How to lose a fortune in two years

IT HAS been described as "the worst deal of the 1990s". And it looks like a textbook example of what not to do when you expand into another country. This is the story of an American superstore coming an almighty cropper over here by making a dog's breakfast out of selling pets.

It was less than two years ago that PetsMart, a US pet retailer based in Arkansas, hit the headlines when it paid a staggering pounds 150m for Pet City, a loss-making pet superstore operator based in Swindon. The figure was surprising for several reasons. First, it was double the value of the company when it was floated on the stock exchange barely a year earlier. Secondly, Pet City had yet to make a profit.

But the Americans knew best, or so it seemed at the time. Following in the footsteps of other "category killers" like Toys R Us, its aim was a huge chain of 300 UK pet superstores in Britain, followed by a 700-store assault on mainland Europe. The idea was to go global.

"This is a tremendous opportunity," said Mark Hensen, PetsMart's chief executive officer. "Pet retailing is one of the growth businesses of the Nineties."

But 16 months later, the grand design has collapsed. Mark Hensen has gone, PetsMart shares on the Nasdaq market stand at a fraction of their level at the time of the deal, and now the Americans want to pull out of Britain with a cut-price deal. The price tag is just pounds 10m. As one former Pet City worker puts it: "You have to ask, what an earth went wrong?"

What did go wrong? Experts say there is no flaw with the concept of a pet superstore and no reason why it should not work in this country. The idea behind Pet City, which was renamed PetsMart after the deal, is credited to Giles Clarke. A serial entrepreneur, Mr Clarke was looking for a new project having made pounds 5m from selling his Majestic Wine Warehouse business in 1989. The pet idea came to him during a visit to the Sainsbury's supermarket on London's Cromwell Road.

"I was looking round the whole store for an idea. Then I got to the pet aisle and here was something that hadn't been exploited."

He was right. Though the UK market for pets and pet products is estimated at pounds 3bn a year, the market was fragmented between small, independent pet shops.

Pet City was born that same year and starting expanding with gusto with stores packed to the rafters with ordinary products like pedigree chum and dog blankets supplemented with bizarre accessories and exotic pets.

A visit to the PetsMart store in Raynes Park, London, shows the business is still true to those founding principles. The difference is noticeable right from the entrance. Behind a glass screen to make it visible is the "Pet Grooming Parlour". A cocker spaniel is being blow-dried after its coat wash. A Yorkshire terrier is standing obediently on a table having its coat trimmed. The next customer, a bored labrador, lies slumped on the floor waiting its turn.

Inside is the pet adoption centre alongside aisles and aisles of pet food and weird and wonderful accessories. There are bundles of hay and grass for horses. There are bags of pigeon grit, a rat starter kit (pounds 39.99) and a hamster "workout wheel" (pounds 6.29). Doggie jumpers sell for between pounds 6.99 and pounds 8.99.

The live pets are at the back. A beautiful Toucan called Tex is available at pounds 1,999 and a curly haired tarantula for pounds 24.99. The standard pets such as rabbits, guinea pigs and budgies are also available, though dogs and cats are not sold. Potential owners are put in touch with the local adoption centre, instead.

The shop is busy and customers look happy clutching their doggie biscuits and "rabbit-owner manuals". But the cheerful shop experience hides the tale of woe that has afflicted the Americans since they took control.

According to those who follow the industry closely, much of it is their own fault. The Americans introduced US-style product mixes and sizes into the UK market. This apparently involved huge product sizes in certain sectors like horse feed that did not sell well.

"It might have been OK if you had a ranch in Texas, but they did not sell well in central Manchester," one observer says wryly.

A policy of "everyday low prices" was introduced, including cheaper product lines brought in from America. But these proved unpopular in the UK, where pet owners like to pamper their pooches with premium scoff. The move disappointed customers and savaged the stores' already wafer-thin margins. The Americans also introduced more "pet services" such as pet grooming and veterinary services, which UK experts say the British market was not quite ready for.

There were external problems too. One was an increase in out-of-town rents which affected PetsMart's store-expansion programme. The rise, together with increasing restrictions on planning applications for out-of-town retail developments, made the American company's target of 300 UK stores almost impossible. There are currently 58 branches.

"They overpaid," says one venture capitalist. "It was, quite simply, the worst deal of the 1990s."

The business was losing pounds 1.5m a year and now, it seems, the Americans can't wait to sell-up. Just like so many UK retailers before them, such as Laura Ashley and the Body Shop, PetsMart has found that transplanting a retail concept across the Atlantic is a risky affair.

There are two potential buyers. One is Pets at Home, the Cheshire-based rival which has around 50 stores. But its bid may run into problems with the competition authorities, due the large market share in certain sectors of the pet market which the combined group would control.

The other bid is a management buy-out led by Giles Clarke, who stayed on as chief executive of PetsMart UK after the deal. It would be a remarkable coup for him to buy back for a 10th of the cost the business that he sold to the US group, though the Americans may balk at the prospect.

For a man who is ironically allergic to cats but who made pounds 20m from pet shops, it is a deal not to be sniffed at.