Pets.com
From Invertopedia, the encyclopedia of how things fail
Pets.com sold pet food and supplies online and became famous for its sock-puppet mascot[6]. It raised $82.5 million in a February 2000 IPO[1] while selling goods for less than they cost it to buy and ship[1][2]. On November 7, 2000, about nine months after the IPO, it announced an orderly wind-down and laid off about 255 of its 320 employees[3][4].
Contents
The bet
Pet owners would rather have dog food and cat litter delivered than carry it home, and a loved brand would bring them in fast. The company spent heavily to build that brand: a Super Bowl ad, a float in the Macy's Thanksgiving Day Parade, and a sock puppet that gave interviews on Good Morning America[6]. Once the customers were in, the plan was to buy in volume, ship more cheaply and move people to its own higher-margin products[2].
What happened
| Aug 1999 | The sock puppet, created by the ad agency TBWA/Chiat/Day, first appears.[3] |
|---|---|
| Q4 1999 | Pets.com sells $5.2 million of goods that cost it $11.6 million, and spends $30.7 million on marketing and sales.[2] |
| Jan 2000 | A 30-second Super Bowl spot, the month before the IPO. It costs almost half of what the whole company will be worth by the shutdown.[4] |
| Feb 2000 | The IPO prices: 7.5 million shares at $11, raising $82.5 million. Since starting in February 1999 the company has lost $61.8 million on $5.8 million in sales.[1] |
| Q1 2000 | Sales of $7.65 million against a cost of goods of $12.5 million, a gross margin of negative 64%.[2][6] |
| Jun 2000 | The stock, which peaked at $14, trades at about $2.50.[6] |
| Nov 7, 2000 | After failing to raise money or find a buyer, Pets.com announces an orderly wind-down and lays off about 255 of 320 staff. The stock falls to 19 cents.[3][4] |
| Nov 9, 2000 | The planned last day for orders: the site says it will take them until 11 a.m. Pacific.[4] |
| Dec 2000 | PetSmart.com buys the Pets.com web address.[7] |
| Jan 16, 2001 | A stockholders' meeting is set to approve the liquidation and rename what is left IPET Holdings.[8] |
The kill shot
It sold heavy, cheap goods below cost and paid to ship them. Every new order added to the loss, so growth made things worse.
Pets.com counted shipping and discounts in its cost of sales[2]. In the first quarter of 2000 it sold $7.65 million of goods that cost $12.5 million, and the company blamed shipping costs and discounting[2][6]. That was before advertising. Marketing and sales cost another $28.9 million that quarter[2].
The numbers did improve. A second warehouse in Indianapolis cut shipping costs, and the gross margin went from negative 64% in the first quarter to negative 20% in the second[2]. But it was still losing money on the goods alone, and when it went looking for more cash, nobody would invest or buy the company[3]. A Gomez analyst told CNET that since pet food is sold at almost any neighborhood grocery, few people had a reason to wait days for a delivery[4].
Red flags ignored
- Negative gross margin. Before any marketing, the goods cost more than the price customers paid.[1][2]
- Heavy, cheap products. Big bags of dog food are costly to ship, and pet supplies run on thin margins even in superstores.[6]
- Brand before business. The puppet was the most prominently featured item on the site when Slate looked in June 2000.[6]
- A crowded field. Five sites sold the same products with the same service and similar names, an analyst said, and they were hard to tell apart.[4]
The cost
Pets.com raised $82.5 million from the public[1] on top of private funding from Amazon, Hummer Winblad and others[1]. Investor David Einhorn later wrote that Pets.com "chewed through just over $200 million of investor capital" over its life[9]. At the shutdown, its share price valued the whole company at about $6.4 million[4], and the company estimated stockholders might get back up to about 25 cents a share over time[8].
About 255 of 320 employees lost their jobs at the shutdown announcement[3][4]. Amazon's stake, booked by the equity method, had already reached zero value on its books[4].
The inversion
If every sale loses money, more sales is the problem, not the fix. Get the cost of one delivered order below its price before you spend on the brand.
What survived
The puppet. Hakan Enterprises bought the rights in 2001 for $125,000 during the liquidation, and in 2002 it became the mascot for 1-800-Bar None, a car-loan company[5]. The idea came back too: when Chewy went public in 2019, its founder Ryan Cohen called comparisons to Pets.com "an absolute crazy comparison"[9].
References
- ^ “Pets.com raises $82.5 million in IPO”. CNET, February 11, 2000. 7.5 million shares at $11, the $82.5 million raised, Amazon and other stakes before and after, the $61.8 million lost on $5.8 million in sales since February 1999, negative gross margins.
- ^ “Pets.com Form 10-Q for the quarter ended June 30, 2000”. Pets.com filing with the SEC, quarter ended June 30, 2000. Quarterly sales, cost of goods and marketing spending for December 1999, March 2000 and June 2000; shipping and discounts in cost of sales; the Indianapolis warehouse; gross margin from negative 64% to negative 20%; volume discounts and the private-label line.
- ^ “Pets.com goes out of business”. CNNfn, November 7, 2000 (read via the Internet Archive). The wind-down, failed fundraising and sale, about 255 of 320 laid off, the 19-cent stock, Amazon's roughly 30% stake, the puppet's August 1999 debut and its agency.
- ^ “Pets.com latest high-profile dot-com disaster”. CNET, November 7, 2000. Orders until 11 a.m. PT Thursday, no bankruptcy filing, the $6.4 million market value and the Super Bowl spot, the analyst quotes, Amazon's stake at zero.
- ^ “Sock Puppet Finds a New Home”. AP via Los Angeles Times, June 24, 2002. Hakan bought the puppet's rights in 2001 for $125,000; its new job with 1-800-Bar None.
- ^ “The Puppet That Ate a Dot-Com”. Slate, June 6, 2000. The puppet, Super Bowl ad, Macy's parade and Good Morning America; puppets as the top item on the site; $7.6 million in sales against $12.5 million in costs, blamed on shipping and discounting; the $14 peak and $2.50 price; thin margins in pet supplies.
- ^ “Petsmart.com buys URL of former rival Pets.com”. Computerworld, December 1, 2000. PetSmart.com bought the Pets.com address.
- ^ “Pets.com to finalize liquidation plans”. Computerworld, January 2, 2001. The January 16, 2001 stockholders' meeting, the IPET Holdings name, the estimate of up to about $0.25 a share.
- ^ “Chewy founder: Don't compare us to Pets.com”. Yahoo Finance, August 8, 2019 (read via the Internet Archive). Einhorn's "just over $200 million" line and Ryan Cohen's response.