The Failure of Pets.

com
 
            Pets.com is one among many other online retailers that failed as a business-to-
consumer e-commerce entity.  Pets.com was a San Francisco-based e-tailer existing
only as a virtual firm that offered pet products, information, and resources to
consumers.  The site was launched in November, 1998 about the same time as several
other online firms offering pet products.  Petstore.com, Petopia.com, Petsmart.com,
and PetPlanet.com were a few of the major competitors in the online pet industry,
although Pets.com had a first-mover advantage being the first of these virtual pet
stores to enter the market.  In spite of the rising competition in the online pet market,
Pets.com appeared to be on a road to success in the beginning of 1999.  Sadly, the
success never brought profits for the online firm and Pets.com decided to close its
doors in November, 2000 just two years after its launch.
Pets.com offered consumers a broad product selection, large-scale inventory,
competitive prices, and expert advice from a staff of pet-industry experts and
veterinarians.  It also offered an efficiently designed website that attracted many
customers.  One problem with Pets.com’s business model was that it was not unique
and did not offer consumers anything different from the other online pet supplies
retailers.  Each of the pet e-tailers could easily be confused with its
competition.  Pets.com claimed that it planned to use the money it received from
investors in November, 1999 to increase marketing and expand its distribution
facilities.  Pets.com hoped to become the “one-stop shop for pet supplies, offering a
wider range of products than any of its competitors, including products carrying its
own product label” (Wolverton, 1999).  Although Pets.com along with three of its
main online competitors received large sums of venture capital funding to keep it
going, the challenge for Pets.com was to differentiate itself from
competitors.  Another problem that Pets.com faced was that it entered a market of
selling low-margin food and supplies that are extremely costly to ship to
consumers.  Many consumers just preferred to shop at local discount stores such as
the grocery stores where they would be shopping for food anyway.  Pets.com as well
as the other online pet supplies firms failed to offer customers a better alternative to
what they already had.  Shopping online for these kinds of products was not any more
convenient for them than shopping at an actual retail store. 
Pets.com had the advantage of owning the most valuable domain name in the
online pet market, but its competitors had other advantages.  For example,
Petsmart.com had brand recognition on which to build its site.  Pets.com received a
burst of confidence when it became affiliated with Amazon.com and gained access to
Amazon’s powerful database of consumer buying habits.  With the extreme name
recognition and popularity of Amazon, Pets.com had a one-up over other e-tailers in
the pet market.  Unfortunately, this advantage was not used to its full potential and
Petsmart.com continued to lead Pets.com in online traffic and revenues.  Despite the
tough competition, Pets.com remained in the “dog-eat-dog” online pet market
(Wolverton, Nov. 11, 2000) and operated on negative gross margins for months.  This
meant that Pets.com was selling its products at a lower price than what it cost to
purchase the products from suppliers.  Although, Pets.com had lost $7.6 million on its
sales since inception, it chose to go public in February, 2000 when it began trading
on Nasdaq (Wolverton, Nov. 10, 2000).  When it went public, Amazon’s stake in the
e-tailer dropped from 46% to 30.1% (Wolverton, Nov. 11, 2000).
In June, 2000, Pets.com made the decision to purchase the assets of its rival
Petstore.com.  Pets.com acquired the customer database, domain name, trademarks,
live fish business, and several strategic supplier agreements from Petstore.com (Olsen,
June, 2000).  This acquisition did not come as a surprise in the online pet market
because consolidation had been expected for a while.  Although Pets.com’s shares
were near an all-time low, executive of Pets.com were confident in their decision at
the time.  “By acquiring these key assets and strategic relationships, we expect to reap
the benefits of consolidation and thus strengthen our position as the online pet
category leader,” remarked one chief executive of Pets.com (Olsen, June, 2000).
Pets.com struggled with the fact that they were not making any profit and In
September of 2000, the decision was made to move part of its operations from San
Francisco to a more affordable location in the Midwest to help decrease operating
costs.  The new location had a lower cost of living and therefore, Pets.com could cut
salaries to lower expenses.  Another way that Pets.com was recovering from its huge
advertising expenses was by selling its sock puppet mascot in retail stores.  Over
35,000 puppets were sold in the first month that they were available (Olsen, July,
2000), which was a pleasant unexpected surprise in the new bricks-n-mortar
segment.  Pets.com began to show increasing sales revenue, but high marketing costs
had driven the stock below its initial trading price
Pets.com had made some major decisions in 2000; it went public in February,
acquired Petstore.com in June, entered the bricks-n-mortar segment by selling its
puppet mascot in June, and moved part of its operations to a new location across
the US in September.  Unfortunately, this is the same year that the e-tailer closed its
doors in November.  Pets.com had become the leading online pet store, but after
months of trying everything possible to cut costs, recover dwindling stock prices, and
attempt to gain some profits, the online retailer saw no better alternative than to shut
down business.
