A Smarter Pets.com?

Now that PETsMART.com owns its defunct rival's URL and is no longer dragged down by discount pricing, it's out to turn a profit

When Pets.com burst on to the scene in mid-1999, it seemed to have a winning formula: a $30 billion-a-year market, a cute sock-puppet ad campaign, and most important, a killer Web address guaranteed to attract animal lovers. Fast-forward a year and a half. After burning through millions in marketing costs and flaming out on Wall Street, Pets.com died. And during the liquidation of the beleaguered dot-com's assets, rival PETsMART.com snagged the URL www.pets.com for such a small amount of money that Pets.com announced the sale "may not generate meaningful cash" for its shareholders. Now, when you type in either URL, you'll end up at PETsMART.com's Web site.

Getting the pets.com address virtually free of charge made for a sweet ending to a very tough year for PETsMART.com. Formed as a separate company in 1999 by Phoenix-based PETsMART and the Pasadena (Calif.) incubator idealab!, PETsMART.com hoped that by leveraging marketing and distribution resources offered by the offline pet-retailing giant, it would get a leg up on the competition (see "PETsMART Tries for a New Leash on Life").


  But to compete with Pets.com, PETsMART.com was forced to match ridiculously low prices and shipping promotions that made profitability an impossible goal. To make matters worse, PETsMART.com's plans to raise as much as $115 million in a public stock offering had to be pulled in November, when it became evident that investors would no longer tolerate unprofitable e-tailers. "Wall Street painted a dirty picture of companies that sold their goods at a loss and gave away shipping," says Tom McGovern, CEO of PETsMART.com.

PETsMART came to the rescue, pledging a $30 million investment in the site that will carry it through 2001. With its ownership in the dot-com jumping from 48.2% to 81%, PETsMART has embarked on an aggressive plan to turn the dot-com profitable by yearend. It created a direct-marketing subsidiary and rolled the Web site into it, along with PETsMART's catalog, R.C. Steele. For the first time, the company will coordinate its marketing campaigns across all three channels.

The potential synergies, especially with the Web site, are significant. The stores will take back items bought online, for example. Customers will be able to print store coupons from the Web site. And the site provides PETsMART with the opportunity to sell items it couldn't carry before. "PETsMART is good at selling 10-gallon tanks and goldfish bowls," says CEO Philip Francis. "But when you try to display 30 gallon tanks, they don't sell fast, so they get dirty, and ultimately a five-year-old with a cart gets the better of them. On the Net, we'll be able to sell every size of tank and every stand in every color of wood."


  Lately PETsMART has found that its Web site is good for more than just boosting sales. It can provide essential data about pet lovers, as well. In November, after Oprah Winfrey featured a dog toy called the Wiggly Giggly Ball on her show, PETsMART tracked the number of searches for the product on its Web site and used it to forecast demand. Within three days, 60,000 Wiggly Gigglies were shipped to PETsMART stores -- plenty to satisfy dog enthusiasts. "The site became an early-warning system," Francis says.

Now it's up to PETsMART to turn the site into a money maker. With Pets.com and other pure dot-com plays knocked out of the competitive ring, the pricing pressure that initially destroyed PETsMART.com's profit potential is gone. Items sold online are now priced the same as those in the stores. Customers who want the UPS man to deliver those 20-pound bags of Hill's Science Diet have to pay the full shipping price.

And with the dot-com now piggybacking on PETsMART's ad campaign, the cost of marketing the Web site has plummeted, from $20 million in the fourth quarter of 1999 to just $2 million in the most recent quarter. "Our world has changed dramatically," McGovern says. He still laughs when he remembers sitting in his office in the summer of 1999 and watching a plane fly by towing a banner. "It said, 'Dog Food 50% Off At Pets.com,'" he recalls. "That could have been the picture of the early online pet category." He's hoping that this year the URL www.pets.com will bring up a quite different picture: an e-tailer, buoyed by the strength of its offline partner, that's actually profitable.

By Arlene Weintraub in Phoenix

Edited by Thane Peterson

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