cnbcs096

Pets.com IPO Makes Modest Debut


by Hal Plotkin
Silicon Valley Correspondent

Pets.com Inc. {IPET} has made a modest debut, though analysts are positive on the company’s prospects, saying it has a good chance of holding on to its ranking as one of three leading online retailers focused on a potentially lucrative market niche.

“I think they have a great idea,” says Robert Labatt, principal analyst at Dataquest, based in San Jose, Calif.. “It’s all about one-stop shopping and convenience.”

Shares of the stock opened Friday at 13 1/2, after pricing its 7.5 million share offering at 11 late Thursday. The company’s stated range had been 9 to 11.

Ranked by the total number of visitors, San Francisco-based Pets.com was the Internet’s third-most-popular pet-oriented retail Web site during December, according to both Media Metrix, based in New York, and PC Data Online, based in Reston, Va.

The other companies jockeying for position on the list of the four most-popular such sites include Petopia.com Inc., based in San Francisco; Pasadena, Calif.-based PETsMART.com Inc.; and Emeryville, Calif.-based Petstore.com Inc. All told, there are more than a dozen Web sites catering to pets and related e-commerce.

PETsMART.com, which is also set to go public later this month, was the most-popular pet-oriented Web site during December, in terms of the total number of visitors.

Rival Pets.com, however, appears to be doing a better job at what analysts say is a much more critical task: turning visitors into buyers.

More than 15 percent of those visiting Pets.com’s site become buyers, as compared with about a 7 percent or 8 percent conversion rate for its competitors, according to PC Data Online.

“It means they’re doing a better job of helping people find what they want and helping them get it over with,” says Howard Dyckovsky, vice president for operations at PC Data Online. “Twice the conversion rate of their competitors is important. It definitely puts them in the range to be successful.”

U.S. consumers spend about $23 billion a year on pet-related products, including services such as boarding, according to the Pet Industry Joint Advisory Council, based in Washington.

Just how much of that market can be captured by online retailers, however, remains an open question.

Andrew Bartels, an analyst at Giga Information Group, based in New York, says the number will probably come in somewhere between 3 percent to 5 percent.

“This isn’t going to be like selling books or music online, which could take 30 percent to 40 percent market share,” Bartels says. “But it’s not bad either. It’s going to find a niche. If you can save someone a half-hour trip to a pet superstore by letting them buy stuff online, it’s a good deal.”

Like many other analysts, Bartels says firms such as Pets.com and PETsMART.com may find their best opportunities making repeat sales of consumables, such as pet food, special veterinary treats and similar items. Repeat sales can be like an annuity for retailers, adding revenue to the bottom line without imposing the costs usually associated with attracting new customers.

“Once you find out what you’re looking for, you probably won’t have any worries about ordering it online and having it delivered,” Labatt says. “It’s not like they’re going to be dropping off a Palm Pilot at your doorstep. Who’s going to steal a bag of dog food?”

Labatt says online retailers selling pet-related items may also enjoy another key advantage over human-focused online retailers in an area that is fast becoming online retailing’s holy grail: personalization.

“There’s been some resistance from people about giving out personal information online, particularly for their kids,” Labatt says. “But I don’t think that applies to pets.”

That could mean increased opportunities for online pet-oriented firms to cross-sell or up-sell customers based on individual pet-ownership profiles.

“It also means non-stop advice,” Johnson says. “There’s a real personalization angle. They’re not going to be worried some stalker is going to come after their pooch.”

Analysts say Pets.com’s name is another big asset in the dogfight between online retailers.

“It’s helpful to have a name that is intuitive,” says Jim Williamson, an analyst at International Data Corp., based in Framingham, Mass.

Several studies have shown, for example, that a majority of Internet users prefer to type Web names of desired destinations directly into their browser’s URL location bar rather than enter the same information in a search engine.

“That’s how a large number of people get anywhere on the Web,” Bartels says. “The name clearly helps. It means they’ll have a bit less in the way of brand marketing they’ll need to do.”

Pets.com recently made a big bet on brand-building that appears to have paid off, buying time for its puppet mascot to make a pitch during the recent Super Bowl broadcast. Traffic to the firm’s Web site spiked immediately after the game, increasing more than 200 percent from its previous level, according to PC Data Online.

“It really looks like it worked for them,” Dyckovsky says.

Most analysts caution, however, that there is probably room for no more than three or possibly four top players in the online pet-supplies market. The current top three are, they say, the most likely to emerge as the eventual winners.

Some, however, are not convinced there will be all that much to win.

David Schehr, an analyst at the Gartner Group, based in Raleigh Durham, N.C., says he has some problems with the whole concept.

“It’s possible there can be a price advantage, and it might be attractive if they build a good consumer experience online,” he says. “But shipping 50 pounds of dog food over UPS may become problematic over time. And if Fido runs out of food, you’re not going to be wanting to wait for it.”

For those reasons and others, Scherhr says he thinks the online pet-supplies market will eventually be characterized by vicious price wars that over time will leave most of the competitors broke and howling at the moon.

“Why do I care who I buy my Science Diet [dog food] from?’ Scherhr asks. “Whoever does it fastest and cheapest is going to get my business. So, what is the point of differentiation or unique selling advantages?”

But Johnson disagrees, saying, “I think there is a real viable market.”

She says consumers tend to be very emotional about their pets and are highly motivated to seek out information, and related products, on pet-oriented Web sites.

“But I do agree there is only room for the top three [Petopia.com, Pets.com and PETsMART.com]. They are the clear winners in terms of brand recognition. I’m sure we’ll see a lot more consolidation over the next six months. The little fish are going to be eaten by the big fish.”

Pets.com, which was established in February 1999, posted a loss of $15.8 million on revenue of $568,000 for its first three months of operations, ended Sept. 30.

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