Understanding Business Failure of Petsmart - Case Study Example

Abstract

Just like many other failed online retail businesses, Pets.com, which was supervised by PetSmart, was not an exception. It was faced with uncertainties and unachievable expectations that led to its failure. The online business started with morale because it was the first of its kind to enter an online market but it found intense competition in the online platform. When the success became a pipe dream, Pets.com opted to close the business barely after two years. The reasons established for Pets.com failure included intense competition, customer preference, prices, uncertainties, unachievable expectations, and the business model. The paper explains into detail how the business failure occurred and the Root Cause Analysis for Pets.com. The article will provide an inside concerning the existing strategies and the necessary recommendations to be considered in future.

Keywords: Pets.com, Business failure, Root Cause Analysis (RCA), E-commerce

PetSmart

PetSmart was formed in 1986 and opened two stores in Phoenix in 1987 operating under the name PetFood Warehouse. The name was transformed to PETsMART in 1989. It continued to flourish and went public in 1993 on the NASDAQ stock exchange. PetSmart later formed a charity organization that was non-profit, and its primary aim was to provide a home for abandoned homeless pets and put an end to euthanasia. The name PETsMART was rebranded to PetSmart in August 2005; this move was to broadcast its evolution from a store that supplies pet to a company that is solution-oriented. PetSmart was assimilated by BC Partners in 2014 for a fee worth 8.7 billion dollars.

PetSmart is the leading industry that deals with dogs and cats. It is the best specialty retailer supplier of pet meals in the U.S.A; it has a supply chain of more than one thousand, four hundred stores in Canada, Puerto Rico, and the USA. It provides eleven thousand products that range from scratching posts to iguana binds. It offers various services such as grooming and training of the dogs, vet services, doggie day camp, and pet expressions; it provides housing facilities for the cats and dogs along with day care services. Pet Smart has various types of animals such as amphibians, reptiles, fish, birds, and several species of small mammals such as mice, guinea pig, hamsters, and Chinchillas.

The research will how the Pets.com, which operated as an e-commerce retailer failed. In PetSmart, pets can be bought or be adopted because it aims at providing lifetime solutions concerning the needs of the pets. They believe people who love pets are better people because that is the effect of the pet. PetSmart mission is to give back to the society by creating a connection between the pet owner and its pet so that the both of them can live a fulfilled life. PetSmart supports an organization that care and rescue homeless pets, by making the community comfortable, they not only get the satisfaction of how the pets add value to the lives of the society- they get to live it.

The research will explain the Root Cause Analysis of PetSmart. PetSmart offers back to the society by collaborating with the local rescue groups. It donates a place for the groups and provides them with pet food and other supplies. The fees generated from the adoption of the pets belong to the rescue group, and PetSmart provides new parents with a guidebook entailing the necessary information concerning the pet care. PetSmart provides employment opportunities to more than a thousand veterinarians in the pet hospitals; this are in-store and provide full services, they are independent of PetSmart and are available to more than seventy per cent of the retail stores.

PetSmart manufactures and sells a variety of dog and cat products- Great choice; it is a line of hard goods mainly for dogs and cats. Authority is a premium food line while simply nourish is a super-premium food line for dogs and cats (Sec.gov, 18). Tow paw is a private label that specifically deals with hard goods for dogs. Toy Shoppe and Whisker City produce toys and furniture for dogs and cats. It sells aquariums, fish tanks, stands, and accessories. It sells the horse products under the State Line Tack section and offers a range of saddles pads, bridles, etc.

PetSmart just like any other retail business might be faced by risk and uncertainties that may result in business failures. Therefore, it should not appear as a wonder when Pets.com ceased from trading regardless of its strategies. The risks and uncertainties that PetSmart should be prepared for include: 1). Any circumstance or alteration that might result in termination of a merger agreement, 2). When the PetSmart stockholders fail to approve any necessary closing condition, 3). General economic recessions, 4). The management of growth and development in PetSmart operations, 5). Transformation in the PetSmart environmental structure, 6). The capability of PetSmart to managing and monitoring the supply chains, and 7). The competitive advantage.

Root Cause Analysis

The Root Cause Analysis (RCA) is a systematic investigation that purposes of determining the causes of concern or a failure and the necessary actions to be implemented to eliminate the problem permanently without having to deal on subsequently with the condition on a daily basis. However, unmasking the real cause of a failure spontaneously in business presents a challenge and therefore, it is essential to employ more than a single approach to separate the problem from its outcomes. Root Cause Analysis identifies the factors by determining what happened, why it happened, and how to eliminate it permanently so that it does not reoccur. RCA is a collective problem-solving approach created to determine the initial triggers of the problems and events. The practice is based on the foundation of the problems because once they are corrected and eliminated; they yield better results than addressing short-term or common symptoms. By handling the problem from its roots, reduces its probability of occurring (Duffy, Moran, and Riley, n.d. pp. 1). Prevention of an issue using one type of intervention is not possible; hence, RCA is combined with other approaches.

