The problem with selling pet supplies online, at least as it's done now, is that the economics don't make sense. Pet owners are happy to have someone else schlep 20-pound bags of dog food to their doorsteps, but the cost of providing that kind of service is prohibitive. And it doesn't help that pet supplies are commodity products that earn retailers razor-thin margins.

Last year, the problem didn't seem to matter. Such reputable outfits as Amazon.com, Discovery Communications, Idealab and Technology Crossover Ventures poured hundreds of millions of dollars into the pet supplies sector. Most of the money went to four California companies - Pets.com, Petopia, PetsMart.com and Petstore.com - which launched within months of each other in 1999, quickly overcrowding the field. Nearly a dozen smaller companies also joined the race.

These days, most online retailers are under pressure, but the situation is particularly dire for pet suppliers. Now a long-awaited shakeout appears to be at hand. Petstore.com has begun laying off workers; the company declines to specify how many of its approximately 200 employees were let go. During a midmorning visit to the company's Emeryville, Calif., headquarters last week, more than half the desks appeared to have been vacated.

Industry executives say Petstore has been shopping itself to other companies. Petstore executives deny the rumors. "We are not shopping the company around," says Chris Luhnow, cofounder and president of Petstore. Just weeks earlier, however, he told The Standard that Petstore had been discussing consolidation since January with the three other leading online pet-supply retailers.

Its rivals are struggling, too. Amazon-backed Pets.com, the only online pet store that's gone public, has seen its stock drop to around $2 from its February IPO price of $11. Like most online retailers, Pets.com has been losing money fast. But while other e-commerce companies are in the red because they've spent lavishly on marketing and expansion, Pets.com has negative gross margins: It loses money on every sale. CEO Julie Wainwright says gross margins should turn positive later this year when a second distribution center becomes fully operational. She has yet to convince investors, though.

That's hardly good news for Petopia and PetsMart.com, which are backed by brick-and-mortar giants Petco and PetsMart, respectively, and have filed to go public. The dismal performance of Pets.com has slammed the door on that prospect.

The companies are quickly depleting their cash reserves. Their backers face a dilemma: whether to infuse the operations with additional cash, or to let them fail. Their best bet could be to merge with a rival to pool their dwindling resources.

Smaller players are also running for cover. Two weeks ago, PetPlanet said it hired an investment bank to explore strategic options. Last Wednesday, PetQuarters, an online and catalog seller of pet supplies, acquired tiny Allpets.com.

Petstore board member Bob Barrett - a founding partner of Battery Ventures, which has invested $9 million in Petstore - has said it's still possible to build an online pet business not as an pure e-commerce operation, but by melding commerce with entertainment and information. But things have turned south so swiftly that he now has doubts about whether even that will be possible. Notes Barrett: "Who knows if we will be able to follow that dream."

Pet Sites in the Doghouse

The four leading sites in the sector are facing problems.

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