Toy Web Sites Brace For Onslaught

When Susan Macon buys her toys and other holiday gifts this year, she'll be in the crowded aisles of actual stores and not at anybody's Web site.

"I had a friend who had such a bad experience with one of the toy sites last year, that I am nervous about trying it out," said Macon, 38, of Jacksonville, Fla.

"Anyway, I get more pleasure out of shopping in toy stores," she said outside FAO Schwartz's main New York store, where she had just bought some sketch pads for a friend's daughter.

Attracting new customers, and luring back those burned by the late deliveries and site crashes that plagued the online toy industry last year, is the big challenge for online toy sites this new shopping season.

Online toy and video sales are expected to reach $790 million this year, according to Shop.org and The Boston Consulting Group. While that's only 2.4 percent of all toy and video sales, it will be twice last year's sales and will give successful companies a critical edge for future years, when sales are likely to grow much more.

If last year was any measure, at least half the year's total sales will occur in the last three months of the year, reaching a peak in the last three days of November earlier than the peak for online purchases of clothing and many other items.

Holiday shoppers like to take care of their children's gift purchases first and foremost, so the online toy companies must cope not only with fierce competition in a trend-driven market with slim profit margins and a short selling season. They also risk an association with the worst kind of holiday guilt.

"Consumers would rather disappoint the great aunt than a child," explained Chris Byrne, an independent toy consultant.

There was more than enough disappointment to go around last year. Many companies' sites were overwhelmed by heavy traffic and their delivery systems were clogged. Toysrus.com couldn't take orders after Dec. 10, costing them as much as $25 million in sales, according to Melissa Williams, an analyst at Gerard Klauer Mattison.

Many sites didn't last for a new season. But the survivors, including Toysrus.com and eToys Inc., last year's leader in online toy sales, and new challengers are taking steps to prevent another disaster, including fine-tuning their offerings and speeding up their search engines.

Distribution systems are getting special attention. EToys scrapped its arrangement to have an outside company, Fingerhut, handle shipment and built two distribution centers totaling two million square feet. It conducted "stress tests" -- jamming packages through the system to replicate the holiday rush.

In August, Toysrus.com merged its toy unit with Amazon.com, which hipped virtually all of its packages on time last holiday. But even Amazon.com realized its efforts weren't enough, and is now placing its hot toys in easy-to-find locations in its distribution centers to speed up deliveries.

Like other areas of online activity, the toy business has been reshaped by consolidations and shutdown as debts have risen and stock values have plummeted in the dot-com shakeout.

Walt Disney's Toysmart.com, Inc., Toytime.com Inc., and Nickelodon's RedRocket.com all have closed. KBKids.com, the unprofitable online division of KB Toys, is still in business but is being sold along with KB Toys by the parent company, Consolidated Stores Inc.

EToys has seen its stock dive and is under heavy pressure to perform this season in the wake of the new partnership formed by Toys R Us and Amazon.com. It is looking for a much-needed financing of $100 million.

Wal-Mart and Kmart both relaunched their sites earlier this month. The two retail behemoths may get large shares of the online market this year, but also will put pressure on other sites by offering low prices, according to Gerard Klauer Mattison's Williams.

This year online sites will be more careful with spending on advertising and with how they build up inventory, Williams said. "The competition hasn't abated. It has just become more rational."

The biggest cyber-toy battle is expected between Toysrus.com and eToys, both of which are touting exclusive products, massive selections and competitive prices. Each claims to have better access than their competitor for this season's hot toys, including the hard-to-come-by PlayStation 2 game console by Sony.

Last year, eToys, which offers more than 120,000 different products, generated toys and videos sales of $106 million for the holiday quarter. The company said it expects to post sales in the range of $210 million to $240 million from October through December.

Amazon.com sold $95 million in toys, children's books and videos, and Toysrus.com sold $50 million worth of toys and video games, but the two decline to estimate how this year will pan out. With those two sites merged this season, analysts say the combination of Toysrus's merchandising acumen with Amazon's prowess in delivery may put more pressure on eToys.

John Barbour, president and chief executive officer of Toysrus.com cited access to 25 million Amazon.com shoppers in addition to the 60 million Toys R Us families.

But Toby Lenk, eToys's chief executive officer, doesn't appear to be concerned.

"Operationally, we have never felt as good about our capabilities," said Lenk.