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EToys, Inc.

 


Address:
2850 Ocean Park Boulevard, Suite 225
Santa Monica, California 90405
U.S.A.

Telephone: (310) 664-8100
Fax: (310) 663-8101
http://www.etoys.com

Statistics:
Public Company
Incorporated: 1997
Employees: 1,000
Sales: $151 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: ETYS
NAIC: 45112 Hobby, Toy, and Game Shops; 45411 Electronic Shopping and Mail-Order Houses


Company Perspectives:


eToys' vision is to create the premier family-oriented destination on the Internet.


Key Dates:


1996: Toby Lenk quits Disney to found Internet company.
1997: eToys opens for business.
1998: Company has outstanding sales in Christmas season.
1999: Company goes public.


Company History:

eToys Inc. is a leading on-line retailer of children's products. Its emphasis is toys, but it aims to sell parents a vast array of things that their children might want or need. Its entire product line comprises more than 100,000 stock-keeping units of products such as children's books, videos, music, and software, as well as toys. Its broad range of toy products includes such mass-market items as Barbie dolls, as well as less-well-known items for more specialized tastes. In total, eToys carries over 750 brands. eToys' goods are sold exclusively on the Internet. Its web site catalogs its vast holdings, and shoppers can use the site's advanced search capabilities to find items by a variety of strategies. For example, consumers can search eToys for toys of a specific color, or ask for suggestions for products designed for children of a particular age. The site regularly lists updated suggestions of Bestsellers, Birthday Gifts Made Easy, Favorites by Age, and 200 under $20. The eToys site also allows shoppers to sign up for a birthday reminder service. The company notifies shoppers by e-mail three weeks in advance of a child's birthday, and appends a list of gifts appropriate for that age. The site also provides a Wish List service. Children or their parents can use it to e-mail friends and family members lists of the gifts they most hope for. Children can also visit the eToys web site to play computer games, through the site's Play&#064eToys service. Other web site features offer tips, advice, and product ideas to parents.

Besides the company's headquarters in Santa Monica, California, eToys maintains regional headquarters in San Francisco; Danville, Virginia; and London, England. It ships goods out of one east coast and one west coast warehouse. eToys operates a related web site, etoys.co.uk, to offer its goods and services to customers in the United Kingdom.

Disney Executive Turns to Internet Toy Sales

eToys Inc. was founded by Edward C. Lenk, known as Toby. Lenk was born in Boston in 1961 and graduated with a degree in economics from Bowdoin College, Maine, in 1983. From Bowdoin he went to Harvard Business School, where he earned his MBA in 1987. Lenk held a variety of positions in the 1980s. He worked in Washington as a health policy researcher and later was a consultant for a firm called LEK Partnership. In 1991 he joined Walt Disney, where he became vice president for strategic planning, overseeing growth of Disney's theme parks. Lenk's career at Disney lasted only five years. By the summer of 1996, Lenk was bored with climbing the corporate ladder. He quit to go into business for himself. He wanted to get in on the Internet craze, but wasn't sure what kind of business he wanted to start. Then, while Christmas shopping for his niece and nephew, it occurred to Lenk that the hectic pace and desperate atmosphere of the late December toy store was something the world might very well do without. He decided to create a virtual toy store. His first proposal to investors was for a web site that would sell high-priced toys to wealthy consumers. This idea failed to get backing, and Lenk thought about ways to refine his plan. He came back with a proposal to outdo traditional toy stores by offering a huge selection on-line, of everything from mass-market toys to the kind of fancy, high-priced toys he had first considered.

No one else yet had a toy store on-line. Being first to the market is always considered a business advantage, and investors began shoving money at Lenk. He collected over $15 million from the venture capital firm Sequoia and other venture capital firms, plus $250,000 in seed capital from a web business incubator called Idealab. He raised money from friends at Disney as well. eToys seemed to be in the position Amazon.com had been in when it became the first on-line bookstore. Lenk was sure that the giant mass-market toy retailer Toys `R' Us would soon start its own web site, and he rushed to get eToys going before that happened. In March 1997, eToys went on line.