Duffy, Moran, and Riley (n.d., pp.2) suggests the RCA has the underlying assumptions for the proposal to be considered possible. It has to be performed in a strategic manner with the assumptions, capable causes and conclusions supported by documented evidence and data. The data collected and analyzed must associate the potential relation between the initial trigger and the defined issue; the Cause and Effect Diagram or Fault Tree enables this. Additionally, any concern has multiple possible triggers. The relationship of the real causes must be thoroughly analyzed and comprehended to identify how they influence each other and the issue under investigation. Finally, the potential solutions will be investigated to determine the appropriate solution to fix the problem permanently and the economic impact projected to the organization.

The RCA approach outline (Duffy, Moran, and Riley, n.d. pp.2)

PDCA= Plan-Do-Check-Act PDSA= Plan-Do-Study-Act

The possible causes of a problem are classified in various categories including physical causes, which can be categorized to materials, or any physical environment that may attribute to the failure in some way. People might contribute to the failure of the enterprise by (not) doing something that does not coincide with the business culture and hence, contributing to its failure. Additionally, the staff might be undertrained for the assigned task or the possibility of inadequate staffing. The human causes might be associated with the physical elements (Li and Guisinger, 1991). The economic recession causes economic factors; these factors people have little control over, but they have the significant influence on our internal environment. Inappropriate management, which is mismanaged by the organization, contributes the managerial causes, it lacks the defined mission, requires communication, lack of performance appraisal and undertrained managers. Organizational reasons are described as a policy that people depend on to make crucial business decisions and in some instance; it might turn out to be faulty. Finally, information management it is whereby the relevant information is unavailable or inaccurate thus yielding uninformed opinions and decisions.

The Root Cause and other Factors (Duffy, Moran, and Riley, n.d.)

Pets.com provided a range of products to consumers and experts pieces of advice; however, its business model lacked something unique that could differentiate it from the other online pet distributors such as Amazon. Pets.com was easy to be confused with other pets’ e-commerce supplies. Moreover, it kept claiming on how it is going to invest the funding it had received from investors in November 1999, to ensure its marketing strategy was advanced and the distribution facilities are expanded. According to Culture(2002), Pets.com pursued the goal of becoming the top pet supplier and gaining the competitive advantage by being the e-commerce that offers the wider range of products that even possess their product label. However, the challenge pets.com faced was that of differentiating itself from the online rivals and shipping the low-margin pet food because it was costly. Therefore, most consumers preferred to shop at their local stores where they could receive a discount and hence, Pets.com failed to provide the customers a preferred alternative than what they had already. Pets.com suffered a marginal loss because it was coerced to sell its products at a lower price than what they had purchased earlier. Pets.com chose to go public in February 2000, and they made an acquisition of their rival Petstore.com in July. They were granted the customer database, domain name, the operating businesses, and several supplier contracts. However, they encountered some drawbacks despite trying to cut down the costs, recover the declining stock prices and attempting to gain reasonable revenues; the online retail entity came to a major decision of closing the business in November. The Pets.com was the leading online pet store but had to withdraw and sought an exit strategy because it was operating on negative gross margins.

Reasons for Failure

The foundation of Pets.com failure can be traced to unsustainable business structure and lack of SMART objectives that led to unachievable expectations. According to Fisher (2000), Pets.com revenue depended on the online market; thus, they gambled with the market. Pets.com had accrued substantial funds from venture investors who overlooked the need to research on e-commerce achievements and hence, they benched high expectations that were beyond what the business could accomplish. Pets.com failed when it went public within a short period without even gaining the essential experience of online retail business. It perceived that it could generate profits within a shorter duration before they exhausted the funding, but instead of making profits, it faced downfalls of intense competition and started crumbling. It started spending too many finances due to its publicity, in particular on the advertisement. It aimed at gaining the competitive advantage, but instead of increasing profits, it assisted the sales of other online pet retailers to increase. The marketing advertisement did not benefit Pets.com; instead, it brought other pet e-retailers in the limelight.

