November 2, 1999
Web Giants Amazon, eToys Bet
On Opposing Market Strategies
By GEORGE ANDERS
Staff Reporter of THE WALL STREET JOURNAL
Toby Lenk, founder of eToys Inc., is sure he knows the secret behind
e-commerce: Build a single-focus Internet site, laser in on one swath of the
marketplace, and don't let customers get confused by clutter from other goods
or services.
Jeff Bezos, founder of Amazon.com Inc., is just as
confident about his strategy: Build the world's biggest
online department store, then offer everything from
Milton to modems, so shoppers can get whatever they
want with one click on their Web browsers.
Messrs. Lenk and Bezos are true pioneers, Internet
innovators with astonishing net worths. So if they're
both so shrewd, how could they take such widely
disparate gambles?
That question, in one form or another, is on the minds
of executives everywhere. In businesses ranging from
aerospace to telecommunications, CEOs are making
big strategic bets, trying to position their companies to
take advantage of productivity and technology trends that they are only
beginning to understand. And very often, major players are making
completely divergent bets within the same industry.
It makes for exciting, if uncertain, times -- particularly at a powerhouse like
Amazon, which now offers about 18 million items on its site. Asked what his
company's brand message is, book chief Carl Gish says: "That's a great
question. I don't know the central message. If it were easy to come up with a
slogan, we'd already have done it."
The contrast between Amazon and eToys is, in some
ways, as old as retailing itself. In the traditional
economy, mass merchandisers like Sears, Roebuck &
Co. held the upper hand for decades. Then, in the
1980s, highly specialized "category killers" like
Circuit City Stores Inc. and Toys "R" Us Inc. came
on strong. Then the balance of power switched again,
as Wal-Mart Stores Inc. became the nation's No. 1
seller of music, toys and other items previously
considered best handled by specialists.
But the speed and slickness of the Internet are
redefining this tussle in striking ways. Suddenly,
all-purpose stores can offer enormous variety
without building huge showrooms that rack up costs
and alienate many shoppers. Being really big doesn't
seem to have the old drawbacks. Instead, it could become a savvy way to build
a household-name brand, spread many one-time costs over a wider customer
base and pitch an ever-greater selection of goods at frequent visitors.
That vast ambition isn't cheap. Last week, Amazon reported a $197 million
loss for the third quarter and warned of even more red ink ahead, mostly
because of spending in its newest product categories. Amazon told analysts that
its U.S. book business is on the brink of profitability but will be used to
subsidize losses in areas such as toys. That wasn't what investors wanted to
hear; since that disclosure, Amazon's shares have slumped more than 10%.
Even so, Amazon keeps spreading its reach wider. In September, Amazon
invited thousands of small merchants to do business in a new section on its
Web site, called zShops. There, vendors have begun selling items ranging
from honey-glazed pecans to concert tickets. Many of these are "small markets
that deserve to be small," Mr. Bezos says. But together, he says, they can be
big business -- and a revenue source for Amazon, which gets a small cut of
each vendor's sales.
That philosophy is anathema for hundreds of rivals, from eToys on down.
Specialists such as Garden.com Inc., CDNow Inc. and Blockbuster Inc.'s
Reel.com are focusing on a single category, hoping to attract loyal customers
with some combination of lower prices, better display or nimbler customer
service. "We could add music, and we might succeed at it," says David
Rochlin, chief operating officer of Reel.com, an online movie store. "But it's
unlikely we'll go that way. We don't want to lose our core audience."
Some niche stores are responding by pursuing exclusive selling arrangements
for certain goods -- especially those made by high-end manufacturers that
don't want their products displayed next to cut-rate rivals. They also are
banding together in various "online shopping malls" run by the likes of
Yahoo! Inc. and America Online Inc. Just as in the physical world, the malls
make it easier for customers to wander from one merchant to another.
Most of all, specialty merchants are trying to pack their stores with twists that
defy easy imitation by superstores. Computer retailer OnSale Inc. has a
50-person customer-service department, including one expert who handles
nothing but memory-chip questions. "There's nothing quite like that at
Amazon," says OnSale's chief executive, Jerry Kaplan.