Getting the site going was very expensive. Merely putting the site up on the web would not guarantee customers, so Lenk spent $3 million to become a so-called anchor tenant of America Online (AOL). This gave eToys a promotional space on AOL's portal for two years. He signed a similar deal with another popular Internet portal, Yahoo! He enlisted 5,000 other web sites to spread the eToys name, offering a 25 percent commission on sales to any site that referred customers. He stocked his California warehouse with goods from more than 350 different manufacturers.

eToys expected competition from Toys `R' Us, but in fact that company waited almost a year before it began offering goods on-line. In the meantime, eToys faced competition in cyberspace from the bookseller Amazon.com. Amazon had basically pioneered web-based retailing, building the business model others strove to emulate. After its first success with books, it began branching into other areas, including toys and music. In October 1998, eToys formed a marketing partnership with three other web retailers to promote each other's sites. The other members of the group were CD-Now, Reel.com, and Cyberian Outpost. By promoting each other's sites and sharing customer lists, the four hoped to counter some of the impact of Amazon's dominance.

eToys ran through its cash quickly. It ended its first fiscal year $2.3 million in debt. Losses were even steeper the next year, yet the firm continued to attract investors. By 1998 it had raised approximately $2 billion, although eToys was admittedly far from turning a profit. Investors seemed to excuse the company's poor finances, because eToys was building a market for itself. The toy industry in total had sales of $22 billion a year, and eToys was the first to take aim at this huge market from the Internet. Estimated total revenues from on-line toy sales across the industry for 1998 were only $40 million, far less than consumers were spending on books, music, and entertainment ($1,300 million), apparel ($300 million), food and wine ($200 million) or even on-line car sales ($70 million). Yet the growth rate from 1997 was more than 300 percent for toys, higher than almost all other categories tracked, according to a survey in Fortune published February 1, 1999.

1998's e-Christmas

Christmas 1998 was the first time the Internet was a significant force in the yearly American shopping ritual. eToys prepared by spending even more money on advertising, using print and television ads for the first time. Its advertising campaign featured the tag line: 'We bring the toy store to you,' hoping to emphasize the convenience of at-home shopping versus the crowded scramble at the mall. The most popular toy of the year was a talking creature called the Furby, which shortsighted retailers had underpurchased for the season, creating a wide demand. eToys held on-line sweepstakes to give away free Furbies, attracting thousands of potential customers. The company also made every effort to keep customers satisfied. It offered free upgrades from regular to express shipping for some, and gave out $5 coupons to mollify customers whose desired goods were out of stock. Operating out of a single warehouse near the Los Angeles airport, eToys shipped out 95 percent of its Christmas orders within 24 hours. The massive warehouse employed hundreds of people to pick, pack, check, and wrap orders. Sales for the fourth quarter of 1998 soared to more than 20 times that of 1997, and overall some 3.4 million people visited the eToys site. eToys surpassed the Toys `R' Us site easily. The Toys `R' Us web site drew few customers, and it was only able to offer half the merchandise that eToys had.

Initial Public Offering in 1999

With this successful Christmas behind it, eToys decided to go public. Its IPO was first valued at $115 million and underwritten by the venerable investment firms Goldman, Sachs & Co., Merrill Lynch, and others. The company cheerfully hoped to raise money by the sale, even as it advised that operating losses and negative cash flow were likely to continue. The IPO was first announced in March, but it was delayed when eToys decided to purchase a company that marketed goods for babies, BabyCenter Inc. BabyCenter's stockholders ended up with about a 15 percent share of the merged companies, and the IPO was put off so this deal could be cemented. The public offering finally took place at the end of May 1999. The results were astonishing. The stock began at $20 a share, and by the end of the first day, it had risen to $77. The company, which had consistently lost money and had revenues at that point of only $30 million, ended up worth on paper $7.7 billion. This made it worth over 30 percent more than Toys `R' Us, although that company was a profitable national chain with annual sales of over $11 billion.

With the enormously successful public offering behind it, eToys began to prepare for increasing competition. This came from two directions. eToys had always had an eye on Toys `R' Us, expecting that company to rush to the web and do on-line what it already did in its nationwide stores. However, the Toys `R' Us web site had proved disappointing, and it did not do well over the 1998 Christmas toy season. In April 1999 Toys `R' Us relaunched its web site. It spun its Internet operations off as a separate company and announced plans to invest $80 million in it. Meanwhile, Amazon.com also put the pressure on eToys. In July 1999 it opened a whole new toy section on its web site. With its huge customer base of an estimated 10 million people, Amazon's CEO believed his company was already the top marketer of children's goods on-line. Amazon had leveraged its name recognition and customer base to become the leading music and video seller on-line, squeezing out sites like CD-Now. It seemed possible that it could do the same thing with toys.

