Toys ‘R’ Us Dives into Deep End of E-Commerce Pool

Looks like it’s going to get crowded in the cyber-toy store this Christmas. Brick-and-mortar toy store chain Toys ‘R’ Us (NYSE: TOY) announced Tuesday that it plans to spend at least $80 million (US$) to create an e-commerce subsidiary.

Helping to bankroll the deal will be Benchmark Capital, the money-men who financed such hot Web offerings as eBay. The new unit represents Toys ‘R’ Us’ effort to become the dominant on-line toy retailer, leveraging its brand name equity and 25-million customer database to immediately compete with eToys.

Better Model than eToys?

“We have a lot of respect for eToys,” Toys ‘R’ Us vice president Rebecca Caruso told the E-Commerce Times, “but in the long term, we believe our model will be superior.” Significant in that business model, Caruso said, are the inherent advantages of having brick-and-mortar stores to complement their Internet site. “We have 700 stores in which (customers) can look at a toy and see how it fits the child. It’s easy to return items and people can go to stores and pick up items.”

Toys ‘R’ Us has been selling products online since June, but hasn’t been able to catch up to eToys. Previously, online sales were not treated as a separate unit inside the company. Why the decision to delve even deeper into e-commerce?

If Not Us, Then Who?

“It’s a fact of life,” Caruso said. “If it’s not going to be us, it’s going to be somebody else.”

Benchmark Capital is expected to bring about $10 million into the deal, as well as Silicon Valley expertise and e-commerce experience gained from financing e-commerce startups like eBay, Art.com and E-Loan. Additionally, Benchmark will provide headhunting smarts as Toys ‘R’ Us goes looking for a CEO to head the new Silicon Valley-based venture. Caruso said Toys ‘R’ Us chose Benchmark for its e-commerce expertise and high-tech connections, rather than using more traditional financing sources.

Warehouse Can Ship $1 Billion Worth of Products

Rounding out Toys ‘R’ Us’ e-commerce plan will be the purchase of a $295 million Memphis distribution center from ProTeam.com, another Internet retailer. ProTeam, formerly Genesis Direct, is selling the 295-employee facility because it is narrowing its product focus to sports-related products, as it shifts away from broad-based catalog merchandise. Toys ‘R’ Us said the distribution center has the capacity to “pick, pack and ship” $1 billion worth of merchandise per year.

The number one toy retailer in the country until last year, Toys ‘R’ Us has 1,488 stores worldwide, with 703 of those stores in the United States. Included are 212 Kids ‘R’ Us clothing stores and 118 Babies ‘R’ Us stores. In addition to its present Internet site, Toys ‘R’ Us operates a mail-order retailing service. The company was pushed out of its number one position in the market by bargain retailer Wal-Mart.