© 2005 UMFK. 1-1 Petstore.com Chapter 4, Case 2 internet business models text and cases Steven Young COS498

© 2005 UMFK. 1-2 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).

© 2005 UMFK. 1-3 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,"

© 2005 UMFK. 1-4 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.

© 2005 UMFK. 1-5 Goal  To become the dominant provider of pet products and services over the internet.

© 2005 UMFK. 1-6 Strategy The 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 s –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

© 2005 UMFK. 1-7 The Facts Value Proposition Value proposition  To provide efficient one-stop shopping for all of your pet care needs while providing highest quality customer service.

© 2005 UMFK. 1-8 The Facts Competitors Competitors Grocery stores (supply approximately half of the pet food market)  Pets.com, Petsmart.com, and Petopia.com All three others entered strategic partnership in 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).

© 2005 UMFK. 1-9 The Facts Economics / Revenues Industry Economics Pet food market 12.1 Billion in 1999  52% dog food  40% cat food  Premium foods 30% of market Pet supplies market = 4.5 Billion in 1999 Pet-related gifts / novelties = 2.5 Billion in 1999 Online market for pet food and supplies = 3-6 Billion Petstore run-rate of $3M for year, w/gross margin of 52%

© 2005 UMFK 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

© 2005 UMFK GBF Analysis - Winner takes all? Network Effects None Economies of Scale Yes, and high profit margins Customer Retention Rates Low

© 2005 UMFK 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%... and  dogfood is heavy and bulky (therefore hard to ship efficiently)

© 2005 UMFK GBF Analysis  $40 Million in advertising / 100,000 unique Petstore.com customers = $400 unique customer acquisition cost

© 2005 UMFK 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.

© 2005 UMFK 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.com So… The only players left were the #1 and #2 brick and mortar businesses!