Petstore.com Bites The Dust

SAN FRANCISCO (06/14/2000) - Online retailer Petstore.com expired unceremoniously today, laying off most of its remaining employees and selling off some of its assets to struggling rival Pets.com. The move comes two weeks after the Emeryville, Calif.-based company fired a large portion of its workforce, which stood at about 200 earlier this year.

Pets.com, based in San Francisco, will acquire some of Petstore's assets, including its customer database and the company's partnerships with Safeway and Discovery Communications, Petstore's lead investor. Pets.com also will acquire Petstore's live-fish business, Flying Fish Express, as well as its URL and trademark.

Under the deal's terms, Pets.com would receive a $3 million cash investment, mostly from Discovery. It would issue about 5.8 million shares of common stock and 850,000 shares of preferred stock, valuing the deal at $13 million - a pittance for a company that had raised $150 million since its founding.

Petstore executives did not return calls.

The end of Petstore signals the acceleration of a long-expected consolidation in the overcrowded online pet-supply sector. "This further solidifies our position," says Julie Wainwright, president and CEO of Pets.com. "It gives us some very interesting relationships with which we can cost-efficiently acquire customers." In addition to Amazon.com-backed Pets.com, the remaining pet-supply retailers vying for survival include Petsmart.com and Petopia.com, which are backed by brick-and-mortar chains Petsmart and Petco, respectively.

Most analysts agree that pet-supply retailing is a tough business, as most products are commodities and profit margins are thin.

Combined, these pet-supply companies have raised hundreds of millions of dollars. Although Pets.com has managed to go public, its shares have fallen from a February IPO price of $11 to a Monday close of $2.13, and shares slid to $2 in late trading today. Petopia and Petsmart both have filed for IPOs that are unlikely to happen under current market conditions. The companies now face the difficult task of raising additional capital.

Wainwright said Pets.com would benefit from Petstore's customer base, the size of which she did not disclose. Wainwright also said Pets.com would be marketed in Safeway stores and to Safeway card-carrying customers, while Pets would resell Safeway-brand pet products on its site. But rivals question the value of Petstore's assets. "You have to look under the hood," says Tom McGovern, president and CEO of Petsmart.com. "What's the value of a combination of Internet companies?" McGovern pointed out that Pets.com already has a live fish business and a Web site filled with good content. What's more, he said, Petstore's long-term relationship with Discovery was pared down to a one-year exclusive agreement for placement on Discovery.com.

But Wainwright said Pets.com also inherited a four-year offline-marketing agreement with Discovery and could renew its Discovery.com agreement on a yearly basis. Officials at Petopia said the acquisition didn't solve Pets.com's key issue: getting the buying power and distribution clout of a traditional pet-supply chain in order to push its profit margins into the black. "I think pure-plays in this category don't work," says Andrea Reisman, cofounder and CEO of Petopia.

"The acquisition does not solve fundamental problems. There are a lot of other things being hyped, but in the end it comes to, can you make the business-model work?" Wainwright said Pets.com will have positive gross margins later this year when its second-distribution center becomes fully operational, which is expected to reduce Pets' high shipping costs dramatically. "We are still on track to do that," she says.

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