I like this smart Wall Street Journal piece on the new economics of the Web as told through the effort to build a “Pets.com 2.0.”
Pets.com, of course, came to symbolize the mania of the Tech Wreck with a we’ll-make-money-later business model based, implausibly, on spending millions on sock puppet ads so the company could lose money shipping forty-pound bags of Kibbles ‘n Bits to your doorstep.
This time there are no Super Bowl ads (yet, anyway)—the online pet-supply sector is going under the radar. The Journal looks at three startups, while noting that Walmart and PetSmart are both selling pet food online now.
What’s smart about this Journal piece is that while it notes the similarities between this go-round and twelve years ago, it focuses on the differences, which tell us quite a bit about how doing business on the Web has been revolutionized in a very short period. Namely, the infrastructure costs and logistical barriers to entry have been dramatically reduced, while the market has dramatically expanded (emphasis mine):
A big part of that comes from the growth of a cottage industry that takes care of the grunt work of storing and shipping products. The rise of businesses such as Amazon’s Web Services division, which rents computing power and storage, has also reduced the need for companies to buy their own computer servers, which Pets.com did. Using what are known as cloud-computing services costs hundreds of dollars a month or less, compared with servers that can cost thousands of dollars.
Overall, it cost an online retailer three to five times as much to launch a decade ago, said Brian Walker, an online-commerce analyst for Forrester Research. Back then, “the technology to run the site, the physical warehouse, site hosting, and staff would require a significant investment before you were even live with the site,” he said.
So, for PetFlow, which the Journal profiles here, it can get started delivering pet food without even owning a warehouse, outsourcing its storage and handling to a third-party logistics company, which means it requires less upfront capital to start such a business.
Its tech-infrastructure costs are far lower, as well. I like that the Journal tracked down the former CEO of Pets.com, who tells the paper that it cost about up to $10 million to get that company off the ground. PetFlow started up with $50,000.
These new businesses sell higher-end pet food, which makes the economics of shipping the stuff more viable. And the market online is vastly bigger than it was in the Pets.com days. The Journal reports that 7.2 percent of all U.S. retail sales are online now, six times the level in 2000, as five times as many Americans have high-speed Internet access.
PetFlow now ships a million pounds of pet food a month and expects to do $30 million in sales this year. But some things haven’t changed:
Still, PetFlow and Mr. Chewy are losing money, while Wag.com declined to disclose its financial data. Many online-retail experts say the online pet stores can be profitable, but are skeptical they will ever become booming businesses.
PetFlow’s founder says the company will make money by next quarter. If they do and show that even the ridiculed online pet-food sector can be made viable, it will something of a watershed for retail.
But those reduced barriers to entry also make it harder to make a profit by making it easier for competitors to start up. The only way to really make money, it would seem, is to create a new barrier to entry by scaling up to realize efficiencies and then lowering prices that new competitors can’t match. I’ll have more on how these companies are doing that later this week.