Online toy sites were a hot ticket with investors last year, who bought in to the promise that legions of folks would opt to do their shopping in cyberspace. And while a lot of people actually are buying toys online -- those very same companies are tanking.
This month was a particularly brutal month for upstart online toy retailers. On Monday, Toysmart.com, a retailer backed by Disney's Go.com network and one of the ten most-visited U.S. toy sites last Christmas, pulled the plug on its operations. The shut-down came less than a year after Disney invested in the company.
The closure followed on the heels of the demise of another toy site -- Nickelodeon-backed Red Rocket -- which announced in early May that it would no longer take orders. Around the same time, retail site Kbkids.com, the online arm of Consolidated Stores-owned retail chain K*B Toys, cut about 30 percent of its staff in a move to reduce costs and restructure the company.
Publicly traded companies in the online toy business have taken a beating as well. Shares of industry heavyweight eToys.com, for example, are trading at less than a tenth of their year-long high.
What's more, experts who follow the online toy business predict the wave of closures isn't over yet.
"We expect more companies to find themselves in the same situation," said Rebecca Nidositko, online retail strategy analyst at Yankee Group.
Underneath the corporate gloom and evaporating investor dollars, however, industry researchers say there is also a more positive truth. It's that online toy sales aren't doing badly at all.
Between 1998 and 1999, online toy sales grew more than tenfold, from $45 million to nearly $650 million, said Reyne Rice, director of the toy services division at the market research firm NPD Group. Sales are expected to nearly double in 2000. By 2002, Rice estimates sales will reach $2.4 billion, or about 9 percent of all toy industry sales.
What's more, Rice expects the online toy business to grow faster than other sectors, partly because they get a lot of their business from working parents, a particularly time-pressed segment of the population that's likely to appreciate the speed of purchasing online.
Such positive projections, however, don't appear to have improved the investment climate for toy retailers. Even meeting or exceeding market expectations has been ineffective in perking up sagging shares.
Take the case of eToys (ETYS), established as an early industry darling following a blockbuster IPO last year that gave the company an instant stock market value in the billions. After its first-day close, the money-losing company's stock was worth more than that of its profitable rival in the offline world, ToysRus.
But that was ages ago, in Internet time. These days, eToys shares are hovering at $6. Although the still unprofitable company reported earnings slightly ahead of Wall Street estimates in its latest quarter, shares still nosedived.
In a way, some industry observers note, toy retailers have been a victim of their success in generating massive hype early in their operating history. As a result, sites like eToys garnered massive valuations based on investor enthusiasm for e-commerce, rather than the company's bottom line.
Now that the enthusiasm has faded, retailers are facing a much tougher sales proposition on Wall Street.
That was the situation for Kbkids.com, which filed plans for an initial stock offering in January, but postponed the IPO following a market downturn in April.
"The market conditions aren't really conducive right now," said Michael Wagner, chief financial officer at Kbkids.com. The company's CEO, Srikant Srinivasan, resigned earlier this month, and Kbkids has not yet determined a new target for its IPO.
Despite the twin travails of job cuts and executive departures, Wagner said the site's performance has been essentially in line with expectations. Month-to-month, the site ranks as either the third- or fourth-most-visited online toy retailer, according to online measurement firm Media Metrix.
Rice sees stronger growth potential coming from sites like Kbkids or Toysrus.com that are linked to chain stores. Customers are more likely to go to sites of stores with names they recognize, and often appreciate having the option of returning purchases bought online to a physical store.
In addition, chains are more apt to weather the season-by-season fluctuations of the toy business, where about 60 percent of sales are made in the last three months of the year.
Still, it remains questionable whether all the players currently vying for a spot in the top ranks will survive.
David Blohm, CEO of education-oriented toy site Smarterkids.com (SKDS), expects the online toy industry won't support more than a handful of sites targeted to a general audience. Small- and medium-size companies will need to offer specialized products or services if they want to survive.
"If you're in the middle, you're in kind of a no-man's land," he said. "You need some sort of differentiation that makes you stand out because you don't want to compete on price and availability."
Of course, being a specialty site isn't a guaranteed ticket to success either. Despite ranking among the top five most-visited toy sites, Smarterkids.com stock has floundered, hovering around $2, down from a high of $17.
Rice predicts the big shakeout in the toy industry will happen this year. There is also a possibility it will happen sooner. With more-established players gearing up for their second or third holiday season, retailers will have to get their end-of-year-strategy together in the next two or three months.
"If all that's not squared away by midsummer, they're going to miss the boat this Christmas," she said.
