Pet category gravitates online, could be a ‘smart’ play for Wal-Mart

PetSmart’s recent acquisition of industry-disruptor Chewy cost the pet specialty retailer $3.35 billion, about as much as Wal-Mart paid for Jet.com. Both eye-popping deals were about acquiring the competition.

PetSmart saw an opportunity to grow sales with Chewy because 40% of shoppers buy products online for their pets, according to the 2017 Pet Owners Survey by the American Pet Products Association. The survey estimates pet sales of $69.36 billion this year, up 3.92% from a year ago. About $1 billion of 2016 sales was attributed to online sales.

A recent report from analytics provider 1010data indicates PetSmart will benefit from an estimated 15% uptick in sales despite 75% of Chewy’s customers already shopping PetSmart. The report found Chewy’s shoppers spent $9 more per trip for an average $71 than at PetSmart. This deal is seen as a way for PetSmart to break out of a three-year flat sales pattern and command more market share in the pet category.

This report also found Chewy.com had a conversion rate of 4.2% in 2016, better than the 3.7% conversion rate at PetSmart. Analysts agree PetSmart no doubt looked at Chewy the same way Wal-Mart viewed Jet’s smart basket technology.

Walmart U.S. e-commerce CEO Marc Lore, who was part of the retail giant’s acquisition, has said acquisition of online players will continue to be part of the company’s growth strategy. He has not hinted that pet specialty is in play, but he did say there are many categories the retailer is looking at expanding its expertise in online and brick and mortar.

FAST GROWTH ONLINE
Talk Business & Politics asked retail insiders about a possible pet acquisition by Wal-Mart. Keith Anderson, senior vice president of Boston-based Profitero, said pet food is a large and fast-growing category online, which has to be garnering some interest from Wal-Mart and other omnichannel retailers.

“Shoppers love it for the selection and convenience. They feel smart letting someone else transport the heavy bag to their home. For the same reason, the economics in this category are very challenging,” Anderson said. “Toys and treats are profitable, but dry dog food in heavy bags is very hard to make money selling online.”

Anderson said subscription auto-replenishment can help by making demand more predictable, allowing for lower-cost ground shipping or expedited air freight. He said some retailers, like Target, have resisted selling pet food online, but instead, preferring to list product details and direct shoppers in-store. He said “selective distribution” is a big deal in the pet food industry, as premium brands need the availability of retail channels.

“Premium brands typically restrict access to specialty retailers. For example, they dedicate a minimum percentage of their assortment to pet-related products or train staff a minimum of X hours on the benefits of pet nutrition. Some of these brands historically resisted or avoided distribution in supermarkets and mass channels for fear of commoditization,” Anderson explained.

The rise of Amazon has changed that perception and premium pet brands have loosened their control of distribution as third-party sellers often sell premium pet products online, he said.

“Regardless, Amazon has been able to attract brands (and) products that Wal-Mart and other mainstream mass retailers may have struggled with, “ Anderson said.

NOT AS MANY ‘ATTRACTIVE’ OPTIONS
Carol Spieckerman, CEO of Spieckerman Retail, said the pet category is an attractive, evergreen business that Amazon and other digital players have already dented.

“PetSmart was smart to snatch up Chewy’s but there aren’t as many attractive niche brand options in pet as there are in more developed digital categories like fashion and home. Pet products would be a logical digital add-on for Wal-Mart yet the dearth of established platforms may delay an acquisitive move for now,” she said.

That said, “Either way, Wal-Mart would be smart to prioritize pet products online from both a price and convenience/quick delivery perspective, particularly frequently-purchased items such as food,” Spieckerman added.

She said Wal-Mart already offers an expanded brand offering online, which is a step in the right direction, but lowering the free delivery threshold for some items would make the retailer more competitive online.

Anderson pointed to several possible takeover targets in the pet speciality space. He said Chewy was the clear leader until PetSmart snapped it up. PetFlow, a New York-based pet specialty startup launched in 2011, was recently acquired by Phillips Pet Foods & Supplies last month. PetFlow has annual revenue around $72 million, according to Forbes. The sales price of this deal was not disclosed.

Following are other possible targets.

• Pet360 began in 1997 offering sales and services from the back of a truck, but that grew into PetFoodDirect.com — one of the first online pet stores.

• Doctors Foster & Smith based in northern Wisconsin is a direct-to-your-door pet supply source that began with a catalog business as a side business for veterinarians. Today they have a growing online business and and one retail location in Rhinelander, Wisc.

• Entirelypets offers online pet supplies and non-prescription pet medications. The vet operated site provides consumers with a wide selection of pet products. The site was launched in 1999.

• 1-800-PetMeds is an online pet pharmacy owned by Delray Beach, Fla.-based PetMed Express. The company has a market capitalization of $730.17 million, and sales totaled $249.18 million last year.