Wednesday, November 30, 2011

Was "Pets.com" Sunk by Bad Strategy?

The World Wide Web is a trove of great examples of obsolete websites that once possessed great potential. Many of these sites failed due to bad strategic decision made by its leadership. Among the most cited examples of a dot-com bust is the defunct “Pets.com”. Pets.com began operations selling pet supplies to retail customers in August 1998. Although sales rose dramatically due to a high profile marketing campaign, the company was weak on fundamentals and actually lost money on most of its sales. After its IPO on NASDAQ in February 2000, it went to liquidation in just 268 days, ceasing operations in November 2000. Its high public profile during its brief existence made Pets.com one of the more noteworthy failures of the dot-com bubble of the early 2000s and nearly $300 million of investment capital vanished with the company's failure. Given this history, I decided to look at how Richard Rumelt’s key hallmarks of bad strategy listed in The Perils of Bad Strategy - the failure to face the challenge, mistaking goals for strategy, bad strategic objectives, and fluff – apply to the epic failure of Pets.com.

The failure to face the challenge – “If you fail to identify and analyze the obstacles, you don’t have a strategy. Instead, you have a stretch goal or a budget or a list of things you wish would happen.”

Pets.com was an early entry in the immature online shopping industry and was uncertain whether a substantial market niche even existed. No independent market research preceded the launch of Pets.com. Instead, the management chose a "land grab" strategy focused on increasing its market share then finding ways to make a profit. The "land grab" strategy presupposes that your market is large enough or will grow fast enough so that revenue allows a profit before seed money runs out. Pets.com wished that it would magically become profitable while it waited for the market to mature. During its first fiscal year (February to September 1999) Pets.com earned revenues of $619,000, yet spent $11.8 million on advertising. It failed to realize its problem would not be gaining market share, but generating revenue to sustain it until it could place adequate resources into market share focused strategies.

Mistaking goals for strategy – “Create the conditions that will make the push effective, to have a strategy worthy of the effort called upon.”

When the company did turn its focus to its business model, it created unrealistic conditions in which to operate effectively. For example, Pets.com offered a guaranteed $4.95 shipping to anywhere in the United States. Unfortunately, Pets.com initially only had one distribution warehouse in California and every shipment to the East Coast cost more than $4.95 and therefore shipped at a loss. It lost money on nearly every sale because, even before the cost of advertising, it was selling merchandise for approximately 1/3rd the price it paid to obtain the products. During its second fiscal year the company continued to sell merchandise for approximately 27% less than cost. The company had it sites on being the number one online pet supplier but failed to leverage key strengths to build on other than a very costly push for brand recognition.

Bad strategic objectives – “A scrambled mess of things to accomplish—a dog’s dinner of goals. A long list of things to do, often mislabeled as strategies or objectives, is not a strategy…Good strategy, in contrast, works by focusing energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes.”

As I researched Pet.com history, I was amazed by the number of “strategies” the leadership claimed. Not all inclusive, CEO Julie Wainright and executives focused on numerous initiatives in an attempt to stand out from the competition. 1) Strive to offer a huge variety of product offerings; it listed more stock keeping units than any other online pet supplier 2) Offer abundant editorial advice from veterinarians, animal lawyers, breeders, scientists, and pet experts 3) Extend its brand offline in the Pets.com print magazine 4) Develop and offer its own proprietary brand of Pets.com pet supplies 5) Acquire a key competitor, Petstore.com 6) Create alliances to allow Pets.com to offer animal health insurance, be the featured petstore on the Yahoo! link to pet health advice, be a part of the Go.com (Disney) network, and establish charitable foundations.

These all seem like good objectives, if focused on one at a time. They also seem like objectives fueled by capital but not sustained by revenues. The management of the company appeared so focused on several objectives that it never developed a solid business model focused on being profitable and generating sustainable returns.

Fluff – “Superficial abstraction…designed to mask the absence of thought.”

According to analyst Jacques Chevron, “Pets.com failed to give its prospective customers a reason for its existence. Its tongue-in-cheek advertising claim ("Because pets don't drive") seemed like an admission of its lack of a reason for being.” Pets.com seemed focused on being the most comprehensive site for pet owners that it failed to be successful in any of its objectives. While it continued to claim it was the one-stop site for all pet needs, it never established a reputation as being good at anything other than advertising.

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In one year Pets.com raised over $110 million in capital funding and its IPO brought in $82.5 million. According to Nielsen/Net, Pets.com became the most trafficked online pet store, with 1.4 million visitors in July 2000 alone. The company had massive infusions of capital, dwindling competition, and award winning national ads that grabbed the public’s imagination. The question I pose: Did bad strategy sink Pets.com? If so, was it the fact that the company focused on so many objectives (Rumelt’s “dog’s dinner”) rather than establish a profitable business plan and focus on just a few reasonable short-term goals?

Sources:

Chevron, Jacques. “Thoughts about the demise of Pets.com”. Duh.com. December 2000. http://www.jrcanda.com/art_duhcom.html

Cheyfitz, Kirk. Thinking Inside the Box: The 12 Timeless Rules for Managing a Successful Business. Simon & Schuster. 2003

Matulich, Erika and Karen Squires. “What A Dog Fight! TKO: Pets.com”. Journal of Business Case Studies. May 2008.

Rumelt, Richard. “The Perils of Bad Strategy”. McKinsey Quarterly. June 2011.

Wolverton, Try. “Pets.com latest high-profile dot-com disaster” CNET. November 7, 2000. http://news.cnet.com/2100-1017-248230.html

“The greatest defunct Web sites and dotcom disasters”. CNET. June 5, 2008. http://web.archive.org/web/20080607211851/http://crave.cnet.co.uk/0,39029477,49296926-8,00.htm

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