Year 2000 Promises an IPO Dog-and-Pony Show

Four sites that cater to pet owners prepare to go public -- and struggle to stand out in the crowd.
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You've probably seen them. In one 30-second spot, a dog sock puppet protests the use of socks as Christmas stockings ("the horror!" he wails); in another, the puppet frolics at a dog park.

Created by online pet retailer

Pets.com

, these TV commercials are the talk of holiday parties and corporate water coolers. But in a competitive and fragmented space, Pets.com and its competitors will need more than cute ads to get a leg up in the online pet store dogfight.

Big Business

In the last six to eight months, a handful of pet sites have sprung up, hoping to capitalize on Americans' obsession with their pets. The front-runners, though they haven't made any announcements, are expected to go public next year. Along with Pets.com, the leaders are

Petstore.com

,

Petopia.com

and

PetsMart.com

, which is majority owned by bricks-and-mortar chain

PetsMart

(PETM)

.

Knowing that only one Goliath (and maybe a David or two) of the online pet store world is likely to survive, the competitors are pushing furiously to capitalize on a growing market, exploit ties to bricks-and-mortar stores and build a strong community among pet owners.

Already in registration, Pets.com's IPO early next year will likely set the tone for pet-related sites. "I suspect Pets.com will start the rush to the courthouse steps," says Marshall Meyers, executive vice president of the

Pet Industry Joint Advisory Council

. "We're going to see a little bit of a scramble."

Youth Will Be Served

Pets.com is a typical dot-com: young (it was formed in February), swimming in red ink (it reported a loss of $19.4 million on net sales of $600,000 since its inception through Sept. 30) and featuring a staff of impressive executives (including top dogs from

Procter & Gamble

(PG) - Get Report

and

Petco

(PETC)

). The deal is estimated at $100 million and is backed by heavyweights

Merrill Lynch

,

Bear Stearns

,

Thomas Weisel Partners

and

Warburg Dillon Read

.

The market for pet sites is ripe. Some 61% of U.S. households own a pet, according to the

American Pet Products Manufacturers Association

, compared to 56% in 1988. And those households are spending billions on their pets: According to APPMA, $23 billion a year is spent on pets domestically, a number that is expected to increase to $28.5 billion by 2001.

The competition is already fierce.

Media Metrix

, the New York tracker of Internet traffic, doesn't rank pet sites, but does track the individual sites' unique visitors. For November, Pets.com had 962,000 unique visitors, Petopia.com had 1.4 million and PetsMart.com had 1.6 million. Petstore.com lagged behind with 823,000 unique visitors.

Despite slightly lower numbers, Pets.com has a behemoth behind it.

Amazon.com

(AMZN) - Get Report

has invested $57.8 million in Pets.com, in exchange for consulting, advertising and marketing services. Pets.com also has a deal with the

American Veterinary Medical Foundation

.

Standing on Two Legs

But its competitors are on the same track. PetsMart.com, an

idealab!

company based in Pasadena, Calif., has the support of PetsMart, a 500-store chain. Petopia.com, based in San Francisco, has inked a deal with bricks-and-mortar chain Petco, and Petstore.com, based in Emeryville, Calif., has an agreement with

Discovery Channel

.

The sites must also have more than just e-commerce, and will need to capitalize on the community and the humane aspects of pet ownership. Petopia.com, for instance, has teamed up with the

American Society for the Prevention of Cruelty to Animals

, Petstore.com has an agreement with the

American Animal Hospital Association

, and PetsMart.com recently acquired

AcmePet.com

, a large online community for pets.

"It's a space that works well because of all the information they can provide," says George Vrabeck, managing director of

Windjammer Partners

, which has been retained by Petstore.com to do acquisitions in Europe. "It really lends itself to the community-formation process."

The Bottom Line

And ultimately, it'll come back to plain old business. Companies with higher margins will be able to increase revenue faster. Petstore.com, for example, acquired

Flying Fish Express

, enabling it to deliver live fish to consumers, which has higher margins than pet food. It's also planning to expand through Europe.

So how will the dogfight end? It's likely that there will be a rush to get out to the public markets, followed by consolidation. And while there won't be more than a few winners in the space, some analysts wonder if there will be any. "Pets.com's revenue is so low," says Mike May, digital commerce analyst for

Jupiter Communications

. "Someone's really going to need to differentiate."

Tell that to the sock puppet.