Kings of convenience: Chewy and Petco highlight why e-commerce rules in 2020

13:27 PM | September 16, 2020 | Joseph Harvey

The latest developments at Chewy and Petco have further underlined how important and increasingly competitive online retail has become in 2020. Chewy has issued extremely strong first-half results, whereas Petco is eyeing a sale or initial public offering (IPO) in 2021.

Around one year ago, David Sprinkle of Packaged Facts underlined why "no one ever went broke buying into the American love of convenience." In 2020, the accuracy of this statement has been even more apparent with the social restrictions put in place by the COVID-19 pandemic. Packaged Facts now claims the US market for online pet products will increase by $3.9 billion this year to claim 27% of all pet product sales.

PetMed Express recently highlighted how online sales are enabling continued buoyancy in the US companion animal sector by posting a 20% sales increase during its fiscal first quarter.

However, the company making the biggest strides in the online pet product space is Chewy. The midpoint of Chewy's 2020 guidance suggests it will grow its revenues by $2 billion in 2020—allowing it to capture over half of the total growth of the US online pet product market forecast by Packaged Facts.

Chewy—owned by PetSmart—further underlined its credentials with a 47% increase in second-quarter sales to $1.7 billion. The company also reported a net loss of $32.8 million (+113%), for the three months ended August 2, 2020.

Sumit Singh—chief executive the Florida-based firm—stated: "Chewy's advantageous positioning in the pet industry's race towards e-commerce, our culture of innovation and our singular focus on customer experience resulted in another quarter of outperformance."

He said the firm set new records in second-quarter sales growth and new customer additions. The company currently has around 16.6 million active customers—up 38% year on year. Chewy receives an average annual spend of $356 per customer, which is up 3% year on year.

”As e-commerce undergoes meaningful changes, multiyear growth curves have been compressed into timeframes measured in quarters, if not months,” he added.

"Over the past few years, we have invested in technology, new businesses, fulfilment capacity, and in building an extraordinary team. This has prepared us to quickly adapt to the acceleration of our own growth curve. This preparation, agility and business athleticism enabled us to provide top-notch service to the growing millions of pet-owning households in the US who depend on Chewy."

At the midway point of the company’s fiscal 2020, revenues were up 47% to $3.32 billion. Net loss improved 28% to $80.7 million.

For the third quarter, the firm expects sales to be between $1.70 billion and $1.72 billion (year-on-year growth of 38–40%). Chewy forecasts full-year revenues between $6.775 billion and $6.825 billion (+40–41%).

Chewy went public in June 2019 and, earlier this month, its shares reached an all-time high of around $61 each on the New York Stock Exchange. The firm currently has a market capitalization of just under $24 billion.

Chewy has continued to expand its distribution network by introducing its latest fulfilment center in Archbald, Pennsylvania. This is expected to begin shipping orders by mid-October. The new site will be Chewy's 10th fulfilment center overall and its first automated facility.

The firm also recently opened a limited catalog fulfilment center in Kansas City, Missouri, that will provide products during periods of high demand. Chewy expects to scale operations in the Kansas City area through 2021 and add a second automated fulfilment center.

Monitoring customer behavior

Chewy is monitoring the behavior of its post-COVID-19 customers that started using the firm's services in the first half of the year. The company is looking for "any notable variances against our more mature pre-COVID-19 customer cohorts and are encouraged to observe a high degree of consistency in customer behavior between the two."

Chewy said: "The first-quarter cohorts remained positively engaged and the initial engagement levels of the second-quarter cohorts matched their first-quarter peers. Overall customer acquisition rates remain above pre-pandemic levels, and other metrics such as basket sizes, reorder rates and Autoship sign-up remain healthy and stable. We remain encouraged by these trends."

Chewy added more active customers in the first half of 2020 than the whole of the previous year. The firm expects its new customers to increase their annual average spend to $500 by year two and over $700 by year five.

It added: "An exciting new development with the newer cohorts is, unlike their predecessors, who primarily purchased food and essentials, we now have the ability to expose our newest cohorts to a larger variety of purchase options earlier in their customer lifecycle.

"These include prescriptions, a wide variety of hard-goods options (fueled by our expansion of private label offerings) and gift cards. These expanded offerings allow us to serve the customer more fully after their initial purchase and expedite the capturing of a greater share of their wallet."

Petco could IPO

According to Bloomberg, Petco is considering a sale or IPO that could be worth $6 billion. The news outlet cited “people with knowledge of the matter.”

Petco is aiming to contest Chewy and Amazon in the ever-increasingly competitive pet retail sector, which has become an even more hotly-fought space due to heightened online consumer spending during the COVID-19 pandemic.

San Diego-based Petco operates over 1,500 stores across the US, Puerto Rico, and Mexico. Some of these stores offer pet care services, veterinary advice and vaccination clinics. Petco also has an online sales channel and a digital health service called PetCoach.

Bloomberg suggested CVC Capital Partners and the Canada Pension Plan Investment Board (CPPIB) are reviewing strategic options for Petco. The process for a sale or IPO is not expected to start until 2021. The owners of Petco could still retain the business.

CVC and CPPIB acquired Petco for $4.6 billion in 2016, which was 10 years after TPG and Leonard Green took it private.