Amazon's Pet Projects

Three months ago, the old Hercules Rubber plant in San Francisco's warehouse district was a cluttered, decaying mess. The mannequins and sewing machines of a children's garment company littered the floor, while 30-year-old paint peeled off the mammoth walls. Today the plant glows from the transforming effect of the Internet economy. Cubicles line the freshly carpeted floor, and power lines run on metal tracks that hang from the ceiling. Around every other corner and under many desks are dogs, each belonging to an employee of a Web start-up that's appropriately named Pets.com.

Along with a litter of other Web ventures, Pets.com seeks to sell everything your pet pines for, from 40-pound bags of puppy food to chew toys and yummy pig ears. It's a lucrative business--Americans spend $23 billion on their pets each year. But unlike its competitors, Pets.com has a formidable hand on its leash: Amazon.com. The Web giant took a 50 percent stake in the start-up in March, and this week will announce it has contributed to a $50 million round of financing aimed at promoting the Pets.com brand. Amazon's CEO, Jeff Bezos, says the investment is part of his larger effort to move from books, videos, CDs and, soon, toys into "giving consumers anything they might want to find online." Amazon's involvement in the pet space is also a shining example of what happens when the new titan from Seattle invades a young market: venture capitalists and competing start-ups get nervous, and real-world companies jump-start their own Web sites to avoid being caught flat-footed.

Back in 1994, of course, the online pet market looked comparatively tranquil. That's when Greg McLemore, a 31-year-old entrepreneur from Pasadena, Calif., registered the Pets.com address and launched the site as an online community for pet owners. Last March, McLemore outfitted the site with some e-commerce capabilities and brought it to eminent Silicon Valley venture-capital firm Hummer Winblad. The firm invested $2 million and handed the reins to Web veteran Julie Wainright, the 42-year-old former CEO of video retailer Reel.com. One of Wainright's first acts at Pets.com was to call her old rival Bezos, who had recently offered her a job, and ask him to fund her new venture. Fresh from similar investments in Drugstore.com and Homegrocer.com, Bezos signed on.

The move was akin to a pit bull's step-ping into a pen of Chihuahuas--everyone jumped, including the brick-and-mortar pet leaders. Petsmart, the nation's largest pet retailer with 472 stores around the country, immediately kicked its Web strategy into high gear. "We didn't want to be snuck up on," says CEO Phil Francis. Five weeks later it joined with a Web venture called PetJungle to build a Petsmart Web site that will formally launch next month. All the activity also forced pet chain Petco, with 465 stores around the country, into hiring banker Morgan Stanley to hash out its own strategy.

Meanwhile, quaky venture capitalists called other pet-preneurs into the conference room to prove that they could survive in an Amazon-dominated space. "They wanted me to tell them that everything was all right," says Petstore.com CEO Joshua Newman, who had to leave his newborn child in the middle of the night to convince potential investors that their $10 million funding deal should go through. It did--but other sites, like AcmePet and PogoPet, were not so lucky. "When Amazon came in, the money froze up," says one disappointed founder.

What were investors afraid of? Amazon, with 10 million customers, throws its weight behind its affiliated companies. In the next month, a Pets.com link will appear on Amazon's main page. Behind the scenes, Amazon offers a buddy system where every Pets.com employee can turn to his or her counterpart at Amazon for guidance on any kind of business issue. More immediately, the investment has helped Pets.com recruit top talent (it recently lured execs from Procter & Gamble and Petco) and--crucially--raise money. The new $50 million round of financing, from Amazon, Hummer Winblad and Bowman Capital, will go toward a multi-channel Pets.com advertising campaign that starts this summer and "won't let up," according to Wainright. The tag line: Pets.com is "where your pet would choose to shop."

The other online pet start-ups doubt that Rex and Morris harbor such bias. In fact, the Amazon investment may have also had a reverse effect: firing up the smaller competitors to take on the e-commerce Goliath. "This has pissed us off and really energized us," says Petstore.com's Newman. Still, no one doubts that there will be some consolidation of the crowded field in the months ahead. In other words, a few old warehouses may be re-abandoned before the catfight is over.

 

amazon.com: The latest buzz says the e-commerce giant will expand into toys. CEO Jeff Bezos isn't talking, but toy sites are gearing up for a fight.

drugstore.com: Amazon took a 46 percent stake. But can the Seattle-based online pharmacy sign up enough insurers to make the service worthwhile?

HomeGrocer.com: The online supermarket now serves Seattle and Portland, Ore., with plans to invade California. Amazon owns 35 percent.

pets.com: Fifty million dollars in new funding will help propel the start-up from the pack. With a large minority stake, Amazon has a hand on the leash.