Time To Kick eToys off the Island

Quick: What do toysellers and drugstores have in common?

At the moment, if their last name happens to be “dot-com,” the answer is financial challenges. Online toyseller eToys can’t pay its bills and Drugstore.com is severely trimming the staff, just as its chief financial officer steps down.

What the companies do not have in common, however, is their relative chance of survival. Drugstore.com may beat the odds and go the distance, but eToys looks to be gasping for air.

Of course, in the volatile, rock ’em, sock ’em world of e-tailing, no one can say for sure, but if missteps were gold coins, eToys would be on Easy Street.

On the other hand, Drugstore.com is fighting the good — if uphill — fight for its very existence. Even as naysayers are lining up one by one, smart marketing, efficient delivery systems and a user-friendly Web site may combine to keep Drugstore.com on E-Commerce Survivor Island.

eToys: What Not To Do

Measuring in e-tail time, it’s been a long, rocky road for eToys. From its conception, way back in 1997, the company hit the ground running. If the company ultimately fails, it won’t be for lack of effort, but it may have much to do with trying to be too big, too fast.

eToys has reported massive financial losses that rattled investors. Meanwhile, infrastructure and shipment problems made eToys’ estimated customer base of 1.5 million users more than a bit nervous.

Just seven months ago, eToys raised US$100 million through the sale of preferred convertible stock, enough to stay in business at least another year, the company said.

By that time, however, eToys had already lost two critical elements of possible survival — money and public confidence.

Battling the Clock

At Christmas, there was little light left at the end of the tunnel. An ominous warning that fourth-quarter earnings would fall short by as much as 50 percent sent shockwaves through even the most ardent eToys supporters. Standard & Poor’s reacted by knocking eToys’ credit rating down three steps.

Then came reports of dwindling cash reserves, as well as the closing of all European operations and an abrupt cancellation of deliveries to Canada. Additionally, 700 of eToys’ 1,000 employees started the new year with pink slips.

Finally, just last week, the company could no longer hide the fact that it cannot pay all its bills, allegedly leaving one creditor, a temporary staffing agency, in the hole to the tune of a cool $2 million.

Graceful Exit

To what does it all add up? Imminent demise or simply bad karma? You be the judge.

Chances are eToys could rustle up another eleventh hour cash infusion and issue more promises of profitability, but so what? There comes a time, when a company’s strategy has faltered and its fortunes have plummeted, that the most respectable move is an exit.

eToys has attributed its bad fortune to everything from a poor online market for toys to an overall downturn in the dot-com landscape, but how do eToys’ principals explain the survival of other online merchants? Could it have something to do with stronger business plans, more effective business models and stronger management of assets?

Not to mention the corporate preemptive strike?

The Comeback Kid

Consider Drugstore.com, a major player in a sector that itself has been plagued by industry-wide challenges. Drugstore.com may just end up teaching careless e-tailers a lesson in savvy e-commerce.

Drugstore.com recently reported a 90 percent increase in net sales and the addition of a quarter million new customers in its fourth quarter of fiscal year 2000. Although it is still posting losses, Drugstore.com has a plan that clearly relies on running lean and mean.

Just days after revealing its year-end showing, the company eliminated 125 jobs. Unlike eToys, the company that stayed out way past its curfew before eliminating 70 percent of its workforce, Drugstore.com has shown enough foresight to trim the fat even as things were looking up.

Those strategic moves will reportedly cut Drugstore.com’s operating expenses this year by $20 million, and further enable the company to reach its stated goal of a breakeven point by the year 2004.

Nicely done, Drugstore.com. Take a bow.

Making History

When they write the book(s) on the toddler days of e-commerce, stories such as these will do more than paint a picture of the new commercial frontier.

The rise and/or fall of dot-coms such as eToys and Drugstore.com will become the necessary reminders about how to grow an industry. Their stories will prove that survival in the marketplace still comes down to some tried-and-true essentials: a strong fiscal strategy, exemplary service and consistency.

eToys just didn’t get it. Instead, it was fiscally foolish, sometimes shaky in the service area and way too volatile to keep the respect of investors and toy buyers.

For those who thought Richard, Kelly and Rudy were the real survivors on that TV show last summer, pay attention. If you want to see true grit, keep an eye on Drugstore.com.

What do you think? Let’s talk about it.