What WSJ Got Wrong About PetSmart & Chewy
Was PetSmart's strategy of acquiring Chewy Inc. and then parlaying it into a successful IPO a stroke of genius? It certainly comes off that way in a recent article published by The Wall Street Journal.
Titled "How PetSmart Swallowed Chewy—and Proved the Doubters Wrong," the report is certainly comprehensive and provides plenty of insight, but it is also far too adulatory.
Don't get me wrong, the fact that PetSmart was essentially able to increase the value of Chewy by billions of dollars (at least on paper) virtually overnight via IPO is impressive. So too is the fact that a 25-year-old entrepreneur (Chewy co-founder Ryan Cohen) was able to turn an upstart online retailing business into a $3 billion payday.
However, the article glosses over some really important details about both businesses. For example, it presents PetSmart's acquisition of Chewy as a shrewd business move to gain a better foothold in the brave new world of online retailing, rather than what many industry experts saw it as—a surrender to a competitor that was using predatory pricing strategies to erode PetSmart's market share.
Another assertion that I—and I'm sure many others in the industry—have a problem with is the idea that Chewy has built its customer base by providing a high level of service and expertise. As someone who has been covering the independent pet specialty channel for more than 15 years, I know what superior customer service and pet care expertise looks like, and I can tell you that it goes far beyond sending hand-written thank you notes and providing product recommendations over the phone without ever meeting a customer and his/her pet. The truth is that Chewy has built its customer base by being convenient and inexpensive, and if either of those elements goes away, no amount of thank yous or even oil painting of its customers' pets are going to make a difference.
That brings us to another point made in the story that I take issue with... that Chewy's path to profitability is all but inevitable. Speaking about Raymond Svider, chairman of BC Partners (the private-equity firm that owns PetSmart), the article reads:
"He says the market didn’t understand that Chewy was reinvesting all of the cash generated from existing customers into acquiring new ones, who were expensive at the beginning because the company lured them with big discounts on their first orders.
As long as Chewy’s newly acquired customer base was bigger than its existing one, its losses would continue to mount. The company believed that eventually revenue from existing customers would overtake the costs of growth, and it would register profits."
It's true that Chewy has seen growth in both the size of its customer base and the percentage of its sales coming from auto-ship subscribers. However, the company is still spending a ton of money on new customer acquisition, which is getting more and more expensive. And, given the lack of clear metrics regarding customer retention rates, I simply don't see a point in the near future where its "revenue from existing customers would overtake the costs of growth."
Still, with all of that being said, one thing that has become painfully obvious over the past several months since Chewy went public is that on Wall Street, the value of a business has very little to do with profitability. That is what has made the online retailer a very dangerous competitor, and I doubt it will change anytime soon.