THE CHEWyMINATOR

Chewy rose from the ashes of Pets.com. Their war to exterminate independent pet stores raged for decades, but the final battle would not be fought in the future. It would be fought here, on your computer. Today...

IN THE BEGINNING - Back in 2011, Ryan Cohen and Michael Day were prepared to launch an online jewelry store. A week before launch (and "loaded with inventory, a website and a safe") Cohen had an epiphany! After an interaction at a local pet store, he decided he wanted to pivot and become an online pet supplies retailer. He wanted to build a best-in-class, customer-obsessed pet retailer. In three months, they built a website, partnered with a local distributor and a 3rd party logistics company and officially launched Mr. Chewy in June 2011. While boot-strapping the business and taking on several small loans, Chewy's sales started to grow. Within 18 months, they had a very impressive $26 million in revenue. After two more years of trying to secure VC, the duo finally hit pay dirt and received $15 million from Larry Cheng at Volition Capital. With an infusion of cash, Chewy embarked on perhaps one of the most ambitious customer acquisition programs. While CAC is an internal measure, it has been estimated that Chewy has spent as high as $225 per customer and with over 14 million of them, that is a lot of money spent to get your attention (and your business).

In 2014, Chewy's sales hit $205 million and in 2015, they had more than doubled again to $423 million. Chewy completed six more rounds of funding and raised over $350 million. Their sales more than doubled again in 2016 and hit $901 million. By April 2017, the ink was dry on a deal with PetSmart. They had been acquired for a record $3.35 BILLION!! They closed out 2017 with almost $2 billion in sales! Chewy continued their amazing growth trajectory in 2018 (armed with PetSmart data and new management experience) and finished out the year with sales of $3.5 billion. By the end of 2019, they achieved sales of $4.85 Billion and after a partial public offering by PetSmart (PETM still owns roughly 65%), Chewy's market valuation hit nearly $9 BILLION! Oh yeah...since it was founded, Chewy has not once, NOT EVER, turned a profit. In the most recent fiscal year, they reported LOSSES of $252.4 MILLION!

In less than a decade, Chewy has acquired 13% of US pet food sales and more than 60% of online sales. They currently employ 10k people and have two HQs (Dania Beach, FL and Boston, MA); two customer service centers (Dallas, TX and Hollywood, FL) and 9 fulfillment DCs across the country. Despite having nearly $5 billion in sales, their own fulfillment network, preferential parcel rates and their own in-house pharmacy (80% of every compounded drug dollar is profit), Chewy remains "unprofitable".

"...ALL OTHERS BRING DATA!" - Mr. Chewy was founded with a mission to appeal to consumers and their love of pets. It was built on customer service and convenience (two things that were horribly missing in pet care at the time). They, like many dot coms, do not produce anything; they simply make the "already available" more convenient. Yes, they have American Journey as their private label and they have an in-house pharmacy, but those are just means to an end...more data points. Data! Terabytes, upon terabytes, of data. Data on you, your pet(s), your shopping habits and hundreds of your preferences and "calls to action" (Chewy's Privacy Policy). They know who you are and where you are; they know your pet's breed, age, weight and eating habits. They know you probably better than you know yourself because your actions are recorded and analyzed. They know the products you've viewed, the articles you've read and the "informational" videos you've watched. When you consider that VCs and corporations have invested and/or spent billions of dollars on an "unprofitable" Chewy, it makes you wonder what it is they see that is so appealing.

DARK FATE - Chewy has positioned, and firmly entrenched, itself between retailers and manufacturers. They have become the consumers "go to" source for pet food and supplies. When asked what pet food they feed their dog, 30% of owners cannot recall the brand but know they buy it on Chewy and THAT, right there, is the issue.

"We have developed integrated technology that enables us to capture personalized profiles for each of our customers as well as their pets so that we may provide them with personalized recommendations." - SEC Filing

The problem with getting "personalized recommendations" is that humans are lazy shoppers. The science of marketing has been highly refined over the last few decades and with the introduction of artificial intelligence (AI), it isn't necessarily WHAT is pitched to us so much as it is HOW and WHEN it is pitched. There is a significant difference! The threat we face is that we may not be able distinguish our "real" wants from what Chewy wants.

The issue is that the overwhelming majority of pet manufacturers have abdicated their consumer insight throne. The future of Chewy isn't about offering better pet food or supplies, it is about controlling what is sold, "owning" consumer/pet data and "pay for play". It is about Chewy making their customer base their new product offering. You will be acquired, assimilated and sold, all without knowing (or caring). Who will you be "sold" to and why? The manufacturers that have made Chewy millions of dollars in sales will pay handsomely for 1) access to Chewy's 14 million customers and 2) knowing who those consumers are and how to reach them. I'm not talking about knowing "where to fish" (e.g. likelihood of a "target consumer" watching baseball and the Tonight Show vs football and The Late Show). This is about knowing what each fish in the barrel likes to eat, when they are hungry and which lure is most likely to hook them! If you don't think this is possible, watch the Amazon Super Bowl commercial where they tout the power of their predictive data and AI.

CONCLUSION - In 9 years time, Chewy has lost over $1 billion dollars while selling nearly $5 billion of food and supplies to over 14 million customers. During this time, independent pet stores have been under siege and falling by the wayside at a rate of hundreds per year. Manufacturers have spent a disproportionate amount of money to participate in Chewy's programs while at the same time, being margin dilutive in their sales to them. If Chewy's pricing is on average only 10% less than in store, they have "lost" $500 million of their own sales and eroded billions from the industry. Chewy has commoditized the pet industry and manufacturers are their accomplices. In 2020, we will see for the first time in at least a generation, dollar sales flat to declining while tons are increasing. And much like when Petco jettisoned "the nasties" to improve their profitability (under the debunked myth of becoming a natural pet store), Chewy will rid themselves (and the buying public) of companies and brands that don’t "play nice" or make them their required margins. We won't notice because we will all be too busy admiring our pet's portrait and our Holiday cards. We will have given away choice and personal data/insights in exchange for their beads and trinkets. Hasta la vista, baby!

ADDITIONAL ARTICLES ON CHEWY

Beware Online Retailers Bearing Gifts

PetSmart, Chewy and the New Economy

Something Wicked This Way Comes