Additionally, the prospective customers, it had assumed to gain, were overestimated. Pets.com failed to offer the customers with a unique shopping experience that they could not access elsewhere; it offered low prices that could be obtained from its rivals. The pet e-retailer business was overcrowded with the companies offering the same range of products and services, and hence, Pets.com did not make to be a sustainable entity and lacked significant clients’ foundation and long-term profitability. The customers seemed to prefer the physical stores to buy their pet food because of the one-on-one interaction unlike what they experience with the online pet entities. Therefore, the Pets.com chose the wrong platform to for its operations because customers lacked the patient of waiting days before their costly shipment could arrive and hence, Pets.com suffered extra costs than the physical stores. Instead of obtaining profit, they operated under negative profit margin and thus, it was difficult for it to recover from the losses.

Exit Strategies

According to Duffy, Moran and Riley (n.d. pp.4) states that when the cause of the business failure is identified, ways to eliminate the problem should be designed to prevent the reoccurrence permanently. The strategic team should determine the cost and benefits accrued from the initiative about to be implemented. Hence, only best cost-benefit ratios could be appropriate. The team should identify if the eradication of the source of the problem were more expensive than the cost of continuously dealing with the symptoms of the business failure. The responsible team should observe even other intangible factors such as employee satisfaction, stress levels, motivation and the employee performance to enable them to make the appropriate decision on whether to eradicate the problem or to fix the symptom or to continue handling it on a daily basis.

The owner of Pets.com should have checked the following factors to determine if the business was worth to be sold. O'brien (2016) states that the best time to look for an appropriate exit strategy for the entity, its performance should be moderate but has to hope for a future since no one would opt to buy a sinking ship. However, despite the economy state of the business, concrete steps are suitable to ensure an increase in the market value of the enterprise. First, Pets.com could have tried on differentiating its business and make sure it gains the competitive advantage by standing out. Secondly, the physical environment for Pets.com could have been trimmed such as the expenditure and additional business contracts to ascertain the expense levels are maintained to a manageable level. Thirdly, Pets.com could have tried to improve its cash flow by reducing unnecessary expenses such as storage costs and ensure appropriate financial controls are established. Fourthly, the financial statement belonging to Pets.com should be have been clear and verified. Fifthly, meticulous equipment maintenance should have been guaranteed in Pets.com stores to ensure every item is in good conditions. Sixthly, Pets.com should have expanded its market range instead of relying on a limited number of the market; thus, providing the sales volume increases. Seventhly, it should have looked for other similar businesses to collaborate with to ensure they complement its client base; by doing that they would have gained referrals and explore new markets that provided its financial stability. Additionally, this could have improved the economic status of Pets.com during the slow seasons. Lastly, Pets.com should have employed a managerial team that is worked towards achieving the set mission and goals; therefore, if the owner is not available they can still perform without strict supervision.

Zwilling (2016) states that every business needs to strategize on an efficient exit in case the company proves to be unsuccessful. Thus, for Pets.com it was necessary to consider merger and acquisition with companies who share the same vision or to agree of being bought out by a larger financially stable company; it guarantees a win-win situation. Pets.com would have gained complementary skills that initially it did not possess, and still save some of its scarce resources that it had originally accrued. Pets.com could have also opted for Initial Public Offering (IPO) although its benefits have since declined because of the emergence of the Internet. However, because Pets.com is a renowned company, it would have opted for this method because shareholders might be interested. Additionally, Pets.com would have chosen the option of selling to a friendly company where they would have paid the investors, creditors, employees and acquired some capital. However, this method is not like M&A because the two entities are not combined. Therefore, when Pets.com is ready they would have claimed their business back, but the friendly company should be more competent and have an interest in the firm in a way that it can operate and scale the company efficiently. Furthermore, Pets.com could have opted for liquidation as the last option to afford to face the failure. They could have decided to liquidate the company because of its continuous losses and the accrued debts instead of letting the business sinking entirely and having it closed.

Conclusion and Recommendations

In conclusion, the Pets.com chose a market that was overcrowded and had intense competition offering services to countable customers. The clients who purchase pets products and services are never cut for online services because it turns out to be expensive and takes time before being delivered hence they require the real deal. Physical pet stores offer amazing experiences than the online retailers. Another factor, Pets.com sold products below what they had purchased from the suppliers hence incurring losses. The shipment costs incurred by Pets.com were also exaggerated hence they were forced to close the business. Pets.com proved that online business is not advisable without well-structured strategies that would ensure business success and prove to be outstanding to the customers. Additionally, the failure showed that Root Cause Analysis should be conducted on a daily basis to analyze the performance of the employees and the management. The relationship between the real causes should be examined thoroughly to comprehend and identify how they influence each other and the issue under investigation. Finally, the potential solutions should be investigated to determine the appropriate solution to fix the problem permanently and the economic impact projected to the organization. The exit strategies to be adapted by Pets.com include merger and acquisition, Initial Potential Offering (IPO), selling to a friendly company and liquidation.