The pet industry has been on a tear for the past two years, and it does not seem like it is going to abate anytime soon. Pandemic homebodies hit animal shelters even as they were undertaking stealth home improvement projects, keeping both categories firmly in the black.
Millennials that are delaying having children are adopting four-footed friends and treating them like children. Meanwhile empty nesting baby boomers are seeking out breeders for surrogate tail-bearing grandchildren and spoiling them accordingly. Full confession, our home applies.
According to the American Pet Products Association, in 2020 sales for pet products exceeded $100 billion ($103.6 billion) for the first time in history. Further they predict that number to increase approximately 6 percent in 2021, double the historical increase of 3 percent.
In a recent CNBC interview on Mad Money, Chewy’s CEO, Sumit Singh reported that there is no appreciable uptick in pets being returned to shelters, post pandemic, which is another positive indicator. Additionally, the pet products provider last month launched a pet adoption service, working with 6,000 shelters, throughout the country.
Privately held PetSmart acquired Chewy back in 2017 for about $3 billion, and split them off in a June 2019 IPO. The $22 per share offering price yielded a $9 billion valuation. The past week’s $75 to $77 per-share price range put the companies market cap over $32 billion. According to a Statistica April 2021 release, based on annual revenue, PetSmart now commands 25.1 percent of the pet product market and Petco has 15.6 percent.
MORE FOR YOU
Meanwhile, in the fast-growing e-commerce pet product market, Amazon AMZN leads with 59 percent, followed by Chewy at 41 percent and Walmart WMT at 33 percent. PetSmart and Petco are in fourth and fifth place, respectively.
Chewy is certainly among the high-flying direct-to-consumer brands whose business continues to grow at a staggering rate. However, from inception through their 2019 IPO, and until the third quarter of 2020, they had never been profitable. The banner year of 2020 saw the company’s customer base rise by 32 percent, to 19.8 million customers, with an 8.7 percent net increase in spending by active customers. Chewy’s 2021 first quarter was also quite positive, with $2.14 billion in net sales yielded a modest net income of $38.7 million. Their gross margin of 27.6 percent improved 4.2 percent years-over-year over 2020’s 23.4 percent.
But, perhaps the most impressive was fact that their subscription “Autoship” customers rose 34.4 percent to $1.48 billion and accounted for 69.3 percent of top line sales. This demonstrates the degree to which Chewy’s customers (our household included) have become dependent upon the monthly box (or boxes) arriving at their doorsteps, more on that in a bit.
As has been the case with most every major direct-to-consumer retailer, that is an e-commerce pure play, growth, scale, and volume do not readily equate to profit; Casper, ThredUp and The RealReal REAL being prime examples. “Wall Street has a tendency to look at anything that’s in e-commerce, jump up and down, get terribly excited about it and say, ‘Oh, isn’t it wonderful?” said Neil Saunders in a recent interview.
Admittedly venture capital and the markets have had an appetite for building these mega direct-to-consumer companies and have taken a ‘long view’ on profitability, but certain market realities are starting to sink in.
As outwardly efficient as DTC selling appears, with its low threshold to entry and its lack of retail infrastructure, the nosebleed costs of customer acquisition, warehousing, distribution, and last mile delivery and return costs will continue to plague their pursuit of profitability. Even with Chewy’s reported gross profit increase to 27.6 percent, it pales in comparison to omnichannel competitor Petco, who reported a gross profit margin of 42.8 percent in their fiscal year ending April 30, 2021.
The Dye Has Been Cast
Clearly, industry leaders such as Target TGT , Walmart, and Best Buy BBY have demonstrated over the last half dozen years that survival and profitability in this era of unified commerce depends on a hub-and-spoke model, with the store being the hub. These retailers have demonstrated that the store has an active role to play in e-commerce distribution, micro-fulfillment, and the customer’s path-to-purchase. Target executives have gone on record saying shipping from stores saves them 40 percent on online fulfillment costs over shipping from distribution centers.
Petco’s 1,450+ store base provides them with the advantage of faster and lower cost delivery. And while we have become conditioned to quick turnaround, there are several other factors that are quickly becoming top-of-mind for more consumers.
Be Sustainable or Be Stained
With the predictability of Chewy’s near 70 percent Autoship prescription penetration, distribution of those products takes on an entirely different complexion. Ironically, PetSmart, Chewy’s biological parent, along with their 1500 stores suddenly looks real appealing as a lifeline and means of solving the increasingly expensive “last mile” fulfillment solution. Oh, and then there is the nasty cardboard problem that will increasingly be perceived as anathema to great brand value.
Sustainability, and carbon neutrality have become hot button issues for consumers of nearly every demographic, but particularly Millennials and Generation Z’s. Not to put too fine a point on the matter, I was rather astounded with our most recent Chewy delivery. The order included a bag of dog food, and a tiny package of probiotics. They were scheduled for the same day delivery and arrived together, but in two separate boxes on the same truck. The order could have readily been put into one box, and this was not the first time “their dog bit the environment.”