It's dog eat dog for online pet sellers

E-tailers continue to consolidate as Pets.com, best known for its sock puppet, buys Petstore for its partnerships and fish

The dot-com consolidation continues with Tuesday’s announcement that Pets.com will take over the business of Petstore.com. The deal gives Pets.com Petstore’s domain, trademarks, content customer list and live fish business, as well as its strategic relationships with Discovery.com and Safeway.

"By acquiring these key assets and strategic relationships we expect to reap the benefits of consolidation and thus strengthen our position as the online pet category leader," Pets.com CEO Julie Wainwright said in a release.

The deal, expected to close by the end of the month, calls for Pets.com to issue 5.8 million shares of its common stock and 5.8 million shares of redeemable nonvoting series A stock. It will get a $3m cash investment.

Discovery.com president Michela English will join Pets.com’s board of directors, and Pets.com will get an exclusive one-year deal to sell pet products on Discovery’s site.

Pets.com will have a 24-month marketing deal with Safeway, where the online store will be promoted in the supermarkets and Pets.com will carry Safeway’s Select pet food line in its online store.

The deal comes at an opportune time for Pets.com, which has been better known for its sock puppet mascot than for its business. The company’s stock has been performing like a dog, dropping around 80 percent from its February IPO.

Petstore hasn’t been faring much better. The firm announced last week that it was laying off workers. The online market for pet supplies has been incredibly tight, with several firms with similar names battling it out for a share.

There is probably space for one online company in the mass-market business, said Jupiter Communications analyst Ken Cassar.

"The fact is that there are five different pet sellers with similar names, selling the same product, at the same price, that get it to me at same time," he said. "If there's a pet site that targets my unique needs, whether it's as an urban pet owner or as a dog owner, they might have a better chance."

The problem is not unique to the pet arena. The e-commerce market has been strewn with bodies over the past few months, as firms with big dreams and little to no profits have burned through their cash and been unable to find new investment sources.

Yesterday, for instance, video-chain Hollywood Entertainment pulled the plug on its Reel.com unit, saying that the e-commerce business just wasn’t paying off.

Other recent dot-com flops have included high-end sportswear retailer Boo.com, Walt Disney-owned Toysmart.com and business site APBNews.com.

And Toysrus.com said today that it will acquire the assets of RedRocket.com, a Viacom-owned toy store that recently went out of business.

Pets.com hasn’t exactly been a slacker in the spending department, running through $59.6m in marketing over the last two quarters. But while the sock puppet has become something of a pop icon, the firm's losses have continued to mount, with Pets.com recently declaring a first quarter loss of $39.1m, or $2.54 per share.

But the company says the acquisition should help it extend its reach without increasing its cash outlay.

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