Amazon not only sold $2.5 billion worth of goods, it introduced Prime members to new services. How should rivals compete in 2017?
Evidence is mounting that retailers need multiple ways for their customers to interact with them and to absorb development and marketing costs if they are going to succeed on the Internet. Just last month two paragons of pure-play Internet retailing-Pets.com and Garden.com-closed.
Pets.com laid off 255 of 320 employees and said it will sell the majority of its assets including inventory, distribution center equipment and its sock puppet brand icon.
The suspension of operations followed numerous efforts to salvage the sagging company, as it tried to attract either capital or a buyer. Earlier this year, the company called in financial adviser Merrill Lynch, which contacted more than 50 prospective strategic and financial partners in search of a bailout. In efforts to cut operating costs, the company as recently as September said it would relocate most of its customer service operations from San Francisco to Greenwood, Ind., where it already operated a distribution center. However, it failed to attract the cash or partners it needed. Fewer than eight potential saviors agreed even to visit with the company. “I regret that we will not be able to continue our commitment to our customers to provide the very best buying experience on the Internet,” said Julie Wainwright, chairman and CEO.
“This is a great category from a content point, but as it relates to buying the product, most of the category is pet food and that gets picked up in a weekend grocery run,” says Thomas Wyman, Internet research analyst with J.P. Morgan Securities. “The other killer is shipping costs-shipping dog food across the country is very expensive.”
Pets.com’s loss could be competitor PetSmart.com’s gain. PetSmart.com’s remaining online competition, Petopia.com, is struggling after recent layoffs. And PetSmart.com has something Petopia doesn’t-stores, which give it extra buying power and needed infrastructure. “PetSmart.com will win now,” declares Wyman.
The comments about content could also apply to Garden.com. That site offered a lot of content to customers, including web-based articles about gardening and a magazine. Garden.com employed seven editors and spent about $500,000 a year on producing editorial content. But the economies of being a pure-play finally caught up with Garden.com, says Duif Calvin, senior retail analyst with iXL consultants. “With only 1.5 million customers, they couldn’t get the economies that a Wal-Mart with 100 million transactions a week can get,” she says.
Furthermore, with only one outlet, Garden.com had continual marketing costs to bring customers to the site and continual development costs to make sure its web site was always exciting. “They could never stop investing in fixed costs,” she says. Calvin says the same is true of Pets.com. Those economics don’t bode well for the rest of the dot-com pure-plays.