DEBTS R US

A dot-com era deal with Amazon marked the beginning of the end for Toys R Us

Toys R Us got serious about the internet much too late. It was only in May that the company said it would revamp its website to compete with Amazon and other online retailers.

The new site was designed to streamline the cumbersome browsing and checkout process on ToysRUs.com, shrinking checkout from five or more clicks to two. “In a year to two years, we have to catch up on 10 years of innovation,” Lance Wills, who joined Toys R Us as its first global chief technology officer in May 2016, told USA Today.

The website rollout hasn’t saved the once iconic toy retailer. Saddled with $400 million in debt due in 2018, Toys R Us filed for bankruptcy protection late on Monday (Sept. 18). The company hasn’t yet received all of its inventory for the critical holiday season and could reportedly be cut off from future shipments. Its toy sales have declined for several years, a stark contrast with the overall industry and with toy sales at Amazon in particular, which rose 24% in 2016. (Toys R Us didn’t respond to a request for comment.)

It’s easy to forget that at the turn of the millennium, Toys R Us was a hot digital property. During the 1999 holidays, the company was so inundated with online orders that it fell behind on shipping and failed to get Christmas gifts to customers who had made their purchases weeks in advance, resulting in a $350,000 fine from the US Federal Trade Commission. In February 2000, Toys R Us received a $60 million investment from Japanese technology conglomerate SoftBank, the same investor that this year has thrown billions of dollars at many of Silicon Valley’s hottest tech startups. Several months later, Toys R Us announced a 10-year partnership to sell toys online with Amazon.

Under the terms of that deal, Toys R Us agreed to stock a wide variety of its most popular toys on Amazon in exchange for being Amazon’s exclusive seller of toys and baby products. The companies also agreed that Toys R Us would give up its online autonomy, with ToysRUs.com redirecting back to Amazon. Toys R Us paid Amazon $50 million a year plus a percentage of its sales through the Amazon site.

The joint toy store quickly became the top site for kids, and sales met or exceeded Amazon’s expectations in 2002. But Amazon wanted more. Jorrit Van de Meulen, an Amazon executive who works on toys, drafted a memo for children’s products in 2003. “Amazon has effectively ceded control of the toy and baby stores to [Toys R Us],” the memo noted. “This is not always a good thing.”

By spring 2003, other merchants were selling toys and baby goods on Amazon. That summer, Van de Meulen and Amazon CEO Jeff Bezos met with Toys R Us executives to demand greater variety in its merchandise. Competitors’ toy and baby products continued to appear on Amazon, including in search-related ads. In May 2004, Toys R Us sued Amazon.

Toys R Us came out ahead in court. The company won the right to terminate its 10-year deal with Amazon and reopen an independent website in 2006. Three years later, Amazon agreed to pay $51 million to settle the dispute. But the deal dealt an early blow to the company’s digital efforts, training it to rely on Amazon instead of curating its own e-commerce platform and identity, so that it still had “10 years of innovation” to catch up on as of this spring. Since then, online shopping has eaten away at brick-and-mortar sales and Amazon become a formidable competitor.

And Toys R Us is yet another retailer whose early partnership with Amazon didn’t work out.

This story was updated after Toys R Us filed for bankruptcy protection on Sept. 18.

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