At eToys, based in Santa Monica, Calif., everything has been adjusted to fit
families' needs and desires. "We don't sell Playboy videos," Mr. Lenk says.
"We don't sell Tupac Shakur rap music. We're child-sensitive, and we get all
the special details of that market right."
That focus extends down to the smallest details. The
company has removed its name from the return
addresses on boxes, so kids won't be tempted to open
them prematurely. EToys can gift-wrap several items
from an order separately, then send them in one big
shipment with appropriate "To/From" tags attached.
General merchandisers aren't likely to imitate that
cumbersome, costly service, Mr. Lenk contends,
because it's of little value for nontoy orders.
Whether such nifty details give specialists enough
ammunition to ward off mass merchandisers is
unclear. Amazon has indicated it will spend nearly
$260 million on advertising, fulfilling customers'
orders and other sales and marketing costs this
quarter. That's the biggest such budget among online
retailers, and far exceeds the estimated $40 million that eToys will spend.
Estimates are that less than 10% of Amazon's revenue now comes from its
newest product categories, toys and electronics, combined. But even that sliver
can be a big amount. A recent survey by PC Data Inc., a Reston, Va., research
firm, estimated that Amazon led all online merchants with 1.1 million
customers in September. EToys ranked 19th, with an estimated 70,000
customers.
Says Mr. Bezos: "It's very natural for a customer to wonder: 'Can you really
be the best place to buy music, books and electronics?' In the physical world,
the answer is almost always: 'No.' " But on the Internet, "all the physical
constraints go away." Indeed, a world where shelf space is infinite "forces you
to rethink all your intuitions about how a store should work," he says.
Lisa McNeill has seen both ways of doing business. For eight years, she
worked as a buyer for Dayton Hudson Corp.'s Target unit, filling more than
800 all-purpose discount stores with children's playthings. Shelf space was
scarce, so she concentrated on Barbie dolls, Tonka trucks and other obvious
best-sellers. Shoppers wanting something out of the ordinary needed to
patronize a pure toy store.
Now Ms. McNeill is a senior buyer at Amazon. "One of my favorite things
about this job is that I get to say yes to vendors a lot more," she says. Take
Betty Spaghetty wire dolls, which have detachable body parts and bendable
limbs. At Amazon, she decided to stock all 13 models, though the most
eccentric versions may attract just 100 orders this Christmas season. At
Target, she wouldn't have dared to offer more than three selections.
Come Into My Web
Amazon.com and eToys typify two radically different approaches to
electronic commerce. Amazon is big and varied; eToys is tightly focused on
one category: children's goods.
$356 million
Revenue
Sept. 30
quarter
$13.3 million
$197 million
Net loss
Sept. 30
quarter
$44.9 million
13.1 million
Customer
accounts
611,000
One-line listings for 18
items including Oscar
Peterson's "Night Train"
CD, Burt Lancaster's film
"The Train,""and "Thomas
the Tank Engine" toys
Search for
"train"and
you will find
The Train Station, a Web
page with five pictures and
information about toy
trains sold under the Brio,
Playmobil and Thomas
brands
"We have
recommendations for you
in books, music and
video""
Home-page
welcome
"Need a last minute gift?
Gift certificates to the
rescue."
For a single-category specialist like eToys, it's still possible to stay a half-step
ahead of Amazon in variety -- but the gap between specialist and mass
merchandiser is a lot narrower than it would be in the physical world. Lego
Systems Inc., for example, sells only its top 60 or 70 best-sellers at land-based
mass merchandisers. Amazon has 110 Lego selections already and is adding
more, while eToys has all 200 of Lego's offerings.
As online niche stores look for an edge over their bigger all-purpose rivals,
their best hope may be in trying to get exclusive rights to some upscale goods.
Brio Corp. of Germantown, Wis., for example, sells its wooden train sets and
other toys through eToys but has shied from Amazon. That's because a
specialty store like eToys can better showcase Brio's carefully crafted toys,
says Peter Reynolds, Brio's president.
