A Turnaround for the Big Boxes?
Has the other shoe dropped for PetSmart?
As was widely reported, the Phoenix-based, big-box pet specialty retailer, which operates more than 1,300 stores in the U.S. and Canada, recently agreed to be acquired by a group fronted by BC Partners Inc., a U.K.-based private equity firm. The sale marks the end of a tumultuous period for PetSmart that started when activist investor Jana Partners—which holds a 9.8-percent stake in the chain—sent a letter to the company’s board in 2014, scolding it for “years of operational and strategic missteps” and urging “a full review of all strategic alternatives including a sale.”
The letter cited a weak e-commerce presence, suboptimal pricing structure, inadequate cost management, a failure to develop new store formats and a lack of product innovation as some of the major issues plaguing PetSmart. It also noted that the result has been a steady decline in the company’s market share in the retail pet care category.
As we reported in the September issue of Pet Business, Jana Partners’ assertions of lost market share seem to be supported by numbers. For example, according to the 2014 Pet Stores in the U.S. Industry Report from IBISWorld, a global market research firm, PetSmart has seen its market share fall to 41.9 percent from 43.1 percent since 2012, after years of steady growth. “PetSmart has had a softer 2013 and 2014 than the years immediately following the recession, when it was posting annual gains of well over five percent per year,” said IBISWorld analyst Andy Brennan, the author of the report. “The company is coming under increasing pressure from online operators and broad line retailers like Walmart.”
So, what does it all mean for independent pet specialty stores?
Many of these retailers have certainly been able to capitalize on PetSmart’s apparent failings by combining a well-constructed product mix with a high-level of personal service. This is particularly true for many of the mid-size regional pet chains that have experienced staggering growth over the past few years. However, this may be an important turning point in the pet specialty channel.
Despite the company’s recent woes, the acquisition could ultimately make PetSmart an even more formidable competitor. The group acquiring company is paying a premium, laying down a reported 9.1 times PetSmart’s adjusted EBITDA for the 12 months ending Nov. 2, 2014. Clearly, it sees a lot of potential within the retail operation, and the industry can probably expect a lot of fine-tuning and resources put behind the company to protect that significant investment.
And it is not just PetSmart that has been making news with potentially game-changing moves. Petco recently announced that it planned to acquire Drs. Foster & Smith, one of the nation’s biggest online pet product retailers. The acquisition of the 31-year-old company will go a long way in shoring up Petco’s Internet business, which is sure to grow more important as shoppers increasingly migrate to the web for their pet needs.
In the face of what just might prove to be the beginning of a big turnaround for the beleagured big-box pet chains, independent pet specialty retailers must be sure to tighten up their own operations. Of course, this means offering the same high level of service and unique products that have long served as their main competitive advantages. However, as you will read in this month’s cover story, it also means constantly making adjustments in areas such as pricing structure, in order to make sure that your store offers options for a broad range of pet owners.