The Puppet That Ate a Dot-Com

The Puppet That Ate a Dot-Com

The Puppet That Ate a Dot-Com

Moneybox
Commentary about business and finance.
June 6 2000 5:25 PM

The Puppet That Ate a Dot-Com

The good news for Pets.com is that everyone loves the puppet. This fact isn't lost on the pet-product retailer, which sells a wide range of "gear" featuring the smart-alecky sock puppet mascot, from caps to watches to food and water bowls. In fact if you go to Pets.com you'll see that the most prominently featured item for sale is not, say, dog food or flea collars, but rather sock puppets, for $20 a pop. The puppets will start shipping June 13, but you can preorder now. (Limit three puppets per order, friends. Step right up.)

Advertisement

The puppet is the centerpiece of Pets.com's unavoidable ad campaign--which included a Super Bowl spot--and it appeared as a float in the Macy's Thanksgiving Day Parade. (You can check out a bunch of Pets.com ads via Adcritic.com.) It has been interviewed on Good Morning America and in Time magazine. The puppet is a sensation, easily the most successful spokesthing of the dot-com era and arguably the most high-profile addition (along with Budweiser's "Wazzup!" campaign) to the pop culture pantheon of the new century. "This is a company's dream," the CEO of Pets.com recently told Forbes. "It's amazing how quickly this character has captured people's hearts. We're happy because he's captured their pocketbooks, too."

Really? That bold statement brings us to the bad news for Pets.com, which is that it's losing buckets of money, shows no particular signs of reversing that trend anytime soon, and its stock stinks. In some quarters, in fact, the whole notion of selling pet supplies online has become shorthand for the kind of idiotic thinking that used to attract investors in the long-ago days of last year, when e-commerce was still in fashion.

True, Pets.com had sales of about $7.6 million in the first quarter of 2000, which did represent a big jump. But those revenues are still a long, long way from, say, the $2 billion-plus annual sales of a big chain like PetSmart. And more to the point, the cost to the company of the goods it sold for $7.6 million was around $12.5 million; the company attributes its operating loss to shipping costs and discounting. Pets.com's spin on this in its quarterly report was that its gross margins improved from negative 124 percent in the prior quarter to negative 64 percent. Impressed? Anyway, figure in marketing and other costs, and Pets.com had a net loss of almost $40 million in the quarter. The company went public earlier this year, peaking at $14 a share, and now trades at about $2.50. So put that in your sock puppet.

It's possible that the company will eventually build a big and loyal customer base that will allow it to gradually boost margins and become a great business. (Among the believers are famed venture capitalist Ann Winblad, whose firm is an investor; Amazon.com, which is its largest shareholder; and well-known Internet bull Henry Blodget of Merrill Lynch.) But a more likely, and more interesting, scenario is that the company has successfully promoted its brand all over the place with an authentically popular campaign--and it doesn't really matter.

On the plus side, Pets.com's three top online competitors all seem to be doing even worse, in some cases announcing layoffs, and a couple of cases postponing IPOs, probably indefinitely. On the minus side, that's happening in part because everyone has figured out that shipping huge bags of dog food doesn't sound like a great profit opportunity. Selling pet supplies in general is not exactly a killer business offline: Even the superstores have thin operating margins, and PetSmart actually lost money last year.

This goes a long way toward explaining why Pets.com shares are in the doghouse. And maybe it explains why we're seeing a curious reversal, in which a company is hyping its mascot rather than the other way around. Pets.com seems to have built a good brand, but it looks an awful lot like they've built that brand for a lousy business. What do you do if you find yourself in such a situation? I guess you sell puppets.