A Place for Kids' Stuff

eToys believed it could match Amazon by presenting itself not so much as a toy store as a place for kids' stuff. That meant it would sell maternity wear and strollers (through its BabyCenter affiliation), books, toys, and perhaps sporting goods, so that parents could go to the site looking for anything their kids might need. By September 1999 eToys had announced that it had 80,000 children's book titles available for sale through its site. It hyped its new bookstore by arranging on-line interviews with notable children's authors, and it made sample pages of some 400 books available for on-line browsing. Then it teamed up with television talk show hostess Rosie O'Donnell. O'Donnell began a 'Rosie's Readers' children's book club on her show, and eToys tied in with her with a special 'Rosie's Readers' portion of its web site. Part of the proceeds of eToys' Rosie's Readers sales went to O'Donnell's charitable foundation.

To prepare for the Christmas season, eToys began running advertising on television and in parenting magazines. The ads differed from its previous year's campaign, which had emphasized the convenience of on-line shopping versus going out to the toy store. The 1999 ads tried to portray the company as uniquely able to help parents meet the needs of children. One ad showed a mother looking at fish in a rock pool with her son. Next the mother was shown typing 'fish' into eToys' web site. The tag line ran, 'Where will you find the perfect gift for your child? EToys. Where great ideas come to you.' The campaign cost eToys $20 million, which represented a significant portion of the company's total revenues. The soft tone of the advertising sought to convey a new, broader image of the company. eToys was not just another place to shop for toys, but a parent's ally in finding the best for a child.

Also to prepare for Christmas, eToys outsourced some of its order fulfillment to Fingerhut.

Principal Competitors: Toys `R' Us, Inc.; KB Toys; Amazon.com, Inc.; Wal-Mart Stores, Inc.





Further Reading:


Andrews, Whit, 'Four Web Retailers Join Forces in Effort to Cross-Promote Sites,' Internet World, October 19, 1998, p. 5.
Armstrong, Larry, 'This Toy War Is No Game,' Business Week, August 9, 1999, pp. 86--87.
Bannion, Lisa, '`Tis the Season for eToys' $20 Million Blitz,' Wall Street Journal, September 27, 1999, p. B10.
Bryant, Adam, 'A Lot of Play-Dough,' Newsweek, May 31, 1999, p. 54.
Kelly, Erin, 'The Last E-Store on the Block,' Fortune, September 18, 2000, pp. 214--20.
Maughan, Shannon, 'Children's Books Look Rosie,' Publishers Weekly, October 18, 1999, p. 12.
Sellers, Patricia, 'Inside the First E-Christmas,' Fortune, February 1, 1999, pp. 71--73.
Weintraub, Arlene, 'He's Not Playing,' Business Week, July 24, 2000, pp. 93--96.
'With Early-Bird Web-Site and Portal Deals, Former Disney Executive Seeks to Pre-Empt Toys `R' Us,' Inc., October 1998.

18th-Century Beginnings

The Paris stock exchange--or bourse, as European stock exchanges came to be known--was among the youngest of Europe's exchanges when it was created by royal decree in 1724. The Bourse de Paris inherited nonetheless several centuries of French trading activity. As early as 1572, King Charles IX announced regulations governing the country's 'couratiers' (which gave way to 'courtiers,' French for broker), establishing practices such as the obligatory separation of a broker's personal affairs from his dealings with his clients.

Toward the end of that century, the kingdom's first major bourse was established in Lyon, focused on money changing--the many dukes, counts, and princes, as well as the king himself, had long held a practice of coining their own money. Money changing moved to Paris at the beginning of the 17th century, where the Pont-aux-Changes served as a gathering point for moneychangers. In 1639, the role and function of the kingdom's moneychangers, called 'Agents de change,' were defined by royal decree. The moneychangers were then organized within a Compagnie des Agents de Change and granted exclusive authority to perform money changing duties.

An investment scandal at the beginning of the 18th century led to the creation of an official bourse in Paris in 1724. The new bourse, which opened in the rue Vivienne, granted exclusive rights to negotiate trading to the Compagnie des Agents de Change. The Paris bourse was to become instrumental in raising funds for the French war effort, as well as its colonial expansion. By the end of the century, however, the bourse had fallen into disarray and scandal and was closed in September 1795. One month later, the bourse reopened, with 25 new agents de change granted the monopoly on all transactions.

