Pets.com: For the IPO Litter Box?
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Not long ago, it was an easy formula to pull off an etailing IPO. First, you need a cool domain name. Next, the market should be huge and fragmented. Finally, you need a strong management team.
But lately, investors are getting skeptical. In fact, the etailing sector has been ailing. True, the Buy.com (BUYC) IPO doubled on its first day. Then again, the price range was not raised and, the IPO had been delayed for several weeks.
This week there is an etailing IPO that fits the once tried-and-true formula: Pets.com. The lead underwriter is Merrill Lynch and the proposed ticker symbol is IPET. The price range is $9-$11.
Of course, the Pets.com site is the place to go for your pets' needs. Besides great content, you also get a broad selection of goods (there are about 12,000 items). Pets.com covers the needs for dogs and cats, but even exotic pets, such as ferrets.
True, Pets.com has Amazon.com (AMZN) as a major shareholder. With this comes access to the huge customer base of Amazon.com, consulting advice and support on operational and strategic matters. After the IPO Amazon.com will own about 30% of Pets.com.
What is troubling is the intense competition. OK, the online pet market is potentially huge. In 1997, about $23 billion was spent on pets in the US. Moreover, about 60 percent of US households own a pet and 40 percent own more than one pet. Pet owners, for the most part, are loyal.
But there will likely be a vicious dog flight among Pets.com, Petopia.com, PetsMart.com and PetStore.com. There is also potential competition from Wal-Mart, Kmart and Target Stores. The result could be pressure on profit margins.
With big losses and heavy competition, prevailing in the pet marketplace will be no easy feat. With investors expecting profitability from e-tailers, Pets.com does not look like a good bet.