Pets.com was a pioneering Internet startup selling pet food. Amazon even owned a significant stake in the company. So why did it stop taking orders in November 9, 2000, become the butt of a Superbowl ad joke the next year, and you see chewy.com packages all over your neighborhood instead?
Chewy.com doesn’t want to hear about how it’s like Pets.com
Pets.com is so notorious, Chewy.com denies being in the same business. But it’s totally the same business model. The difference is Chewy.com learned from Pets.com’s mistakes, but they’re afraid to admit they’re in the same business because investors have long memories and they don’t necessarily all have the willingness to look into the details.
Where two of its fellow dotcom casualties, Etoys and Webvan, had logistical problems, Pets.com’s major problem was more fundamental. Being early to market and having a great domain name and backing from the biggest name in the industry gives you a head start, but you have to make money. The classic business book The Goal stresses that all the other cool stuff your business is doing needs to support that end goal of bringing in more money than you spend.
Getting started early
Pets.com was hardly a spur of the moment launch. The domain name was registered November 21, 1994. That’s super early in dotcom years. Netscape 1.0 wasn’t even out yet in November 1994. But they didn’t open for business until nearly four years later.
Its founders, Greg McLemore and Eva Woodsmall, sold the company to Hummer Winblad and Julie Wainwright in early 1999. Amazon.com got involved early, purchasing a majority 54% stake in the company during its first round of venture funding, which raised $10.5 million.
On February 10, 2000, Pets.com held its IPO, issuing 7.5 million shares at $11 each. The share price peaked at $14, traded on NASDAQ under the symbol IPET, and the IPO raised an additional $82.5 million. But it went from IPO to liquidation in just 268 days, taking $369 million in wealth along with it.
In terms of peak share price, Pets.com didn’t fly nearly as high as some of its peers. This suggests that maybe some investors saw problems ahead. But fear of missing out is a powerful emotion.
What went wrong for Pets.com
The problems were evident from the beginning. in Q4 1999, Pets.com lost $42.4 million on $5.2 million in sales, bringing its total loss since its launch to $61.8 million against just $5.8 million in sales. Meanwhile it spent $11.8 million on advertising, including $1.2 million on a 1999 Superbowl ad, and lost money on every sale. Amazon was still losing money in 1999, but its gross margins were 13 percent. Ebay‘s margin was a staggering 71 percent. Pet food generally only sells with a single-digit profit margin. Pets.com was selling at a loss and also offering free shipping. This made them very popular, with 570,000 customers, but their efforts to acquire customers and then shuffle them to buying higher margin items never materialized. The company expected it to take about 3 years to start breaking even, but its venture capital and IPO money ran out long before then.
Buy.com also sold at a loss, but its gimmick was selling advertising on its site to try to make up the difference. Pets.com never tried that revenue source.
Making matters worse, the NASDAQ peaked exactly one month later, on March 10, 2000, ushering in the dotcom bust. Its share price tumbled along with other troubled dotcoms, leaving no options for raising additional capital it needed to survive.
The end of the line
By January 18, 2001, Pets.com completed its liquidation and ceased to exist as a company. Ten days later, Etrade ran its famous Superbowl commercial making fun of defunct dotcom companies, including a direct reference to Pets.com.
Luring customers with a loss leader is a common tactic among retailers, and it’s something fellow February 2000 IPO Buy.com tried too. And it was probably necessary in 1999, because consumers weren’t used to buying online just yet. But when you make it too easy to buy just the loss-making products and don’t get customers to buy the profitable items, the math catches up with you and you run out of money. The demise of other dotcoms sometimes had multiple factors, but in the case of pets.com, it was that simple. Fundamentally, pets.com had a great premise, but it was selling value when it needed to be selling convenience.
David Farquhar is a computer security professional, entrepreneur, and author. He has written professionally about computers since 1991, so he was writing about retro computers when they were still new. He has been working in IT professionally since 1994 and has specialized in vulnerability management since 2013. He holds Security+ and CISSP certifications. Today he blogs five times a week, mostly about retro computers and retro gaming covering the time period from 1975 to 2000.