After taking power in the early 19th century, the new emperor Napoleon had the bourse moved to the royal palace. In 1806, a competition was opened to design a new home for the Parisian bourse. The competition was won by Théodore Brongniart; construction began in 1808. The completed building was inaugurated in November 1826 and became the permanent home for the Paris stock exchange. At its opening, the exchange boasted some 26 listed stocks. By the end of the 19th century--and despite a number of stock market crashes--the number of listed stocks had grown to more than 1,000.

The Wall Street crash, the beginning of the Great Depression, and finally the outbreak of the Second World War were to sink the Paris exchange into a long troubled period. As one government official was reported to say: 'I'd close the exchange and lock up the brokers.' Nevertheless, the Paris exchange was to prove instrumental in helping to rebuild the French economy after the end of the war.

A European Leader in the 1990s

A series of measures helped to win new confidence in the Paris exchange, such as the end of a double tax on stock dividends in the mid-1960s, and the creation of the COB (Commission des Opérations de Bourse), a watchdog body set up in 1967 as the French version of the Securities and Exchange Commission. The installment of a regulatory body helped to instill confidence in the exchange by new generations of investors and, in particular, private investors. A new law, voted in 1978, giving tax deductions to private investors, also helped to stimulate a growing interest in the stock market. Another incentive to individual investors was the Paris Bourse's unique 'reglement mensuel' or monthly settlement, which permitted investors to defer as much as 80 percent of the cost of their stock purchases until the first of the next month after the purchase. This system enabled investors with limited means to join in the stock market, despite criticism that the system encouraged speculation--investors were granted, in effect, free credit for their market transactions. The 'reglement mensuel' was abolished in September 2000, to bring the Paris exchange in line with its European neighbors.

At the beginning of the 1980s, the Paris exchange lost a large part of its value. A wave of nationalization carried out by the new Socialist government led by Mitterand transformed a number of France's largest public companies into government-run entities, thereby removing them from the Paris bourse. In response, the Bourse de Paris created a new market, called the Second Marché, to encourage mid-sized companies to join the stock market. The Second Marché, which also served as a springboard for larger corporations before joining the bourse's Premier Marché, enabled the Paris Bourse to boost the number of its quoted companies, and the Paris exchange became one of Europe's most prominent.

In the mid-1980s, the Bourse de Paris joined the movement toward electronic trading, when it introduced its own computerized transaction system, called CAC, ending traditional floor trading. The new CAC system linked trading in France's regional exchanges in Lyon, Bordeaux, Lille, Marseille, Nancy, and Nantes exchanges with the larger Paris exchange, as the first step toward creating a single entity, the Société des Bourses Fran&ccedilses.

Following the market crash of October 1987, the Bourse de Paris introduced new changes. Most prominent of these was the ending of the long-held monopoly by the Agents de Change in 1988. Abolishing this monopoly opened trading to foreign investors for the first time, while also opening the exchange to banks and other financial bodies. Three years later, the Société des Bourses Fran&ccedilses was officially created when the six regional exchanges were merged into the Paris exchange. The regional exchanges were now operated as commercial branches of the main Paris bourse.

These moves enabled the Paris bourse to take on greater stature among the European and world stock exchanges in the 1990s, attracting increasing numbers of both foreign and domestic institutional investors. At the same time, a growing number of international corporations began to seek listings on the Paris exchange. In the mid-1990s the Bourse de Paris introduced an upgraded version of its CAC software, giving it some of the most sophisticated trading software among worldwide stock exchanges.

The growing number of high-technology stocks, which often presented different financial portraits and requirements from traditional stocks, led the Bourse de Paris to introduce a new market, called the Nouveau Marché, devoted to the new breed of stock. The Nouveau Marché enabled the Paris bourse to go into competition against high-tech leader NASDAQ and more recent rival, AIM, set up by the London Stock Exchange in 1995.

Competition among the European exchanges was slated to heat up, however, as the European Community headed toward the creation of the Euro currency. As countries battled to determine the site of the new currency's financial center, the stock exchanges also began to jockey for position to become the preeminent exchange of the new Europe. The creation of the Deutsche Börse, gathering a number of regional German exchanges under the main Frankfurt exchange, and then an agreement to partner with the Zurich exchange--fourth largest in Europe--sparked a wave of market mergers and partnerships in the late 1990s. Paris responded by reaching a partnership with the Swiss exchange.

