What PetSmart’s Split from Chewy Means to the Industry | News

In the three years following PetSmart’s acquisition of Chewy, a move that required the big-box retailer to take on massive debt, pet industry insiders have speculated over how the purchase would shake up the pet retail channel. Now, it seems, the acquisition was a poor fit for the mega retailer.

As Pet Product News reported earlier this week, PetSmart officials unveiled the company’s plans to sell all shares of Chewy. In addition, a group led by private equity firm BC Partners, which acquired PetSmart in 2015, will recapitalize and split the companies in two, according to a Bloomberg report.

“As time passed post PetSmart’s acquisition of Chewy, the glaring lack of integration and ‘dueling banners’ of Chewy.com and PetSmart.com, not to mention the siphoning off of PetSmart brick-and-mortar sales by Chewy, always seemed a bit at odds,” David Lummis, lead pet market analyst for market research firm Packaged Facts and author of PPN’s monthly Market Outlook column, recently told PPN.

Following the acquisition, Chewy did next to nothing to help PetSmart bolster its online strategy, insiders suggest.

“In hindsight, the acquisition looks more like a financial [strategy] as opposed to [an] omnichannel strategy that has helped PetSmart begin to dig out from under its considerable debt, including via the Chewy IPO,” Lummis said.

The move to sell its shares of Chewy could indicate that PetSmart officials and the company’s private equity owners will instead focus on services.

“Looking ahead, PetSmart is well positioned to shift more of its focus to higher-margin services and Rx pet medications, especially given its long-standing relationship with Banfield,” Lummis said.

In the meantime, the move enables Chewy to go its own way, which will likely be beneficial to the online retailer.

“[This move] will eliminate any confusion surrounding [Chewy’s] relationship with PetSmart and allow it to function as a pureplay e-tailer, free of any constraints related to PetSmart, financial or otherwise,” Lummis said.

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What Does It Mean for Independents?

The independent pet specialty channel has been feeling the impact of changing market dynamics for years, as the growth of e-commerce and big-box pet specialty stores, among other developments, leeched business from the indie channel. However, the separation of PetSmart and Chewy may not have an immediate or obvious impact on pet stores.

Paul Allen, CEO of Woof Gang Bakery, a specialty pet retail and grooming franchise with more than 100 stores in the U.S., said he doesn’t think it changes anything for brick-and-mortars, but said that Chewy remains a threat to the retail channel.

“I have been very vocal,” Allen said. “I don’t think Chewy is good for the industry; it’s not good for brick-and-mortar pet of any size—the Petcos, the PetSmarts, the big box or the mom-and-pops. I think as long as Chewy is allowed to sell items cheaper than most can buy for, it’s not a good thing. So [the two companies] going in a different direction, I don’t think it does anything to the industry.”

Still, the move will likely help Chewy strengthen its position and continue to grow sales, which means independent pet specialty retailers will also need to follow suit by bolstering their strengths in light of the ongoing pressure from both e-commerce and big-box specialty.

“If independents can be aggressive with services within their store [like] grooming, self-service grooming and maybe veterinary services, I think they can compete, because Chewy is never going to be able to groom a dog online,” Allen said. “Services are such an important part of our business. But [for] brick-and-mortars of all sizes, that’s what’s going to set us apart.”

As for the retail side of the business, Allen added that an industrywide commitment to enforcing minimum advertised price (MAP) policies is likely the only thing that can help level the playing field between physical stores and mega e-tailers—even if it doesn’t fully insulate brick-and-mortars from mounting pressure from online competition.

“The only time we will protect the brick-and-mortar pet industry is when we look at MAP pricing as being real and not just a fabrication and we respect that you can’t ship a 30-pound bag of dog food and make a profit,” he said. “So as long as finance houses and private equity companies are supporting companies for their losses, the industry is going to be what it is today.”

On a positive note, Allen is confident that Woof Gang Bakery’s approach of providing both retail and services under one roof is a winning strategy despite heavy competition from the likes of Chewy and Amazon.

Allen said that the COVID-19 pandemic, which prompted many shoppers to go online, now has customers rethinking their buying habits. As a result, shoppers believe supporting local businesses is very important, and Allen reported that customers that Woof Gang lost to online channels are returning to the company’s brick-and-mortar stores.

“Customers are loyal when you do services and when you’re grooming their dog,” Allen said. “We’re seeing them come back, and we know this year, our average store is going to be up more than 23 percent, and so we’re really happy with what has happened in 2020 growth wise.”

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