On April 18, PetSmart announced the intent to acquire 6-year-old online pet retailer Chewy.com.
Less than 2 years after it had itself been sold to a private equity firm.
The reported $3.35 Billion price tag surpassed the deal that Walmart executed in its purchase of online retailer Jet.com for $3 Billion.
the largest eCommerce transaction in history
Analysts speculate the move was based on PetSmart’s need to expand its reach into more value-oriented shopper segments.
The question remains: how shopper-focused was this business decision?
A more detailed examination of the facts might indicate that buying Chewy.com was a pre-emptive strike to avoid it falling into the hands of a most feared retail competitor.
It remains to be seen whether the shopper will benefit from this business marriage.
SLEEPLESS IN SCOTTSDALE
Over the last year, there must have been many cumulative sleepless nights experienced in Scottsdale by PetSmart leadership.
Reorganizing retail operations was the initial focus to achieve desired efficiencies following the $8.7 Billion acquisition by BC Partners.
But, PetSmart’s leadership was also keenly aware of the increasing marketing spend and associated earned media being driven by Chewy.com’s expansion efforts.
Then in early February, Chewy.com secured a $90 Million line of credit from Wells Fargo.
ALL ATTENTION ONLINE
This ensured the company could continue driving consumer attention to its online retail site where it marketed many of the niche brands PetSmart carried in its retail stores.
1010Data estimated Chewy.com accounted for over half of all online pet food sales.
It is expected to deliver $2 Billion in retail sales this year.
At some point, PetSmart must have become gravely concerned that the people in Bentonville, Arkansas would begin evaluating Chewy.com as an acquisition target.
REACHING DIFFERENT SHOPPER SEGMENTS
Pet retailers are unlike traditional Food, Drug or Mass retailers.
Traditional retail channel operators focus on merchandising national brands with heavy trade promotion budgets.
PetSmart and other pet specialty retail chains (like Petco and Pet Valu) seek to attract shoppers who view their pets more as important members of their families.
Just as they would buy a pair of fashion sneakers for one of their children, these shoppers believe their pets are worthy of receiving expensive food and supplies.
Traditional retailers continue to use paper circulars delivered to shopper’s homes advertising in-store promotions designed to drive store visits.
PetSmart moved away from printed circulars in the last 2 years.
They opted to publish a virtual circular to advertise product availability, rather than to highlight hot deals on everyday food items.
PetSmart is clearly seeking to engage shoppers through non-price value propositions.
They partnered with “Bring Fido” a website that tracks pet-friendly hotels and retailers to integrate the solution into PetSmart’s mobile app.
Then they implemented a quasi-loyalty Buy A Bag Give A Meal campaign that contributed a meal to a needy shelter pet for every bag of cat & dog food purchased at PetSmart.
Petsmart counted on the likelihood that caring shoppers would want to extend their affections to other deserving pets.
So why would PetSmart choose to acquire an online retailer focused on highlighting the price-value equation of shopping?
DEFENSE IS THE BEST OFFENSE?
The Chewy.com target is a price-value oriented shopper who appreciates the convenience of shopping from their desktop or mobile devices.
It must have been increasingly concerning to PetSmart that they would soon experience the “showroom effect” that had befallen electronics retailer Best Buy.
Showrooming is when customers visit stores to
physically evaluate products, and then go to online retailers to conduct the transactions.
Add to this the realization that Walmart was already active in the online retailer acquisition market and Chewy.com could be a prime target to help Walmart expand its online presence in a channel increasingly dominated by Amazon.
PetSmart might well get caught in the collateral damage
The price PetSmart paid for Chewy.com was between 1/3 and 1/2 of what BC Partners doled out to acquire their brick and mortar business.
While there exists an argument that PetSmart snatched up Chewy.com to expand into a segment of price-value shoppers.
However, it seems more realistic that the purchase was a pre-emptive defensive measure designed to preclude Walmart from further increasing its competitive position in the pet care market.
WHAT’S IN IT FOR THE SHOPPER?
In announcing the acquisition, PetSmart indicated that Chewy.com will continue to be operated independently of the parent company.
This makes sense given the lack of synergy between the two shopper communities.
Building a loyalty mechanism based on product savings might well appeal to the Chewy.com shopper, but it might not resonate with a PetSmart shopper more concerned with quality products and the shopping experience.
Conversely, Buy a Bag Give A Meal doesn’t deliver any direct shopper value which would likely not appeal to the Chewy.com shopper.
Moreover, visibly marketing the connection between PetSmart and Chewy.com would necessitate other service-related considerations.
Can a shopper who purchased something at Chewy.com make returns at a PetSmart location?
If no, would this disappoint shoppers?
For the time being, keeping the businesses as separate entities make sense to maintain their individual brand equities.
But, this is done at the expense of any increased shopper value.
In fact, Chewy.com shoppers are losing a little in the deal.
Several brands carried by Chewy.com have announced plans to discontinue distribution because they refuse to support PetSmart at the expense of their relationships with smaller independent pet stores.
Time will tell whether the shopper wins in the PetSmart-Chewy.com deal
One of PetSmart’s corporate values is that they “approach everything – from beginning to end – with the customer in mind.”
As it stands, the acquisition serves only to protect PetSmart against a more direct competitive threat from Walmart.
That may be enough of a reason to justify the $3.3 Billion outlay.
The shopper will have to wait.