While talk turned to the creation of a single European exchange--through the merger of the Amsterdam, Brussels, Frankfurt, London, Madrid, Milan, Paris, and Zurich exchanges, the battle to become the 'bourse of Europe' quickly came down to a race among the London, Paris, and Deutsche bourses. Yet the French exchange was quickly outpaced by its German and English rivals--in 1998, the London and Deutsche exchanges announced their intention to merge and form the giant IX exchange. The merged exchange was to be some three times larger than its Parisian relative. While the Paris exchange had been offered a place in the new exchange, it was only in a minority capacity--just 20 percent of the proposed new exchange, as opposed to the 40 percent to be held by each of the London and German exchanges. Insulted and angered, Jean-François Théodore announced an offer to the Amsterdam, Brussels, Milan, and Madrid exchanges to join the Bourse de Paris in their own merger. The following year, Société des Bourses Fran&ccedilses changed its name to ParisBourse S.A.

While Milan and Madrid declined the offer, negotiations began among the Paris, Amsterdam, and Brussels exchanges. By March 2000, the three exchanges announced their intention to merge into a new entity, Euronext. With the holding company Euronext N.V. located in the Netherlands, the new entity was to act as parent to three subsidiary exchanges, Euronext Amsterdam, Euronext Brussels, and Euronext Paris. The three exchanges were to share a common trading 'floor,' using the Paris exchanges perfected NCS trading system, while both clearing and settlement activities were streamlined into single bodies for all three exchanges.

The announcement of Euronext--which extended an invitation to the London exchange, as well as began talks over a partnership with the New York Stock Exchange--spurred the proposed IX partners to step up the pace of their own negotiations. By summer 2000, however, it became apparent that the London and German partners were not able to agree, and the IX exchange project collapsed.

The Euronext merger went ahead as scheduled, and the new multicountry exchange, the first in the world, came into being in September 2000. Rivaling the London exchange in terms of market capitalization, worth some $2.3 trillion, Euronext became the most important exchange in the so-called 'Eurozone' (the United Kingdom had not yet agreed to convert to the new currency), giving it the potential clout to attract more and more of the continent's largest corporations. The new exchange also announced its plans to extend its trading hours to 20:00 hours GMT in the year 2001, bringing the exchange in line with the NYSE operations. At the same time, Euronext N.V. acknowledged its plans to make its own public offering--on the Euronext exchange, of course.

As Euronext turned toward its first full year of trading, it continued to make overtures for new mergers and partners, particularly to the Milan and Madrid exchanges. The exchange had also entered into merger negotiations with the smaller Luxembourg exchange. At the same time, Euronext left open its invitation to the London Stock Exchange, which by then had come under a hostile takeover attack by the owners of the Swedish exchange. Meanwhile, Euronext pursued negotiations toward the creation of a larger exchange partnership--the so-called Global Equity Market, or GEM, to be formed by the New York, Euronext, Sydney, Hong Kong, Sao Paulo, Toronto, and Tokyo exchanges, which promised to enable 24-hour global trading. As the economy had gone global during the 1990s, the world's stock exchanges were expected to follow. Euronext, as first out of the gate, appeared likely to play a prominent role in the creation of the next century's investment landscape.

Principal Subsidiaries: Euronext Amsterdam N.V.; Euronext Brussels S.A.; Euronext Paris S.A.

Principal Competitors: New York Stock Exchange; London Stock Exchange; Deutsche Börse; Tokyo Stock Exchange.


Clary, Isabelle, 'Euronext Says Merger Offer with LSE Still on Table,' Reuters, May 18, 2000.
------, 'Euronext Seeks NYSE Ties That Would Rival IX-NASDAQ,' Reuters, May 16, 2000.
Grose, Thomas K., 'A European Super Market,' Time International, April 3, 2000, p. 43.
Zwick, Steve, 'The Emperor's New Pipes,' Time International, October 2, 2000, p. 58.
------, 'Euronext Plans Longer Trading Hours in 2001,' Reuters, May 31, 2000.
------, 'What About the Others?,' Economist, July 25, 1998.

Source: International Directory of Company Histories, Vol. 37. St. James Press, 2001.




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