A tiny business that sells dog supplies on the Web pulls in profits while big pet dot-coms take a poop
Company: SitStay GoOut Store Inc., in Lincoln, Nebr.
What it does: Sells high-end dog supplies like the gumball- machine-style Yuppy Puppy Treat Machine, $29.95
Number of employees: 4 humans, 4 canines
Conventional wisdom: It's impossible to run a profitable pet site. Witness well-funded fizzles like Pets.com.
Unconventional wisdom: A niche market, bootstrapped financing, and over-the-top customer service make dog supplies a profitable venture for a husband-and-wife team.
Revenue growth: From $85,000 in 1997 to $888,000 in 2000
Profit profile: Profitable from year one. In 2000, profits were $111,000 on $888,000 in sales.
Capital: $20,000 from the couple's 401(k) investments
The telephone is just about the only thing at SitStay.com that doesn't bark. The clock barks the hour. The warehouse doorbell barks. The computer barks when a customer enters the chat room. And, of course, the four resident dogs -- Kari, Bruno, Dancer, and Tilli -- all bark. The telephone, however, still rings, and when it does, owner Darcie Krueger answers it with a lilt, not a bark.
SitStay.com (aka SitStay GoOut Store) began as a hobby for dog-lovers Darcie, 46, and her husband, Kent Krueger, 41. The pair originally launched a Web site for Belgian-shepherd aficionados. Belgian owners came to rely on the Kruegers for product advice. Darcie soon realized that the hobby site could be a business. Today the company has 19,000 customers worldwide and nearly $900,000 in sales. "People always want to know 'How did you do it?" says Kent. "We did it by accident."
That may be how the Kruegers like to think about their Internet company. But their success is no accident. SitStay exhibits all the traits of a well-run start-up and none of the hallmarks of a stereotypical dot-com. Drawing on 15 years' experience in information technology, Kent built the site single-handedly. Darcie's background in managing retail stores turned her into a service crusader willing to spend an hour on the phone giving training tips to a single customer.
The pair have dug themselves a cozy, high-margin niche market. They generate business by word of mouth -- unlike big E-tailers that spend millions building brands. And they bootstrapped the company by upgrading software, phone systems, and warehouse space only as cash flow permitted. "I'm not risky with money; I'm risky with ideas," says Darcie.
That's hardly surprising, given her previous employment. Darcie quit her job as a city risk-management worker and went to work on SitStay full-time in February 1997. In October, Kent left his position as an information-services supervisor for the Lincoln Electric System. As if quitting their jobs weren't enough, the couple took $20,000 out of Kent's 401(k) plan. At that point Kent's dad proclaimed, "You're nuts."
Though the Kruegers had a head start on a customer base, they needed products to sell and employees to sell them. But instead of staffing up without the sales to pay the salaries, the couple worked around the barking clock until August 1999, when they hired Darcie's son, Sean Kusek, to pick, pack, and ship orders of Icelandic fish-skin chews and Wiggly Giggly balls. (Sean's wife, Amy, took over when Sean went back to college, in January 2000.) As last year's holiday season approached, the Kruegers hired a fourth employee.
As for stuff to sell, the Kruegers asked M.I. Industries, a Lincoln manufacturer of all-natural pet treats, if SitStay could sell its high-protein goodies. The company agreed but eyed the basement start-up warily, taking cash for the first order -- a single box of Macho Stix. (The aptly named treats are made from the male sex organs of beef cattle.) Little by little, SitStay's inventory expanded to fill the basement, then the garage, then a 3,000-square-foot office and warehouse. Little by little, the treat manufacturer extended its terms. Now SitStay sells $16,000 of M.I.'s products in a month, and M.I. president Bob Milligan doesn't give SitStay's credit a second thought. "You know the check's coming," he says.
Unlike the big pet E-tailers that try to be all things to all animal owners, the Kruegers limit their offerings to a relatively small collection of products that, like Macho Stix, meet their personal standards of what's good for dogs. Margins on their 1,500 SKUs range from 15% to 100%. "We don't have 10,000 products," says Kent. "We have the best of the best."
Indeed, when it comes to E-commerce, small is beautiful, says Tim Fogarty, an E-commerce research analyst at Thomas Weisel Partners, a San Francisco-based merchant bank. "Who sells the most? EBay," he says. EBay and Amazon's zShops introduced myriad small sellers to a vast community of buyers, Fogarty says. Though the public doesn't hear much about them, the small shops are running the E-commerce factory. But they're too tiny to compete with a supermarket or a big-box retailer on high-volume, low-margin commodities -- particularly in the pet industry, with freight-heavy items like bargain-brand kitty litter and dog food. In such a fragmented field, "what's really important is to find a niche and grow within that niche," says Funda Alp, spokesperson for the American Pet Products Manufacturers Association, in Greenwich, Conn.
Go too broad and you risk going belly-up, like the former employer of a certain illustrious sock puppet. "Pets.com created great brand awareness, but their business model was all pet products at a discount on the Web. No one has made that work yet," says Andy Pierce, vice-president of branding strategy at Mercer Management Consulting, in Lexington, Mass. According to Greg Kyle, president and CEO of Pegasus Research International, in New York City, Pets.com sold items for less than what it had paid for them. Add shipping costs, and the company lost $277,000 on about $9.3 million in sales in its last quarter in business. The self-funded Kruegers don't have the luxury of losing money on sales.
But last fall, the Kruegers' approach didn't stop SitStay customer Donna McKay (and numerous others) from fearing that Pets.com's failure would presage SitStay's untimely death. McKay posted this message on SitStay's online forum: "Ever since I heard about the demise of Pets.com, I've been worried about SitStay. Is there something we should be doing to ensure its viability?" After a flurry of similar postings, Kent replied, "Let me put your minds at ease. SitStay.com isn't going away. We're like the tortoise. We just keep on going while the hares are running out of steam."
After four years in business, the Kruegers still like their steady pace and don't want any venture capital with its attached strings. They have already spurned one suitor. And no, they're not crazy. "Companies that adopt a risky strategy of growing as quickly as possible without any thought to the bottom line or profitability haven't managed their growth effectively," says Pegasus's Kyle. Instead, the co-preneurs envision growing to $25 million and 25 employees in five years on their own terms. They'd consider a microcap public offering in which they'd retain the majority of stock.
SitStay's biggest challenge will be succession. Someday Darcie won't be able to handle all the phone calls herself. Someday Kent will want to take his motorcycle out for more than half a day's ride. Realizing that their business could play dead -- for real -- without them, the Kruegers are beginning to work out a plan. "As we grow, we'll cross-train the employees" so that they can take over if necessary, Darcie says. "We'll still be the soul of the business, but we won't be the heart anymore, and it can go on beating without us."
With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any "new rules," but there are rules, and we suspect every one of them will look familiar.
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