The reasons for the closing of Pets.com relate back to an unsustainable business
model and unachievable expectations.  Basically, Pets.com “bet everything on the
market” (Fischer, 2000).  It acquired large amounts of funding from venture capitalists
without demonstrating any background of achievements or success which most likely
raised the confidence level of executives far beyond what it should have
been.  Without any experience, the firm went public only a few months after its initial
launch.  Pets.com assumed that the market and its revenues would grow quickly
enough to allow for a profit before funding money was exhausted.  Too strong of a
focus on market share instead of on gaining profits led to the downfall of
Pets.com.  Also, another contributing factor is that this e-tailer may have
overestimated the number of online customers it could gain in the pet market. 
Just like numerous other pure-play businesses, Pets.com went public too soon
and spent money too quickly.  One of its major mistakes was the excessive spending
on marketing and advertising.  Since funding was continuously available during the
beginning months of Pets.com, they did not think twice about spending everything in
hopes of increasing consumer awareness of the business which would hopefully lead
to increased sales.  The goal was to outspend competitors and then adjust prices when
the competition decreased.  During its lifetime Pets.com spent more than $70 million
on marketing and an average of $400 to acquire each new customer (Bucholtz,
2000).  Pets.com advertised more heavily than any other online pet e-
tailer.  Unfortunately, this excessive advertising did not only benefit Pets.com as
hoped for, rather it helped the entire online pet industry to increase sales.  Marketing
expenditures did not establish Pets.com as a market leader, but instead just brought
higher revenues to all pet e-tailers.
Pets.com also failed to position itself in an effective manner.  It needed to
provide customers with a good reason for its existence and to satisfy a need.  With a
few exceptions, Pets.com just offered products that could be more easily obtained at
nearby retail stores and pet information about health, grooming, behavior, etc. that did
not justify a virtual shopping trip.  Pets.com failed to compete with a unique
positioning strategy but instead decided to compete with low prices just like its
competitors.  This mistake led to the selling of merchandise at prices below cost for
the duration of its operations.
 The online pet market was a crowded one in the time period when Pets.com
was alive.  With so many competitors offering the same products and services to a
finite number of consumers, it was no shock that many of these e-
tailers failed.  Pets.com never became the sustainable business that it could have been
with a meaningful customer base and long-term profitability.  It did have a very
valuable domain name, a strong e-commerce affiliate, a very popular mascot, and
other clever marketing ideas and strategies, but none proved to be truly successful in
the end. 
Pets.com along with others in the online pet market chose to enter a market that
was not exactly very attractive for e-commerce.  They just offered products that were
already readily available to consumers.  Pet supplies just weren’t meant for e-tailing
as much as other products because this industry didn’t really serve a real need.  It may
be convenient for some people to have pet food and supplies delivered directly to their
homes, but is it really convenient when they have to wait days to receive orders and
pay shipping costs too?  Another factor was that there was just no way that online pet
stores could offer an experience like physical pet stores were able to offer.
This online retail failure story supports the claims made in the article, “No Sale:
Plenty of Companies Still Don’t Let Consumers Buy Products Online; Why?”  The
costs of doing business online are greater than the benefits for some firms.  Pets.com
demonstrated that their benefits of e-tailing did not outweigh their costs because they
operated for two years with negative profit margins.  They had to sell products below
cost in order to compete, and they failed to recover from their losses.  A large portion
of the market for online pet retailers is not presently online.  The article makes the
argument that there is no point to go online if a business’s customers don’t do much
shopping there.  This is a factor that affected Pets.com because they were unable to
attract enough online customers to reach their goals.  Shipping costs for online sales
are also mentioned as a reason for some businesses to avoid the online
market.  Pets.com clearly understood that they would be offering low-margin products
to consumers for high shipping costs but they decided to launch their business
anyway.  Some businesses can be successful even with high shipping costs, but
Pets.com did not have a chance to prove this.  There are many reasons why some
firms may not want to enter the online selling market, and the experience of Pets.com
is just one example of many