Disney Pulls Plug on Toysmart.com

Toysmart.com, the online toy retailer whose backers included the Walt Disney Company, announced Tuesday that it has closed its virtual doors after a long weekend of speculation.

The Toysmart site, which had posted a notice that it was closed for inventory on Monday, now displays a short thank you letter to its customers. Orders placed through May 19th will be filled, according to the company.

Shakeout Story

Though the site was named the second-biggest gainer by online tracking firm Media Metrix during the busiest shopping week in December 1999, the Waltham, Massachusetts-based company ended the holiday season well behind market leaders eToys and Toysrus.com.

Toysmart joins a rapidly growing list of e-commerce retailers that have folded in recent weeks as the predicted shakeout and consolidation starts to accelerate.

Last week saw the UK’s Boo.com hire KPMG to sell off its assets after burning through $120 million (US$) in just a year. On Monday, Craftshop.com, a Connecticut-based retailer of craft supplies backed by successful Web incubator CMGI, officially filed for Chapter 11 bankruptcy protection.

Funding Ran Out

Toysmart executives knew the end was approaching on Friday, when attempts to raise additional capital failed. By Monday morning, the company had informed its 170 employees they would be let go and had stopped taking orders. The Recovery Group of Boston has been hired to sell off the company’s assets.

“We did the best we could,” said chief executive officer David Lord. ‘”I’m trying the best I can to help our employees. That’s my only concern right now.”

Intense Competition

The company’s woes first began to surface a month ago, when in a bid to appease Disney and other investors, Toysmart laid off 55 employees and started to rethink its Internet strategy. Toysmart had attempted to carve a niche by positioning itself as a “safe toys” zone free of guns and other violent games. However, the company faced fierce competition in the online toy market.

In the end, brick-and-click retailer Toys “R” Us and online retailer eToys had too strong a hold on the market for Toysmart.com to survive. During April, Toysrus.com drew 1.3 million visitors to its site, compared to 1 million for eToys and just 205,000 for Toysmart, according to Media Metrix.

Not All Fun

While toys and games make up one of the largest single categories of Internet sales, online toy sellers have found the going difficult. KBkids.com recently announced deep cuts in its workforce and the firing of its CEO, and RedRocket.com, the online toy seller backed by Nickelodeon, shut down earlier this month.

Even the big players have had problems with business strategies. Last holiday season saw traditional retailer Toysrus.com struggle to fill Internet orders in the weeks before Christmas. While eToys had less trouble filling orders during the holidays, the Santa Monica, California-based pure play has yet to show a profit.

Mouse Pulls the Plug

Analysts raised a collective eyebrow last summer when Disney’s Buena Vista Internet Group paid $45 million for a controlling stake in Toysmart.

“Toysmart must beware of Disney’s track record of burying fledgling brands under the weight of the Magic Kingdom,” Forrester Research analyst Carrie A. Johnson said at the time.

Johnson’s words proved somewhat prophetic, as Lord reportedly has acknowledged that it was Toysmart’s board of directors — which includes several Disney employees — that decided to pull the plug rather than give the site another infusion of cash to get it through to the coming holiday season.

According to Gabriel Fried, director of strategic planning for Toysmart, Disney’s overall Internet strategy is shifting away from e-commerce after attempts to turn Go.com into a major portal foundered.

Disney has decided to “bow out of the portal race” and “focus their attention on information and entertainment and not commerce,” Fried said.