The Next Next Thing
Three entrepreneurs decided they could turn their money-losing brick-and-mortar business into a well-funded dot-com. The question: Will they be able to win SmarterKids.com a place in the market?
Makeover
For years Jeff Pucci and Richard Viard struggled to find a profitable formula for their company. Then -- eureka! -- they realized they could turn their money-losing brick-and-mortar into a well-funded dot-com. So far, it seems to be working
The jury is impaneled at the Newman Elementary School, ready to carry out its duty of analyzing the evidence. Paper fish with red stripes and green fins festoon one classroom wall. All the fish are grinning. So are the jurors. Susan Graham calls the proceedings to order: "All right, let's go." Five jurors, gathered around a table, begin playing a newfangled version of Monopoly that features a trip to the wilds of Alaska. A red-haired second-grader moves her piece, shaped like an igloo. What's this square? she wants to know. "Go to Jail" has been changed in this Monopoly game to "Go to Lunch." What a disappointment -- she'd like to see her classmates serve some time.
Four toys are spread out on tables in the classroom. One, a card game, has attracted no players. That's a bad sign. Graham scribbles a note to herself.
Graham, director of education for SmarterKids.com Inc., performs a critical task for her company, which sits on the edge of a busy highway in Needham, Mass., a few miles away from the school. With her staff of eight former teachers and a merchandising team, Graham evaluates kids' products and chooses those that SmarterKids.com will offer on its site, which sells educational toys, games, books, and software. Graham's group -- with the help of test labs of school kids, like this one -- chooses some toys and discards the boring ones and the ones that, for reasons not apparent to adult eyes, don't pass the demanding playtime criteria of, say, a seven-year-old. Most important, the group refuses toys that have no redeeming educational or developmental value. This focus on education, of course, eliminates many best-sellers with buzz. "No games -- nothing -- that blows anybody up," declares Graham definitively. You won't find Sega's Zombie Revenge on SmarterKids.com. No Furby, either. "The educational value is not substantial," says Graham. G.I. Joe patrols on Neptune, for all she knows.
Once they've made their choices, Graham and the rest of her crew spend from one to four hours with each product, rating it for fun, ease of use, and depth (how often a child will continue to play with the toy once the novelty has worn off). The idea behind these evaluations goes beyond that of a typical product review. These ratings, combined with other features on the site, are intended to help Web-surfing parents choose toys that meet the individual needs and tastes of their kids -- not just kids of the same age and gender.
That personalization, in a nutshell, is what separates SmarterKids.com from its much larger online competitors, which include big names like Toysrus.com, eToys Inc., and the ubiquitous Amazon.com Inc. On the SmarterKids.com site, parents can build individual learning profiles of their children, comprising their ages, grades, learning goals, and most effective learning styles -- linguistic, visual, physical, or musical, for example. In addition, children can take skills tests on the site -- tests through which parents can learn their kids' academic strengths and weaknesses. Those scores also are factored into the learning profiles.
From the profiles the company recommends products tailored to fit each child. Even leading terra firma educational retailers like Learning Express and Zany Brainy Inc. can't do that. "We reshuffle store shelves," says David Blohm, SmarterKids.com's CEO. "If you could go to a store and tell the clerk all about your child, and he could push a button and reshuffle the aisles and shelves to show only products for your child, that's what we do."
Blohm, 49, and his colleagues, cofounders Jeff Pucci, 39, and Richard Viard, 40, understand all too well the differences between what they can achieve on physical store shelves and what they can do in cyberspace, having struggled for years in the brick-and-mortar economy. For eight years the company, first under the name Virtual Entertainment Inc. and later Virtual Knowledge Inc., developed software that it sold in retail stores. It lost big money for the last five years. Only around Thanksgiving, 1998, did it awaken, utterly transformed from an old-economy company into a sexy Internet play soon to be valued at $63 million at its initial public offering. Investors didn't seem to care that at the time of its IPO, in November 1999, the company had just $1.1 million in sales for the previous nine months. They didn't seem to care that SmarterKids.com lost $14.1 million on those meager sales. (Adding in the three-month retail holiday season, the company finished 1999 with sales of $5.4 million and losses of $34.7 million.) And they didn't seem to care that for years Pucci, Viard, and Blohm had been unable to find the formula for a profitable educational company. Or so it appeared until they transformed their venture into SmarterKids.com, almost a decade after its founding.
As it is with many of the toys the SmarterKids' kids evaluate under the gaze of green and red fish, the jury is still out on SmarterKids.com itself, despite the success of its IPO. Until recently, investors tolerated losses in dot-coms that would send them stampeding for the exits in traditional retailing. What they had loved, even at dizzying valuations, were companies with great ideas that promised to attract millions of Web surfers; the profits could come later. Investors saw in SmarterKids.com something that seemed unusual in the toy market: the company's potential to leverage the Internet's power to build one-to-one, interactive relationships with customers. "Theirs is the only customized educational tool out there," says Liz Leonard, a senior analyst at Gomez Advisors Inc., an Internet-research company in Lincoln, Mass.
