Will Amazon Get a Case of Fleas?

Amazon.com (Nasdaq: AMZN  ) is going to the dogs -- literally. The Internet retailer is launching a new pet-centric website to do for pet care what it's done for books, electronics, and even groceries.

Last year, the e-tailer paid a princely sum to acquire Quidsi, the owner of such notable Web domains as Diapers.com and Soap.com. There was a lot of talk at the time that a toy-focused site was coming, along with one targeting babies. Apparently, though, it'll first go after the booming pet care industry with Wag.com.

Wag the dog
Pets are big business. The American Pet Products Association says 62% of all households -- some 73 million homes -- have pets, with dog owners outnumbering cat owners 46 million to 39 million. But no matter what they own, pet lovers are expected to spend nearly $51 billion in 2011 on their "pet babies," up 5% from last year.

According to the American Express Spending and Saving Tracker report, nearly half of all dog owners intend to pamper their pets in 2011, including buying gifts for their pets (44%) and taking them on trips (12%). Interestingly, dog owners spend an average of $101 on their dogs each month, with toys averaging $18. And if you're from the South, you'll likely spend more on special-occasion gifts for your dog than dog owners overall will ($77 vs. $63).

But those statistics above show why PetSmart (Nasdaq: PETM  ) is soaring these days. Pet ownership is actually at its highest level in 20 years, and owners are willing to pay up to care for them. Interestingly, the majority of pet owners report that the economy doesn't influence their decision on whether to own a pet. In fact, 2% to 5% of pet owners reported spending more money on their pet than in previous years.

PetSmart is often seen as a proxy for the pet care industry, because it is the only publicly traded pure play. There are others that cater to pets, from privately held Petco to the more diversifed business of Spectrum Brands, while PetMed Express (Nasdaq: PETS  ) strives to keep critters healthy with a lock on pet prescriptions.

Cough up a furball
Of course, there's an immediate comparison with Pets.com, the pet care company that had an incredibly famous sock puppet mascot, but an equally infamous (and lousy) business model that eventually collapsed under its own weight.

As good as the demographics seem for launching a pet-centric site, there's plenty of competition in the space, too. Big retailers like Target (NYSE: TGT  ) and Wal-Mart (NYSE: WMT  ) offer pet supplies. In fact, Amazon supposedly bought Quidsi in part because Wal-Mart was pursuing it, too. Even local grocery chains like Kroger and Safeway (NYSE: SWY  ) carry pet supplies.

In the doghouse
To start, at least, Wag.com will offer free shipping on all orders greater than $49. That might not cut in too much to the margins of PetSmart, which already offers free shipping for customers who sign up for its premium membership plan, a program similar to Amazon's Prime membership. Operated through ShopRunner, PetSmart's plan costs $79 to join, and membership can also be used at Toys R Us, Drugstore.com, and elsewhere.

How long Wag might offer free shipping before converting to some other model remains to be seen, but if Quidsi does launch toy- and baby-focused sites, then Toys R Us and Bed Bath & Beyond (NYSE: BBBY  ) , which has invested a lot of capital in its buybuyBaby brand, need to take note as well.

Having e-commerce giant Amazon's muscle behind it gives Wag.com a better than even chance of gaining some market share. But I'm not expecting PetSmart in particular to be kept on a short leash as a result.

The Motley Fool owns shares of PetMed Express and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart, PetSmart, Amazon.com, and Bed Bath & Beyond. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here.


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