Why Chewy Is So Dangerous



We finally got a peek behind the curtain at Chewy, Inc., and what we found could have some serious implications for brick-and-mortar pet stores.


While Chewy’s IPO filing with the U.S. Securities and Exchange Commission (SEC) in April revealed that the company does not actually turn a profit, it still contained plenty of evidence that traditional retailers should be deeply concerned about the future of this already dangerous competitor. 


First and foremost is the incredible growth that Chewy has experienced over a relatively short period. In just eight years, the company’s net sales grew from $2 million to more than $3.5 billion, including a nearly 68 percent increase from FY17 ($2.1 billion) to FY18 ($3.5 billion). What’s more, despite the reputation that Chewy has for selling products at or even below wholesale pricing, the company’s gross profit margin has grown over at least the past three years, going from 16.6 percent in FY16 to 20.2 percent in FY18.


Along with increases in gross sales and profit margin, Chewy has experienced significant growth in both the size of its customer base and its net sales per customer. As the number of “active customers” reported in the company’s SEC filing grew from 3.3 million in FY16 to 10.6 million in FY18, the net sales per customer increased from $297 to $334. 


In addition, the percentage of net sales that came from Chewy’s “autoship” customers grew from 62.8 percent in FY16 to 65.7 percent in FY18. Last year, that amounted to $2.3 billion spent by customers who did not have to regularly contemplate their purchases—they simply sat back and waited for their scheduled pet food delivery. This trend becomes particularly troubling when you consider how hard it would be to entice those passive customers to go back to shopping in traditional pet stores for their four-legged friend’s food.


Of course, the fact remains that Chewy has been operating at a net loss (-$267.89 million in FY2018) because of operating expenses. Yet it’s hard to take comfort even in this, as the company is likely to gain operational efficiencies as it continues to grow. In fact, Chewy has already improved its operational expenses in relation to gross sales between FY17 and FY18. 


Still, despite all the worrisome information contained within Chewy’s SEC filing, the company’s future is far from certain for a couple of reasons. First, given Amazon’s emergence as a major competitor for online pet product sales, it is likely that Chewy will have to spend even more on marketing and advertising to retain, much less grow, its customer base. That will be no small feat, as the company is already spending hundred of millions of dollars in these areas over the past few years, including $253.7 million in FY17 and $393 million in FY18. 


In addition, as the company acknowledged in its SEC filing, potential conflicts with creditors and PetSmart’s ongoing control over Chewy could negatively affect the online retailer’s future performance. Even the infusion of capital that could come from an IPO (which some estimates say could bring in $100 million) may not necessarily have a positive impact on the company, as no guarantees have been made about how this capital would be used. 


Ultimately, what the future holds for Chewy is still very much open for debate. But if this IPO does happen, at least we can count on getting the type of insight that is typically only available when a company is publicly traded. And one thing I think we can all agree on is that it’s always better to have more information about your competitors—particularly those as dangerous as Chewy.


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