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The Last Days of eToys

By Michael Mahoney & Jon Weisman E-Commerce Times ECT News Network
Mar 7, 2001 5:23 PM PT

Perhaps the tone for eToys' imminent farewell from e-commerce was set in February, when the online retailer specifically warned investors that its own stock was "worthless."

The Last Days of eToys

Forget about defiant last words. Forget about "if only" or "should have" disclaimers.

Instead of going out with a bang, eToys is going out with a barely audible sputter.

The story of eToys is an important fable for the e-commerce industry -- a fable without a happy ending. Founded in 1997 with the dream of becoming the premier family-oriented site on the Internet, eToys had visions of unlimited growth and opportunity. The company established itself as a building block of e-commerce.

Less than four years later, those visions turned into painful lessons, not only for eToys, but for every e-tailer on the Web.

Turn Out the Lights

As it heads for its demise, having filed for Chapter 11 bankruptcy protection Wednesday, eToys' Web site shows few vital signs -- mainly large advertisements for the company's "Final Closeout Sale." Even less evidence of life is emanating from eToys' corporate office.

The company announced last month that it was closing on or about March 8th, but attempts this week to confirm the closure date left callers wandering aimlessly through eToys' corporate automated recording and voice mail system, with no human voice within range.

Although eToys customer service reps continue to plug away on the phone lines, one wonders how many are actually left to handle last-minute business, considering the 5-to-10 minute telephone hold period.

Of course, eToys had even fewer employees during its early days. But the atmosphere was different then.

Big Dreams

Like many of the first pure plays on the Net, eToys grew quickly, increasing its employee roster from 13 people to 235 during 1998. But along with increased popularity came increased spending, and by the end of that year -- after 14 months of operation -- eToys had accumulated a total deficit of US$17.5 million.

Undaunted, eToys announced in February 1999 its intention to file for an initial public offering (IPO). Showing how different the investor atmosphere was two years ago, eToys said without shame, even as it was announcing its IPO, that it expected to incur continued losses.

eToys added at the time that some proceeds from the IPO would be spent to further the company's branding efforts, distinguishing eToys from competitors like Toysrus.com, Amazon.com and Wal-Mart.

eToys had little idea how distinguished it would become.

Building Blocks

eToys spent 1999 focused on expansion. The company pushed forward on a second fulfillment facility and purchased BabyCenter for more than $150 million in stock.

In August of that year, eToys signed a three-year, $18 million marketing agreement with America Online. Under the terms of the deal, eToys became the premier retailer of children's products, including toys, videos and books, across numerous AOL sites.

The same month, eToys also unveiled plans to launch a Web site in the United Kingdom in time to capitalize on the holiday season. A warehouse for the company's toys and other children's products was established in Swindon, England, west of London.

Later during 1999, eToys inked agreements with Discovery Toys and the Gap, extending eToys' reach in the children's product market. The partnerships were hailed as bold moves that would keep building the eToys name.

The Hammer Falls

With order fulfillment problems plaguing Toysrus.com as 1999 drew to a close, eToys was in position to see its significant growth pay dividends. Along with Amazon and eBay, eToys ranked in multiple studies as one of the most visited sites during the 1999 holiday shopping season.

But investors started to lose faith. Long before the dot-com shakeout had achieved infamy, eToys stock was falling. From a high of $84.35 in October 1999, eToys opened 2000 at $26.25.

Then in January 2000, eToys reported a loss for the previous quarter of $62.5 million, compared to losses of $8.2 million for the year-earlier period.

On March 10, 2000, the day the Nasdaq was hitting its all-time high, eToys closed down at $13.06.

On Its Heels

eToys took aggressive action in 2000 to keep investors at bay. The company moved its distribution in-house and announced plans to bring outside advertising to its Web site.

eToys also launched an aggressive summer marketing campaign -- its "first major non-holiday marketing push" -- as part of a plan to raise consumer awareness of the company as a "year-round resource for kids-oriented products and ideas."

The company found some breathing room in June by raising $100 million in capital from the sale of preferred convertible stock.

But the fun and games were ending for eToys. In November, eToys stock fell to $2.56 on analyst predictions that the e-tailer would not see an operating profit until 2004, two years later than expected.

Auld Lang Syne

eToys' last hope was a miracle holiday season, but well before Christmas Day, the company realized that Santa was not coming around with the gift of sales. On December 15th, eToys said that it would miss its revenue estimates for its third quarter and that it planned to cut its workforce to conserve a dwindling cash supply.

eToys laid off about 700 workers, or 70 percent of its workforce, in January. The company's European wing, which ranked as the top toy e-tailer in its market, also shut down that month, citing a lack of financial support from its parent company.

Early in February, eToys announced that it would wind down operations and lay off its remaining employees by the beginning of April. At the end of the month, eToys said it planned to file for bankruptcy.

Thanks for the Memories?

In a way, eToys was the standard bearer for a vision of e-commerce that barely exists anymore. Multichannel retailing is the path to success now, most analysts say.

However, for all its flaws, eToys helped shed light on that path -- something worth remembering as the company takes its ball and goes home.


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