%
Source: Forrester Research Inc., "On-Line Retail Strategy," April 1998