Chewy, Petco touts healthcare as path to profit

  • Chewy and Petco are increasingly dependent on pet healthcare for their sales.
  • Both companies have seen a decline in hard goods such as toys and leashes, but are building a pet healthcare model.
  • Chewy CEO Sumit Singh said:

Monty Luxen | Culture | Getty Images

If one thing is clear from Chewy and Petco’s latest earnings report, it’s that pet health care will be key to whether the company can grow and generate higher profits in the long term. about it.

The retailers, both of which released their quarterly results on Wednesday, began investing heavily in pet health as a pandemic-fueled pet boom brought 23 million American families into their homes with new animals. .

The boom will make the overall US pet market a $123.6 billion powerhouse in 2021, growing to $200 billion by the end of the decade, according to new research from the Pet Products Association of America and Bloomberg Intelligence.

According to Bloomberg Intelligence, pet healthcare and the associated high profit margins are key factors for the overall market, driving spending growth in the United States.

Ann Hunter Van Kirk, senior biopharmaceutical analyst at Bloomberg Intelligence and co-author of the report, said: “This has led to a growing need for spending related to expensive medical care for older pets, and we expect this spending to keep pets healthy will continue to grow over the next decade.”

However, both companies may still need to woo investors with this approach as their shares fell on Thursday.

Chewy, an e-commerce giant known for its convenient automated delivery service and generous customer service policy, has focused on building pharmacy, insurance and telemedicine sectors while partnering with veterinarians to generate revenue for supplies. I’m here.

Founded by Ryan Cohen in 2011, the company now operates the largest pet pharmacy in the United States, CEO Sumit Singh told investors on an earnings call.

“Non-discretionary categories such as consumables and healthcare continue to be pillars of strength,” Singh, a former Amazon executive, said on a conference call.

A dog high fives with its owner in front of the New York Stock Exchange (NYSE) during Chewy Inc.’s initial public offering (IPO) in New York, USA, Friday, June 14, 2019.

Michael Nagle | Getty Images

Petco, meanwhile, has also invested in insurance and pharmacies, but is focused on building veterinary hospitals using its brick-and-mortar footprint. In 2020, we changed our company name to Petco Health and Wellness Company.

Longtime pet retailer Petco has a total of 247 hospitals nationwide from 10 in early 2018 to now, bringing a veterinary presence to 90 percent of Petco stores, said chairman and CEO Ron Coughlin. (Ron Coughlin) said on the earnings call.

“Petco hospitals and clinics will see approximately 1.9 million pets in 2022, positioning them as one of the leading providers of veterinary services in the United States,” Coughlin told investors, adding that Petco He added that it is in the top 10 in the nation from a hospital sector perspective.

“Veterinary customers also show 2.3 times higher lifetime value than non-veterinary customers,” he said.

Against the backdrop of a tough veterinary job market and a shortage of pet doctors, Petco will employ 1,100 veterinarians in 2022. This is a 40% increase over the previous year.

Chewy did not disclose how many vets and veterinary technicians it employs for its veterinary telemedicine service, Connect With a Vet.

The results of these efforts have not yet fully materialized for both companies. Early initiatives are expensive to build. But in the long term, it can provide a lasting runway for growth and profitability.

The surge in pet adoptions during the pandemic has led to a surge in demand for pet supplies. Sales of high-margin hard goods such as toys and leads are trending downward for both companies due to uncertainty in the macroeconomic environment and an increase in cautious consumers.

At Petco, where discretionary supplies and companion animals account for about 38% of sales, the category fell 9% for the full year, the company said.

Petco store in Louisville, Kentucky, USA, Tuesday, August 23, 2022.

Luke Charlett | Bloomberg | Bloomberg | Getty Images

Chewy, which is less dependent on hard goods, posted its first full-year profit on Wednesday. But management also repeatedly noted softness in the discretionary and hard goods categories on the company’s earnings call, which Singh said he doesn’t expect hard goods sales to accelerate in 2023. said no.

Additionally, the hard goods market is becoming more competitive, making it harder for Chewie and Petco to maintain market share, said Jessica Ramirez, senior analyst at Jane Hari & Associates. .

“Off-price retailers have very good categories, and those categories continue to grow,” she told CNBC.

But when it comes to pet care, there are far more avenues for growth and longevity.

“Puppies adopted or purchased in 2020 are now 3 years old and will only need more health care as they grow,” said Anna Andreeva, Senior Equity Research Analyst and Managing Director. I’m here. at Needham and Company. “And I think both companies are smart in developing these areas.”

According to Andreeva, pet insurance is very little prevalent in the US compared to other markets such as the UK. The UK could ‘definitely’ change in the future and will be another driving force in the sector.

Additionally, the footprint of independent veterinary providers is declining, which creates “interesting” market share opportunities, Andreeva said.

“Certainly, we were sharing donations from that channel,” she said.

The two companies share many similarities in the products they sell and the customers they serve, but they take different approaches to pet health.

Without a brick-and-mortar location, Chewy has focused on building a virtual telemedicine capability, but faces obstacles as state and federal regulations prohibit veterinarians from treating animals in some areas. doing. it directly.

“It’s a little bit more complicated. If you look at Petco, they have the advantage because they have stores,” Ramirez said.

CNBC previously said Chewy, along with other pet companies, sponsored a lobbying organization working to change these regulations, and some veterinarians believed veterinary telemedicine was unsafe for pets. , reported that they were concerned that it could be a problem.

Petco has not yet ventured into telemedicine and does not face the same problem as all its veterinarians practice at physical locations. However, it will take time before the hospital becomes profitable.

Petco CEO Coughlin said in an interview with CNBC, “The margins on our service business are expanding. This is a three-year payback for these veterinary hospitals, and we’re seeing more than our model.” is progressing,” he said.

Either way, a foray into pet health is a positive avenue for growth for both companies as consumers focus on health and seek easier ways to meet all their needs, Jane said. Hari analyst Ramirez said.

“Wellness continues to be an important category for us consumers, and that is reflected in our pets,” said Ramirez. “It makes sense for this kind of lifestyle to extend to our furry animals at home because it makes everything so much more streamlined and so much easier. It makes sense for both parties.” I think it works.”

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