Updated from 12:36 p.m. EDT
In a deal that weds an e-commerce giant with a bricks-and-mortar brand name,
Amazon.com (AMZN Quote - Cramer on AMZN - Stock Picks) and
Toys R Us' (TOY Quote - Cramer on TOY - Stock Picks) Toysrus.com said Thursday that they will create a co-branded online toy and video games store as well as a co-branded online baby products store.
Under the 10-year strategic alliance, Amazon.com will get periodic fixed payments, per-unit payments and a single-digit percentage of revenue. It will also receive warrants giving it the right to buy 5% of Toysrus.com. The companies did not provide any further detail as to the financial terms.
Toys R Us will identify, buy and manage inventory while Amazon.com will handle site development, order fulfillment and customer service, housing both Toysrus.com's and its own inventory in Amazon.com's U.S. distribution centers.
Toysrus.com and Amazon.com said the toy and video games store was expected to be launched in the fall, while the baby products store would be launched in the first half of 2001.
The pact, dubbed by the companies as "a milestone in online shopping," is designed to exploit operating efficiencies and makes room for global expansion of the arrangement. All parties, including Toys R Us, will market the co-branded store.
Toys R Us owns a majority share in Toysrus.com. Earlier this year, Japanese Internet incubator
Softbank became a minority investor.
The agreement brings together two companies who wield a great deal of clout online: During the 1999 holiday season, toysrus.com ranked fifth in
Media Metrix's list of the top 25 e-commerce sites for the holiday season. Amazon.com headed that list.
That said, Toysrus.com found itself scrambling to appease angry
consumers during that holiday season by failing to deliver gifts on time. The company ended up handing out $100 gift certificates to assuage its customers.
The deal has huge implications for both Amazon and Toysrus.com, but its ripple effect could force the hand of a third company as well, said Ken Cassar, analyst with Web research firm
Jupiter Communications.
"It is a daunting combination" in that it brings together Amazon.com's customer fulfillment expertise and traffic and the Toys R Us brand, Cassar said.
The clear winner in the deal is Toysrus.com. For that company, the deal is a "no-brainer," Cassar said. "They've essentially bought off one of their biggest competitors and compensated for their biggest weakness: remote fulfillment."
For Amazon.com, the deal could mark a further transformation for a company that began by selling books on the Web and within a few years became the dominant e-tailer and the bellwether for the entire e-commerce sector. While Amazon.com will remain a dominant seller of books, music and movies online, in the areas beyond that, its role may shift to a company that lends customer fulfillment expertise and a huge customer base to other online retailers.
"For Amazon.com, it is basically a concession that it can't go it alone outside their core media play -- books, music and movies," he said. "If Amazon wasn't able to make toys work, they are never going to make categories like lawn and garden work."
Wednesday's announcement is the latest and perhaps most high-profile acknowledgement by the company that there are better ways to exploit its 17 million customer base than going solo outside its core e-commerce units. Earlier this year, it
struck similar deals with
drugstore.com (DSCM Quote - Cramer on DSCM - Stock Picks) and
Living.com, among others.
The deal could also spell trouble for the third big player in online toy sales,
Etoys(ETYS Quote - Cramer on ETYS - Stock Picks). The company, whose stock has been hammered in recent months, may find itself in an untenable position now that its two biggest competitors have joined forces. Etoys, which was also among the top five most visited sites during last year's holiday season, may have to find a partner to give it the clout with wholesalers to rival its newly strengthened competitors, Cassar said.
The most obvious candidate, Cassar said, would be the biggest retailer of them all:
Wal-mart(WMT Quote - Cramer on WMT - Stock Picks). That company, which leads Toys R Us as the biggest seller of toys in the U.S., has been a laggard online, and a strategic combination with Etoys, which is one of the most efficient e-tailers in customer service and order fulfillment, "potentially makes a lot of sense for both of them," he said.
Ken Ross, a spokesman for Los Angeles-based Etoys, dismissed the idea that Thursday's announcement will diminish Etoys' competitive advantage.
"I don't think there's anything to suggest that that "Amazon R Us" has a real ring to it," he said. "In fact, it is just the opposite." Ross contended that the announcement was an admission by both companies that they cannot compete with Etoys on their own.
Etoys closed down 3/32, or 2%, at 3 15/16. Amazon.com ended down 7/16 at 30 7/16. Toys R Us finished flat at 17 3/8.
Justin Dini
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