Beware of Online Retailers Bearing Sales

"Timeo Danaos et dona ferentes." ["Fear the Greeks, even those bearing gifts."]

For those of you that may have forgotten (or never read) The Aeneid and the story about the fall of Troy, here is a quick recap. The Trojan Prince Paris (in a ridiculous "beauty" contest) chooses Aphrodite over Hera and Athena. As a reward, Aphrodite "secures" Helen for Paris and the two set sail for Troy. Menelaus (Helen’s husband) is more than a little angry and with the help of his brother (King Agamemnon) launches “a thousand ships” to fight Troy and return Helen to Greece.  After a 10 year “stalemate”, Epeius (a master carpenter) builds a giant wooden horse (an offering from the Greeks to Athena in exchange for a safe voyage home) for Sinon to present to the Trojans. Despite the warnings of Cassandra and Laocoon, the Trojans take the horse in past their city gates. At night, when the Trojans were least expecting an attack, the Greek warriors that were hiding in the horse emerged and opened the gates for the entire Greek army to enter and conquer Troy.

Let me introduce you to the cast - The Trojan War is the pet food industry fight between brick and mortar stores and online retailers. The role of Helen is played by Pets.com (the poster child of dot com failures); Epeius is played by Chewy’s Founder/CEO Ryan Cohen and Chewy.com IS the Trojan Horse. I know, humor me.

Back in 1998 Pets.com started with much fanfare thanks to a Super Bowl ad and a sock puppet. Many in the industry thought it was a beautiful harbinger of things to come and Wall Street agreed. However, within 22 months of its start, Pets.com closed shop, losing an estimated $300 million for its investors. Sadly, for the pet industry, there was no turning back as the “ships” had been launched.

For the next decade, traditional stores fought with many different online startups, each believing they had the upper hand. It was a stalemate as the online competitors couldn’t figure out how to “crack the code” of customer service and cost to serve. Then in 2011, Ryan Cohen (Epeius) and Michael Day created their Trojan Horse where “promise” beats “profit”. Yes, Amazon had been selling online for more than a few years BEFORE Chewy came about but Cohen and Day flipped the model by aggressively going after customers from ALL channels. They promised phenomenal customer service, super premium/”natural” SKUs (with higher margins), free shipping and a lower price than their brick and mortar competitors.

In 2016 it is estimated that Amazon and Chewy accounted for almost $2 Billion (or about 90%) of the total online pet food sales. Still a “small/single digit” piece of the 2016 total pet food sales pie (about $24 Billion) but it is growing at an impressive rate. A March 3 post by www.petfoodindustry.com claims online sales have a 15% annual growth rate which is 3.5X that of the channel as a whole. What’s NOT to like about that, right? 

"Things aren't always as they appear. I've been believing things to be a certain way because I want them to be that way." - B. Dennen

On the positive side, shoppers are paying less online for the same product they can pick-up at a store. Delivery is "free" right to your door and damn it if Chewy doesn't make you feel all warm and fuzzy with their customer service. In my best impression of Laocoon, there are plenty of negatives. While manufacturer gross dollar sales have gone up, EBITA has most certainly fallen, in some cases, hundreds of BPS. Funding Chewy and others in a fair and equitable way is challenging, as is the creation and adherence to MAP. Shoppers now expect (no, demand) free shipping AND pricing discounts of 15-20%. While some may argue this point, pet food is quickly becoming more and more of a commodity and driven by price. In the case of Chewy, a shopper doesn't have a relationship with the manufacturer, CHEWY is their relationship. This is where the industry needs to read the tea leaves carefully.

If, as a manufacturer, I no longer OWN the relationship with the shopper, my brand is easily replaced in the pantry. Online retailers collect terabytes of data on their shoppers behavior and when that data is combined with the target audience preferences from the manufacturer, you have the birth of a very dangerous opportunity - online private label. Its coming! While manufacturers are blinded by sales growth, they are unwittingly wheeling in a great big horse that holds a potentially devastating surprise. Online retailers gained their shoppers by cutting out distributors and accepting a lower margin than B&M retailers. Why wouldn't they cut out the manufacturers margins and make themselves profitable. If a shopper paid $79.99 for a branded product in store and switched to online shopping (with auto-replenishment and free shipping) for $64.99, don't you think they would switch again to buy the private label offering for $57.99?

There are a lot of different scenarios that can play out in this space, no one knows for certain what will happen. What I have written may just be my own biases and the invading army, springing out from the horse, may just be the best thing ever for the industry. Only time will tell. I'm off now to sit by the water with my sons, trying to catch a glimpse of those sea serpents!