Chewy, the online pet supply retailer that was acquired by PetSmart in 2017 for $3.35 billion, is facing some challenges in the competitive and dynamic online pet market. The company, which split off from PetSmart a few years later, has seen its growth slow down and its profitability decline in the recent quarters. Chewy has also laid off more than 200 employees in November 2023, as part of its efforts to consolidate its headcount and align its efforts into priorities.
Chewy’s main challenge is to retain and attract customers in a crowded and fragmented online pet market, where it competes with other players such as Amazon, Walmart, Target, Costco, and Petco. Chewy’s value proposition is based on offering a wide selection of products, fast and free shipping, personalized customer service, and subscription-based services such as Autoship and Connect with a Vet. However, these features are not unique to Chewy, and some of its competitors have advantages in terms of scale, pricing, and loyalty programs.
Chewy’s revenue growth has slowed down from 40% in fiscal 2020 to 13.6% in fiscal 2022, while its net income turned positive for the first time in fiscal 2022, but only at $49.2 million. Chewy’s active customers declined from 20.49 million in the fourth quarter of fiscal 2021 to 20.39 million in the fourth quarter of fiscal 2022, while its net sales per active customer increased from $430 to $495 in the same period. Chewy’s CEO Sumit Singh attributed the decline in active customers to the impact of inflation, which has made consumers more cautious and discerning in their spending habits.
Chewy plans to expand internationally in 2023
In order to boost its growth and diversify its revenue streams, Chewy plans to expand internationally in 2023, starting with its first market outside of the US. Chewy has not disclosed which market it will enter, but it has said that it is building the capabilities and team to launch its international operations over the next few quarters. Chewy expects that this move will unlock a meaningful incremental total addressable market, and that its brand and mission will resonate strongly with pet parents in other countries.
Chewy’s international expansion is a bold and ambitious move, but it also comes with significant risks and challenges. Chewy will have to deal with different regulatory, legal, cultural, and competitive environments, as well as higher costs and lower margins. Chewy will also have to adapt its product assortment, pricing, marketing, and customer service strategies to suit the preferences and needs of local consumers. Chewy will face competition from local and global players, such as Zooplus in Europe, Petlove in Brazil, and JD.com in China, who have established presence and loyal customer bases in their respective markets.
Chewy’s international expansion is also a long-term investment, which may not pay off in the short term. Chewy will have to spend heavily on building its infrastructure, logistics, inventory, and brand awareness in the new markets, which will weigh on its profitability and cash flow. Chewy will also have to balance its international growth with its domestic performance, and ensure that it does not lose focus or market share in the US, where it still generates the majority of its revenue and faces intense competition.
Chewy could be leashed by an acquirer
Given the challenges and uncertainties that Chewy faces in the online pet market, some analysts and investors have speculated that Chewy could be an attractive acquisition target for a larger and more diversified company, who could leverage its strengths and synergies to create value. Chewy’s market capitalization as of December 8, 2023, was around $25 billion, which makes it a sizable but not prohibitive deal for potential acquirers.
Some of the possible acquirers that have been mentioned in the media and analyst reports include Amazon, Walmart, Target, Costco, and Petco. These companies have strong positions in the online and offline retail markets, and could benefit from adding Chewy’s loyal customer base, product assortment, and subscription services to their portfolios. These companies could also offer Chewy lower costs, higher margins, and greater scale, as well as cross-selling and bundling opportunities with their other products and services.
However, there are also some barriers and drawbacks that could prevent or deter a potential acquisition of Chewy. First, Chewy’s valuation is not cheap, and it may not offer a significant premium to its current shareholders. Second, Chewy’s acquisition by PetSmart in 2017 was not a smooth and successful transaction, and it resulted in a complex and contentious relationship between the two companies, which eventually led to their separation. Third, Chewy’s acquisition by another company could alienate some of its customers and employees, who may perceive it as a loss of independence and identity. Fourth, Chewy’s acquisition by another company could also trigger antitrust and regulatory scrutiny, especially in the US, where the online pet market is already highly concentrated and competitive.