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.
Unlike Buy.com, Pets.com is a new company. It began selling products in February 1999. No surprise, the company is losing lots of money and this will likely continue for several years. For the fourth quarter of 1999,
the company lost a staggering $42.4 million on sales of $5.1 million. The accumulated deficit is $61.8
million.
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.