Amazon and Toysrus set up shop together

Amazon.com to set up an online toy shop jointly with Toysrus.com, said companies Thursday

Amazon.com and Toysrus.com will launch a co-branded toy and video game store this autumn and a baby store next year, the companies said Thursday.

Under the ten-year deal, Toysrus.com, working with its parent company Toys 'R' Us, will identify, buy and manage inventory, Amazon.com will handle site development, order fulfilment, and customer service. Amazon will house both Toysrus.com's and its own inventory in its US distribution centres.

The deal would seem to play to both companies' strengths and weaknesses. Toysrus.com was pilloried last holiday season for sloppy fulfilment, causing many orders to miss the Christmas deadline. The company ended up paying off disappointed customers.

Amazon, meanwhile, has stated that it miscalculated badly on ordering toys, and ended up having to write off inventory.

A dollar value was not put on the agreement, but Toysrus will make periodic fixed payments to Amazon, as well as per unit payments and single-digit percentage of revenue. Amazon.com will also receive warrants entitling it to acquire five percent of Toysrus.com.

"The strength of the Toys 'R' Us brand and our merchandising expertise combined with Amazon's unbeatable Internet savvy will create an online presence second to none," said John Eyler, chief executive of Toys "R" Us.

Amazon could use the boost. The company's stock plunged last month, after it reported disappointing second quarter revenue figures.

Several analysts have bailed on the stock, including Lehman Brothers analyst Holly Becker, who said in a note that she was "throwing in the towel". Becker was following the lead of the Lehman bond analyst Ravi Suria, who panned Amazon and sparked cash flow worries.

The deal with Toysrus could be seen as admission from Amazon that it needs some help outside of its core media business, said Jupiter Communications analyst Ken Cassar.

"The question is how well Amazon knows toys. Can it hire people that know toys, and retrofit its fulfilment [operations] to sell toys and establish relationships with suppliers to get the hot toys," he said. "The other side is the consumer side, are consumers willing to make their toy purchases from Amazon? They're very comfortable buying books, music and video from Amazon but toys may be a stretch."

While this pact could solve problems at Amazon and Toysrus.com, it could spell trouble for other online toy firms such as eToys and Smarterkids.com.

Earlier this week, Merrill Lynch analyst Henry Blodget downgraded eToys to an intermediate term "neutral" from "accumulate". Blodget's long-term rating was cut from "buy" to "accumulate".

EToys did top estimates in its latest quarter and has moved to smooth out its seasonal sales with summer promotions.

While Toysrus has struggled online, it's still an 800-pound gorilla in the toy world. In fact, most of its woes last holiday season stemmed from drawing too much traffic to its Web site and being swamped with too many orders. That, combined with Amazon's brand muscle, should position the new site well to toy buyers.

"It is an example of consolidation. Two of the three biggest players in the online toy space have essentially merged," Cassar said. "Does this make them a better toy seller? It does if they execute well, if they're able to take the best of both worlds, rather than the worst. The risk is that Amazon will be slowed down by Toysrus, and Toysrus' toy focus may be diluted as a result of the joint venture."

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