e-Biz Failure: Too much competition for Toysmart.com

Toysmart.com, an Internet retailer, abruptly closed its doors after falling victim to fierce competition from other online stores, as well as a growing wariness among investors toward online retailers. Read on to find out how it failed and learn from it.
Written by Andrea Orr, Contributor
The Internet retailer Toysmart.com abruptly closed its doors over the weekend and said Monday it was going out of business after burning through most of its cash and being unable to raise more.

PALO ALTO, 23 May 2000 - The Waltham, Mass.-based company, which is majority owned by Walt Disney Co., said it will seek a buyer for the business but was not in a position to continue operations in the meantime.

Chief Executive David Lord said in an interview that all but a handful of the company's 170 employees have been laid off, and that if it cannot find a buyer, it will liquidate.

Lord, who had sought to carve an online niche in the educational toys category, said Toysmart fell victim to fierce competition from other online stores, as well as a growing wariness among investors toward online retailers.

Taking their ball and going home
A last-minute financing deal being negotiated with an outside investor fell though last week, and Disney chose not to put any more money into the business, he said.

Disney declined to comment on the matter, other than to issue a brief statement saying that the online toy retailing industry was "an incredibly strong business that has some very strong players." It said that after reviewing all its options it decided over the weekend that closing the site altogether was the best course of action.

Toysmart had competed with a number of higher-profile online toy stores including eToys Inc. and Toys "R" Us Inc. Even these market leaders appear to be having trouble turning a profit and running efficient Web sites.

Toy retailing, one of the first consumer markets to move online, has also emerged as one of the toughest businesses, crowded with multiple stores which have rapidly burned through capital in an effort to build brand awareness.

Because of the state of the market, analysts wondered whether Toysmart would find a buyer, even at a bargain basement price.

Not enough room in the toy box
"The Internet cannot support all these toy stores," said David Cooperstein, an analyst with Forrester Research in Cambridge, Mass. "When companies are spending multiples of their revenues rather than a percentage of their revenues on marketing, there is something wrong with that."

Earlier this month, another online toy store, RedRocket.com, owned by Viacom Inc., also closed its doors.

Toysmart, which was founded in 1997, never disclosed the amount of funding it had received, although sources say it was about $45 million in cash and other considerations.

Lord said on Monday that the company had had about 260,000 shoppers on its site and had won some of the best reviews for customer service and order fulfillment.

"We thought we'd done a great job executing, but there were so many dotcoms making so much noise over Christmas that the noise wasn't that effective," he said.

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