Amazon's bite doesn't deter pet-shop rivals

In March, Amazon announced an investment in Pets.com, but that hasn't spooked three rival start-ups or the venture capitalists backing them.

"I have the utmost respect for Amazon and what they have accomplished," said Jay Hoag, whose Technology Crossover Ventures firm is putting $9 million into start-up Petopia.com.

"[Amazon's] goal is to become the provider of anything that anyone will ever buy online, so you have to assume they will be coming," Hoag added. "But it's pretty hard to envision there will be only one online retailer in the world."

The pet market is estimated at $23 billion a year, Hoag noted, big enough for multiple major players both online and off.

Joshua Newman, chief executive of Petstore.com, said the Amazon-Pets.com announcement came a week before his firm closed on $10.5 million in venture funding from Battery Ventures and Advanced Technology Ventures.

"There was a lot of introspection and discussion--there was a definite opportunity not to close the financing," said Newman. "But our funders and [management ] team felt we have a great opportunity and that we should move forward."

Many industry watchers wonder if the market can support four Internet stores, particularly since warehouse retailer PetSmartrecently announced plans to come online.

"I doubt there's room for four," said Andrea Reisman, chief executive of Petopia. "I'm certain of some consolidation."

Bob Barrett, the Battery venture capitalist who funded Petstore.com, agrees, and he even thinks Amazon's entry may scare off investors for even more "pretenders" in the category.

"The market is big enough to support certainly two players, but there will be a lot more than that," Barrett said.

The extent of the Amazon-Pets.com alliance isn't clear yet, although Amazon has a seat on Pets.com's board and about half of the company equity. Newman expects the Pets.com deal to parallel a similar Amazon investment in Drugstore.com, which has given Drugstore.com a link on Amazon's well-trafficked front page, shared affiliate networks, and other cross-promotions.

Given Amazon's marketing muscle, Pets.com rivals have attempted to create marketing alliances of their own. For PetJungle.com, funded and incubated by Bill Gross' idealab, that meant a tie-in with offline publisher Rodale Press and sponsorship of a 13-week PBS television series called "Pets: Part of the Family" which will begin airing this month.

For Newman's Petstore.com, the backbone is an exclusive relationship with the American Animal Hospital Association, with 12,000 real-world animal veterinarian members. The deal includes co-branding, licensing all content from AAHA's HealthyPet Web site, and a marketing deal to woo pet owners to Petstore.com through veterinary clinics.

Newman also signed on pet retail expertise, including the owner of Sammy's Pet World, a highly profitable chain of retail pet stores based in San Francisco.

"We think we have the best pet retailing expertise in the country," Newman said.

Newman is trying to play his own Amazon card. He says the largest Web portal sites are fearful of Amazon's sway and Petstore.com has been in serious discussions with those portals about partnerships.

"The tenor of the discussions changed" after the Amazon-Pets.com announcement, Newman added.

"Basically it energizes the market," said Barrett. "The deal with Amazon creates an excitement among everybody that isn't necessarily in Amazon's camp to do a deal. It forces the issue among the cyber-group."

The would-be pet supply magnates agree that most pet owners are both fanatical about their animals and less than enamored of spending time in pet stores.

"We offer a full array of goods and supplies to be a one-stop shop for pet owners, so they can spend more time with their pet instead of in a pet store," said Reisman.

Pet store entrepreneurs and investors alike both brag that the pet market, unlike many other retail categories, isn't seasonal and that pet owners are loyal to brands. They also love to talk about their pets, which is why community and chat areas are major features of all the online pet stores.

But the business also offers significant challenges. First, shipping isn't as easy as it is for books, music CDs, or videos, which all go into standard-sized boxes. Pet supplies come in all shapes and sizes.

Second, products like cat litter or dry dog food are bulky and thus expensive to ship--but they're not high-value items, so shipping them through the mail doesn't always make sense.

For that reason, Pets.com isn't selling food, though some competitors are.

Petopia, for one, is in the pet food business. "For the animals we service we intend to provide all the food, all the supplies, all the information," said Reisman. That's one reasons Petopia is staying away from reptiles (the food needs to be shipped live) and large animals like cattle or horses.

"Shipping hay isn't a great business," Reisman quipped.