CEO: Partnership Hurt Toysmart

Says timing was also a factor in store's demise

Palm Desert, Calif.

Bad timing and a poor choice of partners are what ultimately killed Inc., not so long ago a darling in the crowded and highly competitive online toy market.

"It seemed like we had it all," said Toysmart CEO David Lord, ticking off a list of once-shining assets during a highly emotional keynote presentation at last week's Computerworld Premier 100 IT Leaders conference here.

Those assets included an enviable partnership with The Walt Disney Co., the indisputable king of the U.S. family consumer market; a spanking-new 126,000-square-foot fulfillment center; and a top-notch Internet development team that built from scratch a state-of-the-art Web site that was ranked in the top 40 by both Nielsen Corp. and MediaMetrix.

But it still wasn't enough.

On Friday, May 19, Disney, which last August invested more than $50 million and took a 60% stake in the Waltham, Mass.-based toy retailer, pulled the plug on it all, leaving 200 employees out of jobs. The company's inventory and physical assets, including a fully integrated Web site infrastructure, is on the auction block, and both Lord and CIO John Puckett are visibly and abjectly heartsick.

"Everything we poured our hearts into for the past three and one-half years is gone," Lord said.

The biggest lessons learned, according to both executives, are first, that you must choose your partners wisely, and second, that it's all about timing.

"I think timing killed us," Lord said. "We could have gotten an IPO and have been secure (financially) if timing hadn't killed us." For example, Lord said, Disney and Toysmart - which went online in 1997, after spinning off from The Holt Co., a maker of educational products whose CIO was Lord - agreed to their partnership in May 1999. But it wasn't until August that Disney announced the deal and Toysmart saw any money.

"We couldn't get product because we didn't have the cash yet, and we had to delay our marketing spending, which meant losing our chance to convert customers in the pre-Christmas buying season," Lord said.

Disney officials didn't return calls by press time.

Culture Clash

There also was a major culture clash with Disney, which languished far longer over business decisions and operated much more bureaucratically than its faster and nimbler dot-com partner.

Case in point: It took Disney until January 2000 - after the end of the crucial holiday retail season - to approve the sale of Disney books on, which was supposed to be its official online bookseller. Disney baby items didn't make it to the Web site until February, again too late to cash in on the Christmas shopping rush.

"We were on very different timetables. We wanted to make decisions the next day vs. the next month," Lord said.

In late 1999, Disney decided to switch its Internet focus away from toys to leisure and entertainment. That, coupled with Wall Street's steady souring on dot-coms, particularly electronic retailers, made an early 2000 initial public offering (IPO) out of the question.

"Any one of these things might have been easy to overcome, but combine them all and no one can overcome them," Lord said.

Carol Ferrara, an analyst at Gartner Group Inc. in Stamford, Conn., said she expects to see more failed ventures between traditional companies like Disney and their quicker dot-com partners.

Smaller Internet companies "need to carefully consider who they're going to be with," Ferrara said. Big retail companies think a lot differently than pure-play electronic retailers, she noted.

"Traditional retailers are very focused on the bottom line and inventory turns, and we don't see as much of that in the virtual retail space," she said. "A lot of these virtual companies are technologists rather than merchants and lack the understanding of what it takes to succeed in the toy market and in retail generally." Other examples she cited include, and some of the recently shuttered online pet stores.

Still, Puckett, who came to Toysmart from GTE Internetworking last August, said he wouldn't change a minute.

"It was painful, with incredible highs and lows. But I learned more in the last year than I learned in 10 years in corporate America," Puckett said.

Five weeks after Disney pulled the plug, more than 90% of Toysmart's 200 employees have new jobs, many at other dot-coms.

"The first day (after the shutdown announcement), we had 250 companies call and try to hire our employees," Lord said. "We've had calls from companies wanting our entire systems department."

In fact, Lord said, about 75% of Toysmart's Web team went to Core Change Inc., a Boston-based Internet services firm.

Lord and Puckett have also had hundreds of telephone calls from potential employers. Neither has decided what to do.

But there's one place you probably won't find Lord.

"I don't think I'll stay in the toy business," he said. "I don't think I'm that much of a glutton for punishment."


Copyright © 2000 IDG Communications, Inc.

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