The isolation imposed in 2020 by the Covid-19 pandemic triggered a boom in pet adoptions and a bonanza for vendors of kitty litter, dog food, and accessories. In the first 12 months of the crisis, shares of Chewy, an online pet supply merchant, quadrupled as its racked up 45-50% year-over-year quarterly revenue surges. The two dominant U.S. bricks-and-mortar retailers, PetSmart and Petco, saw similar spikes.
Four years later, growth in the $136 billion annual pet supply business has slowed and Chewy’s stock trades at about a third of its 2021 peak price. Yet pet ownership remains as popular as ever.
According to industry statistics, 70% of U.S. households have a pet “child” at home, while only 40% have a human child.
It turns out that retailing pet supplies is mostly a dog-eat-dog business where Amazon, Walmart, Costco, and just about every other general merchandise retailer competes on the price of consumables. That’s not a growth scenario as PetSmart, the largest national chain, has discovered. S&P Global Ratings recently downgraded the company’s debt, noting in its recent report that same-store revenue shrank last year by almost 5%. Shares of publicly-traded rival chain Petco, with about 1,500 locations, have also taken a beating over the last four years—down about 90%.
But Petco seems to have found a niche that is producing a turn-around.
In its most recent quarterly report, Petco said its revenue was up by 1% to $1.51 billion, with improved margins. What’s the secret ingredient?
In its third quarter call with analysts, at the end of December, CEO Joel Anderson’s remark was: “Our initiatives are currently focused on three critical areas: merchandising, servicing our customers, and driving efficiency across our business.” Petco’s strategy is rooted in serving as a complete, one-stop shop that caters to all of a pet’s needs, with hands-on services being a clear differentiator from online-only competitors. For pet parents, a move reflected in its decision in 2021 to change its corporate name to Petco Health and Wellness Company.
More than 250, full-service Vetco Total Care hospitals now include full medical care in a setting under the Vetco banner. Most Petco stores also offer dog training, grooming and other services on site, as well as mobile veterinary services. Hospital revenue was up 17% for the recent quarter.
The company recently launched a “Welcome to the Family” program aimed at first-time pet owners. Last year, Petco and Nationwide Insurance launched a customizable pet health insurance program. Taken together, Petco’s services revenue was up 9% for the recent quarter and the company reported a 5% boost in gross profit.
In spite of the flat pet supplies market, the approach to complete pet care CEO Joel Anderson told analysts. “We don’t have to rely on the marketing getting better in order for our business to get better.”
Stephen Reyes is the SVP, Pet and Veterinary Services at Petco and in speaking to him recently he shared that “Pet parents see pets as family members” and it is this closeness that will drive growth in the pet care services part of their business. Stephen shared that, younger generations are also looking for “quality and personalization and are willing to spend on levels of services that range from grooming and training to veterinary services” which is why he is seeing services outpacing other areas of the business. Citing Morgan Stanley’s assessment, Stephen believes: “Spending growth in the pet industry could reach 7% annually by 2030.”
Stephen went on to say, “one of our core differentiators in the market is our wholistic care from start to finish”. He said that Petco offerings are also differentiated as a premium provider who offers 6-week pet grooming plans, vet recommended packages and even salons of their customers.
The demographics of pet ownership are more complex than one might imagine. Gen Z and Millennial consumers are most likely to have a pet and less likely to have children. According to recent data from the National Association of Realtors (NAR), the share of households with children dropped from 48% to 40% over the last two decades while the number of households with a pet has seen steady growth since 1988, from 56% to about 70% today.
Real estate and pets are increasingly connected. Younger consumers who tend to be renters are finding landlords increasingly resistant to allowing pets. That’s driving some into the housing market.
In the past, more homebuyers were looking for properties that had the right features for a house with kids. The NAR says it is seeing an uptick of consumers looking for the perfect house for their fur-bearing children. The association’s report found that 19% of all buyers said they thought of their pet when looking at neighborhoods.
Petco’s wholistic care approach is a reminder about what goes into creating a brand that inspires loyalty. As we noted here recently, Starbucks began as a single Seattle coffee shop until founder Howard Schultz realized it had become a community meeting spot and a juggernaut was born. Petco’s approach—treating pets as children and customers as parents—should also pay off in the long run as its stores become one-stop pet community centers.
Keeping the customer and community center to all their decisions will help them better understand and serve them.
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