Pandemic pet adoptions add to Chewy’s tailwinds, but is sustainability in store?

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The pet industry has been in tears for the past couple of years, and it doesn’t look like it’s going to end anytime soon. Pandemic outbreaks have hit animal shelters even as they embarked on stealthy home improvement projects, keeping both categories firmly in the dark.

Millennials who are late in having children adopt four-legged friends and treat them like children. Meanwhile, empty nesting baby boomers seek out breeders for their surrogate tail-carrying grandchildren and spoil them accordingly. Full confession, our house applies.

According to the American Pet Products Association, in 2020 pet product sales topped $ 100 billion ($ 103.6 billion) for the first time in history. In addition, they predict that number will increase by around 6% in 2021, double the historic increase of 3%.

Choose Chewy

In a recent CNBC interview on Mad Money, Chewy CEO Sumit Singh reported that there was no appreciable increase in the number of pets returned to shelters after the pandemic, which is another positive indicator. Additionally, the pet products provider launched a pet adoption service last month, working with 6,000 shelters nationwide.

Private company PetSmart acquired Chewy in 2017 for around $ 3 billion and separated them in an IPO in June 2019. The offering price of $ 22 per share gave a valuation of $ 9 billion. Last week’s $ 75 to $ 77 per share price range put companies’ market capitalization at over $ 32 billion. According to an April 2021 Statistica publication, based on annual revenue, PetSmart now has 25.1% of the pet products market and Petco 15.6%.

Meanwhile, in the rapidly growing online pet products market, Amazon

AMZN
leads with 59%, followed by Chewy at 41% and Walmart

WMT
at 33 percent. PetSmart and Petco occupy fourth and fifth places, respectively.

High flight DTC

Chewy is certainly one of the top direct-to-consumer brands whose business continues to grow at an astounding rate. However, from their inception until their IPO in 2019, and until the third quarter of 2020, they had never been profitable. The record year of 2020 saw the company’s customer base grow 32% to 19.8 million customers, with a net 8.7% increase in active customer spending. Chewy’s first quarter 2021 was also quite positive, with $ 2.14 billion in net sales generating a modest net income of $ 38.7 million. Their gross margin of 27.6% improved 4.2% year-on-year from 23.4% in 2020.

But, perhaps most impressive is the fact that their “Autoship” subscription customers grew 34.4% to $ 1.48 billion and accounted for 69.3% of online sales. This demonstrates how much Chewy’s customers (our household included) have become dependent on the monthly box (s) arriving at their doorstep, we’ll talk about that in a bit.

Benefits anyone?

As has been the case with most large direct-to-consumer retailers, that is, pure e-commerce game, growth, scale, and volume do not easily equate to profit; Casper, ThredUp and RealReal

REAL
being exemplary examples. “Wall Street tends to look at everything in e-commerce, jump up and down, get terribly excited about it and say, ‘Oh, isn’t that wonderful? “said Neil Saunders in a recent interview.

Granted, venture capital and the markets have been keen to create these mega direct-to-consumer businesses and have taken a “long-term view” on profitability, but certain market realities are starting to take hold.

As effective in appearance as DTC selling seems, with its low entry threshold and lack of retail infrastructure, the bloody costs of customer acquisition, warehousing, distribution and costs of last mile delivery and returns will continue to hamper their quest for profitability. Even with Chewy’s reported gross margin increase to 27.6%, it is paltry compared to omnichannel competitor Petco, which reported a gross profit of 42.8% in its fiscal year ending April 30. 2021.

The dye has been poured

Obviously, industry leaders such as Target

TGT
, Walmart and Best Buy

BBY
have demonstrated over the past six years that survival and profitability in this era of unified commerce depends on a star 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 buying journey. Target executives have publicly stated that shipping to stores saves them 40% on fulfillment costs online compared to shipping from fulfillment centers.

Petco’s base of more than 1,450 stores gives them the benefit of faster, lower cost delivery. And while we’re used to quick turnaround times, several other factors are quickly becoming the priority of more and more consumers.

Be durable or be tainted

With Chewy’s Autoship’s nearly 70% prescription penetration predictability, the distribution of these products takes on a whole new complexion. Ironically, Chewy’s biological parent PetSmart and their 1,500 stores suddenly look very attractive as a lifeline and a way to solve the increasingly expensive “last mile” treatment solution. Oh, and then there’s the nasty cardboard issue that will increasingly be seen as anathema to great brand value.

Sustainability and carbon neutrality have become burning issues for consumers across almost all demographic groups, but especially for Millennials and Generation Z. Not to overemphasize the issue, I was rather amazed at our more. recent Chewy delivery. The order included a bag of dog food and a small packet of probiotics. They were to be delivered the same day and arrived together, but in two separate boxes on the same truck. The order could have easily been put in one box, and it wasn’t the first time that “their dog bit the environment”.


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