Human Capital & Careers

E-Commerce: Dot-coms Navigate Holiday Traffic

Toysrus.com links up with Amazon.com to allay last year's fulfillment woes.
Michelle GabrielleDecember 7, 2000

Looks like this season’s holiday traffic won’t just be on the roads.

This month, cyberspace will be jam-packed, with over 55 million visitors to Internet retail sites—up from 14 million in the same period last year, says Sean Kaldor, vice president of Internet commerce of NetRatings, a Milpitas, Calif.-based research firm. That represents a great opportunity for dot-coms, but also a sizable peril. If they’re not ready for the influx of traffic, there will be a price to pay, warns the Federal Trade Commission.

Last year, seven e-tailers paid a total of $1.5 million dollars in federal penalties for failure to fulfill their shipping promises during the holiday season. For its part, Toysrus.com shelled out $350,000. But, in a sense, the case is still not closed. When a renowned company like Toysrus.com disappoints its customers, the penalty does not stop at $350,000. If proper action is not taken to prevent future calamities—especially around the holidays—the company risks getting a bad rep, which can cost it much more in the future.

Further, the FTC cautions that this year it will be keeping an even closer watch to see that retailers pay attention to their Mail and Telephone Order Rule. The rule requires that retailers ship goods within the date promised, or, if no date is promised, within 30 days of the order’s receipt. If the company cannot follow through on its agreement, it must notify the buyer with a revised shipping date, giving an opportunity for the buyer to accept the delay or to cancel the order. The rule applies to merchandise ordered over the Internet as well as by telephone, fax, or mail.

To prevent fines and negative publicity, E- tailers like Toysrus.com have spent the last year giving their entire operations a serious facelift. Toysrus.com’s greatest feat in that regard is the partnership it forged with Amazon.com.

Toysrus.com and Amazon.com announced that they were forming a strategic alliance on August 10. In collaboration with its majority shareholder and parent company, Toys “R” Us, Inc., Toysrus.com is responsible for identifying, managing and buying inventory; Amazon.com is handling site development, order fulfillment, and customer service, housing Toysrus.com’s inventory in Amazon.com’s U.S. distribution centers.

Under the terms of the 10-year agreement, Amazon.com will be compensated through a combination of fixed periodic payments, per- unit payments and single-digit percentages of revenue. Amazon.com will also get warrants entitling it to acquire 5 percent of Toysrus.com.

Through the Toysrus.com-Amazon.com alliance, the companies are seeking solid customer- service and fulfillment capabilities, the main factors that contributed to Toysrus.com’s 1999 holiday havoc.

One source of the trouble was that every holiday season, Toys “R” Us, Inc., distributes a “big book” catalog promoting not only itself, but Toysrus.com, as well. Ads promoting both are inserted into Sunday newspapers, for example. “When the big book dropped in early November,” says Jeanne Meyer, vice president of corporate communications at Toysrus.com, “the site just did not have enough server capacity to handle the surge in traffic.” Although the company did quadruple its server capacity, some damage had already been done, which led to a delay in shipping items to consumers.

In some cases, consumers never received their orders.Toysrus.com sent those consumers $100 gift certificates in time to shop before Christmas, regardless of how much their original order amount was.

Technical errors were one reason for Toysrus.com’s inability to fulfill some orders by the holidays. While 95 percent of the orders were fulfilled, the percentage of consumers who did not receive them was still too high for the company’s tastes.

In addition, Toysrus.com only had one distribution center, located in Memphis. Thousands of orders can arrive in almost no time. This year, for example, thousands of Sony PlayStation 2’s were sold in only twenty- three seconds. Thus, additional staffing, as well as more distribution centers are crucial for fulfillment.

The entire process appears simple, but one glitch can cause the whole operation to collapse. As soon as the consumer types in an order, it is fed into a computer system in the distribution center. The order is printed out and “picked off” by a worker, who then packages it and sends it to be shipped. If a company is lacking in the technology to process the order and the bodies to distribute it, there’s no guarantee that an order can be completed. Toysrus.com’s alliance with Amazon changes all that.

“E-commerce fulfillment is very different from physical-world fulfillment,” says Kristin Schaefer, an Amazon.com spokesperson. “It is a direct-to-consumer model versus a full replenishing model. Our distribution centers are structured to fulfill individual orders to one person.” Amazon.com has eight distribution centers across the United States.

Schaefer explains: “All orders placed through Toysrus.com will go through the Amazon.com com order pipeline, which feeds directly into one of our distribution centers, where the inventory is. We fulfill it and ship it. Ideally it goes to the distribution center closest to the shipping address of the order,” where human “pickers” get the items where they need to go. With Amazon.com’s technology, including optical scanning and factory-like conveyor operations, the inventory moves through the distribution centers very quickly.

Last year, 99 percent of Amazon.com’s orders were delivered on time for the holidays, with over 20 million items shipped. Amazon.com generated about $95 million in sales in kid’s products for the fourth quarter, with the bulk of that in toys.

Toysrus.com’s Jeanne Meyer says that in the off-line toy business, about 50 percent of sales are generated during the last eight weeks of the year. “In the online world, however, the selling season is even more crucial—70 percent of sales are generated in the last eight weeks.”

About half of that eight-week volume stems from about 200 “hot products,” explains Meyer. Being able to predict what those products will be, as well as having the power to obtain them is key.

“There are some toy manufacturers who are very selective about who they do business with, so the name goes a long way,” notes Meyer. “While Toysrus.com has been set up as rather an autonomous unit from Toysrus Inc,” she says, “we can still enjoy the leverage of the Toysrus Inc. name and buying power, which is very important in the retail business.”

“We get the toys at a great price because we share the same financial terms as our parent company,” Meyer says. And now that the toy distribution will be handled through Amazon.com’s superior back-end fulfillment and customer service, she adds, “we can concentrate on what we do best,” that being the toy business.

“It is a very strong partnership,” says Michele Rosenshein, an analyst at Jupiter Research, a media research company. “At the latest possible, but appropriate moment, they made a radical change. They did an admirable job to get ready for this season.”

“We may not have an entirely problem-free Christmas,” adds Rosenshein, “but retailers have made great strides this year.”

Rosenshein says that, like Toysrus.com, a majority of retailers have invested in fulfillment infrastructure, order-management systems and demand-planning systems. “Due to a great deal of tech investment over the last twelve months, this year retailers will be able to understand exactly where the problem occurred throughout the processing of orders.”

In addition, there has also been a decrease in broadcast advertising and a greater focus on more measurable media that has a better cost- to-performance ratio, for example, direct-E- mail campaigns. Retailers are also offering fewer “deep deep discounts,” adds Rosenshein.

“Last year’s attitude that a customer should be acquired at any cost is simply not the case this year,” says Rosenshein. Retailers are now much more practical about what they can afford to spend to reach a customer and will aim fulfill their commitment regardless of the fact that it’s the holiday season. Still, there are several precautions retailers can take to get through this season without a glitch.

“The most important thing,” advises Rosenshein, “is to check your Web site every day for promised deliveries. Inform customers on a daily basis of the status of their orders. Keep a flexible staff in place at all distribution and call centers. If you have a slowdown on a Web site, make sure you compensate for customer service for a possible increase in call volume. Retailers cannot afford to permit items to fall through the cracks.”