*PETsMART Steps Up Online Commitment as Internet-Only Players Fail

PETsMART Inc. added to the ferment in the online pet supplies market with the decision last week to acquire majority control of PETsMART.com, a joint venture with outside investors and Internet incubator idealab.

PETsMART, the nation's No. 1 offline retailer of pet supplies, will pay $20 million in cash and will throw in its $10 million catalog business to form a new direct marketing subsidiary. The deal closes this month and will raise the Phoenix retailer's interest in PETsMART.com to 81 percent, from 48.2 percent.

“We had an investment in PETsMART.com,” said Neil T. Watanabe, executive vice president and chief financial officer at PETsMART. “It was not part of our consolidated operations. [Now] it will be part of our financial consolidated results.”

The PETsMART development came only a week after Pets.com, the online category leader in pet supplies, folded when extensive efforts to raise cash or find a buyer yielded no results.

The demise of Pets.com makes PETsMART.com the No. 1 online retailer of pet supplies, mirroring PETsMART's offline stature.

“We believe that PETsMART.com is near profitability,” Watanabe said. “We have a clear path to profit.”

PETsMART.com, including the pet catalog business, “is expected to achieve a run rate in excess of $50 million in sales this year,” a company statement said. The retailer added that it does not “anticipate the need for additional future funding for PETsMART.com.”

Overall, PETsMART is projected to report fiscal 2000 year-end revenue of $2.23 billion — a touch above 1999 sales of $2.2 billion — and net income, before PETsMART.com losses, of $26 million to $28 million.

Third-quarter revenue for PETsMART is estimated at $540 million, though performance was affected by lower same-store sales in a difficult environment and higher inventory shrinkage.

Online, the issues are different for pet supplies retailers. Pets.com, a category leader and also the first publicly traded dot-com to fail, spoke for its equally troubled Internet-only retail peers.

“We sought to raise capital and we failed to do so, and we looked at some other strategic opportunities [and] we didn't see any,” John Cummings, director of investor relations at Pets.com, San Francisco, said earlier this month.

The shakeout in the Internet market for pet supplies became a reality in July when Pets.com announced a takeover of rival Petstore.com's assets and strategic partners. At the same time, Pets.com was looking to raise extra working capital or sell the company.

Though sales were growing, Pets.com was furious at work to trim costs. The customer service call center was relocated to the cheaper Greenwood, IA, area. It attempted to improve product margins and cut shipping and fulfillment costs — scourges of the online pet retail category. Even sales and marketing expenses were cut.

“It's not that they had a bad business. It's just that they did not get enough cash,” PETsMART's Watanabe said. “They just couldn't get enough money or enough time to bring in enough volumes and leverage that.”

PETsMART.com, by contrast, has an edge over its competition, Watanabe said. It can take advantage of the bricks-and-mortar chain's distribution and economies of scale in purchasing. Plus, it benefits from promotions across channels as well as the ability to allow returns at physical store locations.

It also helps that PETsMART.com was in no haste to become market leader online.

“We went earlier this year for profit versus revenue [online], and that has paid off,” Watanabe said. “You can go for revenue at cost, but you don't make money.”

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