Pet Paradise no investor’s utopia

Author:PETER GOTTING Date: 10/02/2000

Online pet stores are taking Internet mania to new heights, with two US sites aiming to raisesome $US200 million ($315 million) in public share offers.

Neither Pets.com nor PetsMart.com which have both announced floats in the past three monthshas ever made a profit. Pets.com reported a net loss of $US61.8 million for the first 10 months ofoperation, and PetsMart lost $US47.5 million over roughly the same period.

The recent explosion of online stores such as Petopia.com, Petstore.com and Petplanet.com isattracting venture capital in the US.

Some, like PetsMart, have been built on US retail chains, while others such as Pets.com, 40 percent owned by Amazon.com, originated on the Web. They do not sell pets as such, except perhapsfor an occasional fish, but pet products and information.

Does the dog need a collar, chew or an ``outdoor clean-up" product? Try Petopia.com, ``theInternet pet paradise". Does the cat need flea powder, a scratching post or litter? VisitPetsMart.com, ``where pets are family". Does the bird need seed or a bell? Go to Pets.com``because pets can't drive".

But these online stores don't even make money on their products. Pets.com has earned $US5.8million in sales since its inception but the cost of selling was $US13.4 million, creating a negativemargin of $US7.6 million. PetsMart had a negative margin of $US6.3 million.

It is particularly because of these negative margins that analysts in the US have suggested theshare offers could face investor resistance.

Both Pets.com and PetsMart.com acknowledged risk factors in their filings with the US Securitiesand Exchange Commission, warning that they anticipated future losses, possibly for the next fouryears; that they had limited operating histories and were therefore difficult to evaluate; and relied onthe future success of e-commerce over traditional forms of retailing.

Online pet stores have barely taken off in Australia, with just a few scattered sites, primarily homepages for individual retail stores.

The NSW retail chain, Pets World, has set up its site at www.petsworld.com.au, complete with anonline store, but says it is still in early development.

National retail controller for Pets World, Ms Cathy Whelpton, said the company might consider floating itsonline business in a few years but would probably only do so if the online store was profitable.

``The choice whether to make it public is down the track," she said. ``We have to see what kind ofresponse we get first."

Perth-based Internet broker Mr Tony Cunningham, of CPS Capital, said thetwo US floats would probably be successful but the shares were unlikely tobe a good long-term investment. ``This is a boom and this will go bust," MrCunningham says.

``It's just a case of when."``I wouldn't like to be there in five years."