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Petstore.comChapter 4, Case 2

internet business models

text and cases

Steven Young COS498

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Overview of Petstore.com Introduction

Introduction Petstore.com offered pet food and supplies online. The pet supply business is huge, bigger than

books, toys, music, and videos (but not as shipping friendly).

The U.S. market for pet food, supplies, and gifts was over 19 Billion in 1999

Gross product margin 37 – 43% (gift, novelty, and fish as high as 70%)

In 1999, Petstore.com were in fierce competition with three other major players in the pet supply business for partners, customers, and credibility for potential investors (Pets.com, Petsmart.com, and Petopia.com).

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Overview of Petstore.com Mission and Vision

“All things Animal“ Shopping Community Directory and resources Educational and entertaining content

Establish a leadership position through innovation which caters to the “emotional bond that exists between people and their pets,"

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Overview of Petstore.com History

History Petstore.com is based in Emeryville, CA, and was created in

October 1998 by a seasoned founding team with more than 50 years of combined experience in technology, Internet businesses and the pet industry.

Petstore.com launched in May of 1999 The first major online retailer offering full line pet food and

supplies Invested 40 Million in customer acquisition advertising in

1999 Partnered with the Discovery Channel’s Animal Planet in 1999

Partnership with Discovery Channel was: • Positive in that Animal Planet is a well established brand name

(with 10 Billion in net equity value)• Problematic in that the merger will reduce flexibility, and there is

a possibility of the Petstore.com customer getting “lost” in the Discover site.

Petstore.com has been named by USA Today as a "Hot Site of the Day" and received top marks from Gomez.com.

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Goal

GoalTo become the dominant provider of pet

products and services over the internet.

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StrategyThe company adopted the following strategic objectives: Offer complete pet care solutions to customer needs Provide a superior customer experinence Built strong brand identity by:

– establishing exclusive or semi-exclusive relationships with portals such as Yahoo and Lycos, as well as targeted websites (Women.com)

– Communication with potential customers through opt-in emails– Off-line advertising in top 20 internet-pentrated markets– Ongoing public relations campaigns– Capitalize on association with American Animal Hospital

Association (AAHA) an umbrella organization of over 6,000 veterinary clinics.

Strengthen and expand strategic partnerships (Discovery channel)

Build a sustainable business model Maintain technical leadership

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The FactsValue Proposition

Value propositionTo provide efficient one-stop

shopping for all of your pet care needs while providing highest quality customer service.

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The FactsCompetitors

CompetitorsGrocery stores (supply approximately half of the pet food market)Pets.com, Petsmart.com, and Petopia.com

All three others entered strategic partnership in 1999.• Pets.com getting $55M in equity from Hummer,

Winblad, and Amazon.com (who funded 50% of this.• Petsmart (the leading brick and mortar pet supply

company w/7% share) merged its online business with petjungle.com, andPetopia received a major equity investment from Petco (the #2 brick and mortar chain w/3% share).

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The FactsEconomics / Revenues

Industry EconomicsPet food market 12.1 Billion in 1999

52% dog food40% cat foodPremium foods 30% of market

Pet supplies market = 4.5 Billion in 1999Pet-related gifts / novelties = 2.5 Billion in

1999Online market for pet food and supplies = 3-

6 BillionPetstore run-rate of $3M for year, w/gross

margin of 52%

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Primary Stakeholders

Discover Channel (Animal Planet)

Joshua Newman, President and CEO• Harvard MBA, former CEO and Marketing Director, Amerigon

Chris Luhnow, Senior VP, Corporate Development• Wharton MBA, former President and CEO of Flightways

Manufacturing

Brian Sherman, VP Merchandizing• Stanford MBA, founder of Sammy’s Pet World (largest pet

store chain in San Francisco)

Mark Reilly, VP Inventory Management• Stanford MBA, former VP of Inventory Control and

Merchandising Planning at Petco

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GBF Analysis - Winner takes all?

Network Effects• None

Economies of Scale• Yes, and high profit margins

Customer Retention Rates• Low

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GBF Analysis

This is a hard business to capture market share, especially because… pet foods are the biggest ticket, of

which…dogfood comprised over 50%... anddogfood is heavy and bulky (therefore

hard to ship efficiently)

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GBF Analysis

$40 Million in advertising / 100,000 unique Petstore.com customers = $400 unique customer acquisition cost

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Success or Failure?

The goals and strategy failed as Petstore.com was bought out by Pets.com in June of 2000

Pets.com gave Petstore stockholders 6.61 million shares of stock, worth $13.6 million at $2.06/share.

Pets.com received: • $3 million cash infusion from Petstore investors,

largely Discovery Communications Inc. • Petstore's list of 100,000 customers (not

duplicated in Pets.com), • Petstore's live-fish business, called Flying Fish,

and• key marketing partnerships.

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Update

Pets.com went out of business in November of 2000

Petsmart.com (going strong)• $3.36 billion total sales for 2004 • Two year comps of 13.3%• Services sales up nearly 24-1/2 %• Opened 83 net new stores

Petopia.com now operating under Petco.comSo…

The only players left were the #1 and #2 brick and mortar businesses!