The encyclopedia · Strategy & Leadership · Strategic decision · 2000
Toys 'R' Us outsourced its website to Amazon — and handed over its online future
After a botched 1999 holiday, Toys 'R' Us let Amazon run its e-commerce in a 10-year deal. When Amazon opened to rivals, Toys 'R' Us sued — too late.
Toys "R" Us · Amazon · 2000-08
What happened
Toys 'R' Us launched its website, Toysrus.com, in 1998, but the 1999 holiday season was a disaster: the site was overwhelmed and the company failed to deliver gifts on time, drawing a flood of complaints. Shaken, the toy giant decided it needed help online — fast.
In 2000, Toys 'R' Us signed a 10-year deal with Amazon: Amazon would build and run the toy retailer's e-commerce operation, and Toys 'R' Us would be the exclusive supplier of toys on Amazon's site. In effect, the world's biggest toy chain outsourced its online future to a company that was, even then, an ambitious and fast-growing rival.
The partnership soured. Amazon began letting third-party sellers offer toys on its marketplace, arguing that Toys 'R' Us wasn't stocking a wide enough range. Toys 'R' Us sued, claiming Amazon had broken the exclusivity deal; in 2006 a court agreed and let Toys 'R' Us out of the contract (it was later awarded $51 million in damages). But the damage was strategic: Toys 'R' Us had spent the crucial early years of e-commerce letting Amazon run its online business, and emerged with no strong online operation of its own. It filed for bankruptcy in 2017 and closed its US stores in 2018.
Why it happened
- After a botched 1999 holiday online, Toys 'R' Us panicked and outsourced its e-commerce to Amazon rather than building the capability itself.
- The 10-year exclusive deal handed Amazon both the toy business and the data on what toy shoppers wanted.
- When the deal broke down, Toys 'R' Us had no strong online operation of its own to fall back on.
- Amazon used what it learned about the toy market to compete directly, while Toys 'R' Us was also crippled by buyout debt.
The lesson
Be careful what you outsource, and to whom. Toys 'R' Us handed Amazon its online business, then watched Amazon use what it learned to dominate that market. Don't outsource your future to a rival.
Aftermath
Toys 'R' Us filed for bankruptcy in 2017 and closed its remaining US stores in 2018, a collapse driven by buyout debt, competition from Walmart and Amazon, and a weak online presence. The Amazon deal is taught as a cautionary tale about outsourcing a strategic capability to a company that may become your biggest competitor: the short-term fix (let Amazon run the website) traded away the long-term asset (your own direct online relationship with customers). The lesson: outsource the non-essential, but never the capability that will decide who wins your market.
Sources
- Toys "R" Us — Wikipedia (2000 Amazon e-commerce deal, 2006 lawsuit, $51M damages)
- Toys R Us vs Amazon deal dispute — Los Angeles Times (May 2004)
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