eToys has issued a severe profits warning.
When it floated in May 1999, eToys was worth more than Toys R Us, the massive, global toy store. But eToy’s share price has been dropping all year; today it plunged 72% to just 28 cents. It now has about three months to live unless it can raise some more money to fuel its cash burn of $50-60 million per quarter.
eToys blames the current disfavor towards Internet retailing and a consumer population… distracted by the [US] presidential election and its aftermath. It is true that online shopping hasn’t taken off as expected. Blaming the election, however, is perhaps missing the point. It’s not as if Bush and Gore have managed to steal Christmas any more successfully than the Grinch.
Again, eToy’s demise demonstrates the change in the eTailing climate. An Internet start-up, beginning with no customer base and huge operating costs, cannot compete with its bricks-and-mortar competitors. Traditional retailers, which already have brand recognition, have years of retail, marketing and category management experience combined with the all-essential ingredient – financial backing. The Internet is simply another distribution channel that can reach new audiences and build incremental sales. An offline presence is a key asset. If consumers can go to their local store at the first sign of trouble they are more likely to trust a company’s security and fulfillment capabilities.
Given the current climate and the fierce competition, both on- and offline from Toys R Us (which sensibly teamed up with Amazon) and Wal-Mart, eToys may struggle to find a ready source of new cash. Perhaps its best move would be to team up with a real world retailer or a dotbam and become its online partner. However, now that Toys R Us and Wal-Mart have strong online operations, even if it survives, eToys may find itself lagging behind.
