Why Did Pets.com Fail? (Setting the Record Straight)

How is it that the greatest pet e-commerce domain name of all time, has only ever been in use for two years?

The Pets.com failure was a result of fierce competition from imitators including Petstore.com, Petopia.com and PetPlanet.com leading to aggressive and unprofitable marketing strategies in an effort to grow top line revenue at all costs. By 2000, when the company needed another round of funding to keep operations running, the dot-com bubble popped and investors were nowhere to be found.

As is the case with most failed startups, a post-mortem of Pets.com reveals the official cause of death to be running out of cash and lack of financing. As is also often the case, blaming funding alone turns out to be a gross oversimplification of their downfall.

A series of poor decisions and unfortunate events led to the company becoming the poster child of the dot-com bubble.

But in order to truly understand the cause of the Pets.com failure, we have to start at the beginning.

Pets.com Timeline

Just 734 days elapsed between the launch of Pets.com in November 1998, to their official November 2000 announcement that they would not be taking any new orders.

In fact, the 342 days between the company’s $82.5 million IPO and complete liquidation, makes it one of the fastest publicly traded companies to go under.

But their imminent failure was far from obvious at the time.

Up until their acquisition of rival “Petstore.com” in June 2000, one might mistake the high-level Pets.com timeline for a company destined to dominate the pet care industry for decades to come.

What Happened to Pets.com? (Why It Failed)

So what specific decisions and events should be credited with the rapid demise of Pets.com?

As it turns out, the answer depends a lot on who you ask.

From the outside looking in, at its core, this was a case of a management team operating under the baseline assumption that they could always raise more capital. When this baseline assumption proved to be wrong, albeit due to “unlucky” circumstances, the company collapsed.

Whether you agree with this outsider’s perspective or not, here’s one thing everyone seems to agree on – from its’ inception, Pets.com was burning a hell of a lot of cash.

In some sense that’s just a result of the trajectory they were on. As a company, their strategy could neatly be placed in the “grow quickly and worry about profitability later” category.

And when you understand the environment they were operating in during the late 90s, it’s easier to appreciate how this strategy came to be….

Competition

Julie Wainright had already experienced firsthand at her previous company Reel.com, what it was like to get buried by Jeff Bezos. So it’s not surprising that her very first move as CEO was to seek an investment from Amazon.

“The opportunity just got significantly less risky with Amazon in as a partner, not a competitor.”

– Julie Wainwright (Clark, “Amazon Invests in Online Pet Store,” March 29, 1999)

Immediately following Pets.com’s official launch and their Amazon funding announcement, other VC firms were eager get a piece of the action.

And so despite joining forces with their most dangerous perceived competitor, by early 2000 a slew of imitators including Petstore.com, Petopia.com and PetPlanet.com entered the arena.

Greg McLemore, the original domain owner, would tell you in no uncertain terms that these “stupid competitors” killed the company.

Collectively, their rivals raised hundreds of millions of dollars and the result was a customer acquisition arms race.

In an effort to be the first pet e-commerce site to reach critical mass, Pets.com went all-in on marketing. The goal was not merely to survive. The goal was to be a category killer – one pet brand to rule them all.

Marketing

What Pets.com lacked in terms of a functional business model, vice-president John Hommeyer tried to make up for in a high profile marketing campaign.

Hommeyer’s first order of business was bringing on advertising agency TBWA Worldwide. Having previously led Apple’s “Think Different” campaign, followed by unleashing the Taco Bell chihuahua on the world, TBWA was up for the challenge.

Together, in late 1999 they launched the Pets.com sock puppet mascot.

The puppet quickly became a fan favorite. Through appearances in talk shows, Super Bowl XXIV, and the Macy’s Thanksgiving Parade, the company achieved global recognition at breakneck speed.

They had successfully built a brand icon for the company, but that was just one component of their marketing strategy – the second was aggressive pricing.

Very little differentiated the pet eCommerice competition at the time. As a result as one competitor slashed prices, the rest were forced to follow suit.

Pets.com was no exception.

Not only did they sell a number of products below costs, they would often run free shipping promotions, cutting further and further into their margins. It was a vicious circle.

The marketing combo of aggressive promotion and pricing proved deadly. With costs per customer acquisition ultimately ballooning to $400 per customer, management forecasted they would need to clear $300 million in revenue to break even.

A milestone they estimated would take at least 5 years to reach…time they simply didn’t have.

Timing

One could argue, and Wainwright certainly has, that Pets.com was ahead of its’ time.

She was quick to point out in a 2011 Business Insider interview that back in 2000 there “were no plug and play solutions for e-commerce/warehouse management and customer service that could scale”.

Wainwright would go on to emphasize that at the time of the Pets.com launch, there were roughly 250 million worldwide Internet consumers – in contrast to over 5 billion today.

Put simply, the underlying infrastructure and total addressable market (TAM) required to run this type of business-to-consumer company (B2C) weren’t there yet.

This backdrop makes it *somewhat* easier to understand how a similar company like Chewy (started over a decade later) was eventually able to achieve net sales of $10.1 billion in 2022. But don’t let these eye watering numbers fool you. Chewy faces many of the same headwinds Pets.com faced.

With profit margins well below 1%, it took Chewy nearly 11 years to turn a profit! Had PetSmart not acquired them in 2017, granting them access to their resources and infrastructure, there’s no telling if profitability was ever in their future.

Oh, and I almost forgot to mention one other unfortunate timing related event – in 2000, the dot-com bubble burst.

Pets.com’s share price started to plummeted along with the rest of the market.

In 1999, venture capitalists invested over $100 billion in tech companies. By 2000, this amount fell below $30 billion, a 70% nose dive.

Just as Wainwright and team needed another round of funding the most, there were no VCs in sight.

Final Thoughts

Despite hundreds of other dotcom companies going bust over the same period, Pets.com stands alone in our collective consciousness.

With the benefit of hindsight, I can’t help but feel empathy for Wainright and the management team. Ironically, the highly effective sock puppet mascot ensured the world would never forget their failure.

“I became sort of a pariah. I was like, the dumbest person in the valley and it was a little tough.”

– Julie Wainwright (Hanna Storm, “The RealReal’s Julie Wainwright Had to Get Out of Town After Pets.com,” Vanity Fair, April 19, 2017)

And yes, they absolutely had a failed business model. But it’s not like chasing revenue above profitability was some new strategy no one had ever seen before.

You need look no further than Amazon for another dotcom company that deployed this very same strategy. Amazon lost money every single quarter for the first 9 years. So why didn’t they also crash and burn when the bubble burst?

Bezos was an incredibly effective executive, but he was also lucky. Amazon just so happened to close their round of funding just one month prior to the 2000 market crash. Otherwise it’s entirely likely they too would have faced insolvency.

It’s worth noting that contrary to countless false reports, Pets.com never filed bankruptcy. Instead, Wainwright sold off all of their assets and returned what she could to their shareholders. In the process, PetSmart took ownership over the Pets.com domain in December 2000, which has redirected to the PetSmart website ever since.

And that’s how Pets.com became the greatest pets e-commerce domain name that never was.