Finance Finance News The Amazon deal that spelled doom for Toys ‘R’ Us

The Amazon deal that spelled doom for Toys ‘R’ Us

What went wrong for Toys 'R' Us? Photo: AP
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When Toys ‘R’ Us partnered with a new online bookseller called Amazon 18 years ago, it gave the e-commerce fledgling an early boost in its meteoric rise to world dominance.

It’s a deal the struggling toy chain may now come to regret, according to one retail expert.

On Thursday it emerged the company would sell or close all of its 885 toy stores in the United States in the coming months, a move which may also affect Australian stores.

In the early days of online retail in the late 1990s, Toys ‘R’ Us was so inundated with online orders on its new website that it fell behind in its shipments during the crucial Christmas season.

The company suffered widespread consumer backlash in the US when customers did not receive their gift orders in time for Christmas Day.

The toy company signed a 10-year deal with Amazon soon after in 2000 – an e-commerce platform that at the time was fighting its image as a books-only website – to run its online business in exchange for exclusive rights to sell its toys and baby products.

But in doing so, the toy chain inadvertently handed over valuable data to Amazon, perhaps signing its life away and equipping Amazon with the knowledge it needed to rise up the ranks in the toy sector, according to retail analyst Scott Kilmartin.

“Toys ‘R’ Us’ challenges can be rooted back to the late 1990s when it launched its e-commerce business,” Mr Kilmartin told The New Daily.

“It paid Amazon to run its online business but this allowed Amazon to learn a lot about selling toys – a segment that remains a large part of its marketplace today.

A lot of Amazon’s early understanding of the toys market came from this deal.

“Amazon had been floundering with the consumer perception that it only sells books. It couldn’t believe its luck.

“Data wasn’t big at the time and Toys ‘R’ Us didn’t know what they were giving away.”

When asked for comment by The New Daily, a spokesman for Toys ‘R’ Us Australia, which has 44 stores, would neither confirm nor deny claims in The Wall Street Journal that the toy chain is also likely to liquidate in other countries including Australia.

The announcement regarding Toys ‘R’ Us in the United States relates to their US operations,” he said.

“Toys ‘R’ Us Australia stores are open for business and continue to serve customers.”

Russell Zimmerman, Australian Retailers Association executive director, also confirmed that Toys ‘R’ Us Australian stores are currently trading as normal.

“Toys ‘R’ Us is committed to the Australian market and it is hopeful and expected that it may be able to continue trading in Australia,” he told The New Daily.

“Various options are being looked at.”

So Australian stores are safe – for now.

IBISWorld senior industry analyst Kim Do said Toys ‘R’ Us Australian stores are expected to leverage their physical presence over the next five years by creating “experience destinations” – for example, in-store play areas for kids.

What went wrong for Toys ‘R’ Us?

While the Amazon effect undoubtedly came into play, there were many other factors contributing to the demise of Toys ‘R’ Us – once one of the largest toys chains in the US.

Dr Louise Grimmer, a retail expert at the University of Tasmania, said Toys ‘R’ Us – like many other department stores – was slow to invest in online.

She said it was a case of too little, too late.

“They had difficulty meeting fast shipping times which consumers expect to be the same-day or next-day delivery in many cases,” Dr Grimmer said.

“It’s sad because there’s been significant growth in online toys sales and Toys ‘R’ Us obviously missed a great opportunity here. They probably weren’t competing well in terms of range or price with their e-commerce offering.

“They also maintained their large stores, often in high-rent areas, which would mean a lot of rent. They may have been better off having smaller stores in more places.”

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