Amazon goes to court to fire Toysrus.com

Please leave $750m at the door

By Drew Cullen, 26th June 2004

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Amazon has filed suit in New Jersey, seeking to scrap its distribution deal with Toysrus.com and claiming $750m in damages from the online subsidiary of Toys R Us.

This is a counterblast against the giant toy retailer which filed suit in New Jersey last month, accusing Amazon of breaching its exclusive rights for toys, games and baby stuff sold on Amazon. Toysrus.com has paid Amazon $200m since 2000 for co-branded solus tenancy rights for toys and baby goods on the site. On the strength of its Amazon deal, Toysrus.com stopped selling goods through its own website. Its $50m-a- year tenancy agreement expires in 2010.

Amazon claims in its countersuit that Toysrus.com "failed to effectively choose the top toys and baby products and to keep products in stock," The Seattle Times reports. "During peak holiday buying weeks last year, Toysrus.com was out of stock on more than 20 per cent of its most popular products... Only by enabling more sellers to sell these products — and only by doing so quickly, before the next holiday selling season - can Amazon.com begin to make up for (Toysrus.com's) failures to provide adequate selection and to keep top-selling products in stock."

It was all so different in 2000, when Amazon boss Jeff Bezos heralded the Toys R Us agreement as the first of many big distribution deals. The alliance reflected the prevailing new economy orthodoxy of the day that mono sellers would rule the online retailing world (who remembers Pets.com?). Amazon showed the way with books, even if it had singularly failed to make a profit, and was thought to lead the way in other catalogue-heavy product categories, through first mover advantage, an obsession at the time of every excitable dotcom bubble VC.

So the gig suited both sides - Amazon was caught badly with piles of unsold toys the previous Christmas, because it made the wrong choices. Toys R Us had big problems mastering the mechanics of online distribution, and by tieing up with Amazon, it had the likely mono seller winner as a colleague, not a rival. As such it was happy to take on all the inventory risk, enabling Amazon to conserve its cash. ®