Etoys Inc - Spent Heavily To Gain Customers

SPENT HEAVILY TO GAIN CUSTOMERS

At this point—and indeed throughout its four-year history—eToys was not concerned with turning a profit. The company had lost $2.3 million in its first fiscal year ending March 31, 1998, and another $15.3 million in the nine months ending December 31, 1998. Its goal was to acquire customers, and it spent heavily to do so. With venture capital running out, the company turned to the public equity markets and held its initial public offering (IPO) in May 1999. Eight percent of the company was offered to the public. Shares began trading on the NASDAQ on May 20, 1999 at $20 a share, raising $166 million for eToys. The stock rose as high as $85 on the first day of trading and ended the day around $76.50, giving eToys a market value of $7.8 billion, more than the $5.6 billion market value of Toys 'R' Us.

Around this time the company acquired Baby-Center Inc. (which it later sold off at the end of 1999), and outsourced its e-commerce order fulfillment to Fingerhut Companies Inc. Preparing for the 1999 holiday shopping season, eToys increased its stock to 15,000 items, not including children's books. It also carried music, videos, and video games. In July, eToys began selling children's books, offering some 80,000 titles, and its acquisition of BabyCenter expanded the company's demographic to infants and toddlers. Based on its 1998 performance, eToys had become the brand to beat in merchandise for children up to age 12. For 1999 it would face increased competition from Toys 'R' Us, which spun off its Web site as a separate company and planned to invest $80 million in it, as well as from Amazon.com ., which added a toy section in July 1999. Other competitors included KB Toys, a subsidiary of Consolidated Stores Corp., and Wal-Mart Stores Inc., the largest U.S. toy seller, which had plans to overhaul its Web site in time for the 1999 holiday season.

eToys attempted to distinguish itself from its competitors in several ways. One was the depth of its product offerings—15,000 items compared to Toys 'R' Us' 10,000. The company also focused on offering services that its competitors could not match, such as putting personalized gift tags on each item and offering multiple wrappings, a gift registry that parents could protect with a password, a wish-list feature for kids, and a spare parts and repair service for toys. The company also had a compelling product bundling strategy, whereby no item was treated as a single entity. Rather, toys were bundled with books and videos, for example, and customers could select which items they wanted to include in their bundle.

In August 1999 eToys expanded its marketing relationship with America Online by committing to a three-year, $18 million agreement that made eToys the premier retailer of children's products on several AOL channels, including Shop@AOL, AOL Families Channel, AOL.com, Netscape Netcenter, and CompuServe. The company's national print and television advertising campaign, which launched in October, was expected to cost $20 million. eToys also expanded into the United Kingdom for the 1999 holiday season, opening a U.K. Web site in October and stocking some 5,000 items at a British warehouse.