At a mass merchandiser, Mr. Reynolds worries, his wares might be stuck next
to cheaper alternatives. Brio's profusion of gates, bridges and other add-ons
could be pared back to a bare-bones selection if sales didn't meet targets -- a
prospect that he regards as a cruel injustice to both his company and its young
enthusiasts.
Amazon insists those concerns are overblown. "We wouldn't compare his
products to cheaper alternatives," says Mr. Bezos. "We'd contrast them and
show what's special about Brio." Still, the two companies have yet to strike a
distribution deal.
As Amazon keeps expanding, its breakneck pace has contributed to
management turnover, with three vice presidents leaving in the past six
months. But Mr. Bezos, who owns more than 30% of the company's stock, has
been able to recruit new talent from some of America's biggest companies. He
says he would be "disappointed" if Amazon next year couldn't expand its
retailing offerings at least as much as it has this year.
Meanwhile, specialty-store operators sometimes wonder if they should widen
their scope. EToys recently flirted with the idea of buying
Bluemountainarts.com Inc., the leading online greeting-card company. But the
company backed away, in part because of concern that many Bluemountainarts
customers wouldn't relate to the children's market. Instead, Excite At Home
Corp. agreed to buy the card company for as much as $1 billion.
As the Christmas season approaches, online stores of all varieties are
scrambling to assemble deep inventories of hot-selling products -- or strong
ties to wholesalers that can get the goods. It is, after all, much harder to ship
goods reliably than to build a good-looking Web site.
Some of the Internet's mass merchandisers have stumbled as they try to
deliver everything. AltaVista Co.'s Shopping.com unit shrunk its superstore
earlier this year, dropping out of the market for baby products and
home-improvement gear when it had trouble finding wholesalers to reliably
stock those items. AltaVista still sells computer equipment, books and videos
directly, but it steers customers to other merchants if they want
out-of-the-way goods.
The clearest way for online merchants to avoid inventory and shipping snags
is to take command of those processes themselves and build giant warehouses.
Both Amazon and eToys have embarked on that route. How that expensive
strategy will work is anyone's guess. EToys says it is happy with its delivery
initiatives; Amazon acknowledges some "speed bumps" in getting its
warehouses up to speed, but says it expects to offer greater reliability as it
goes along.
In courting customers, superstores hope to get the upper hand by using the
Internet for cross-category merchandising. Last month, Amazon's toy section
included a Halloween shopping list that urged visitors to try everything from a
"Nightmare on Elm Street" video to a Halloween cookbook and e-mail
Halloween greeting cards. Such tie-ins can be created and dismantled within
hours on the Internet, at a very low cost. Something similar might take months
of planning and hundreds of employee hours at a traditional chain.
Still, tie-ins alone can't boost traffic in a lackluster department, any more than
a television network can attract viewers to a dull show by constantly
promoting it in the midst of a hit.
A case in point is Amazon's online auction site, launched in April. People
selling treasures such as Ernest Hemingway's typewriter can have their items
mentioned, free of charge, on Amazon's purchase pages for Hemingway
novels. Even with that feature, a recent survey by Prudential Securities found
that Amazon had less than one-tenth the auction volume of eBay Inc., the
industry leader -- a single-specialty company that does only auctions.
Online superstores should have one undeniable edge: the ability to spread fixed
costs over a larger customer base. At Amazon, software written to help
organize auction listings is now being used by the toy-selling team to
rearrange their catalog by price, age group and other variables. That "cost us
almost nothing," says Mr. Miller, the toy-store manager.
Superstores may have a harder time projecting an appealing image to
customers across all categories. Amazon built its book, music and video
businesses on a reputation for convenience and big selection, without trying to
win every price war. While that has worked well so far, it may be the wrong
strategy for electronics, where more than 40 online stores are in the midst of
kamikaze battles for market share.
Competitors aren't about to help Amazon resolve its quandary. As Jerry
Kaplan, the CEO of computer retailer OnSale, says, "If your brand stands for
everything, it stands for nothing." |
