Sell Block: Pet Cemetery

Any move by Wal-Mart into a new area of business sounds a death knell for competitors in that space. That’s why Cramer offered a eulogy Thursday for PetSmart.

PetSmart , the one-stop shop for all things pet – from food to veterinary care – is going to be under enormous pressure as Wal-Mart sets up a shop of its own on the former’s turf. The outcome, if history is any guide, will not be good for PetSmart.

Whole Foods, Best Buy, Circuit City, even pharmacies in the generic prescription drug sector all took a hit when Wal-Mart stepped in. Well, now the discount giant is increasing its footprint from just pet food to include pet care. “We’ve spent a lot of time on pets,” the head of Wal-Mart’s grocery division told analysts at an Oct. 27 meeting, and the company’s expecting to take share by keeping prices low.

[Cue doomsday bell sound.]

And therein lies the not-so-secret strategy behind Wal-Mart’s success: Massive scale and size allows it to cut prices to such a level that competitors can’t compete. Then a company like PetSmart watches its gross margins deteriorate as it tries to keep pace and shopper traffic peters out.

How does Wal-Mart do it? The company has only one degree of separation between it and its overseas suppliers. That’s why Wal-Mart’s home-related products are sold for 15% to 50% cheaper than competitors. PetSmart has six, a margin-killing business model in this contest.

So as the recession continues and consumers pull their collective belt buckles one hole tighter, Wal-Mart is going to be the go-to retailer for more than just food, clothing and electronics. Now pet owners, who in a country as cute-obsessed as the U.S. aren’t about to stop feeding Fido, will be shopping there, too.

That means PetSmart cannot be owned, and it’s the reason Cramer put the stock in this week’s Sell Block.

Jim’s charitable trust owns Wal-Mart.

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