Is Petco positioned for long-term growth?

Petco’s on a roll.

The specialty pet retailer in 2022 alone has introduced new store formats in underserved markets, partnered with home improvement retailer Lowe’s for shop-in-shop concepts and reported record revenue and profits, all while continuing to lean into its promise of being a health and wellness destination for pets.

But things haven’t always been so rosy for Petco. In 2020, the pet retailer had a Caa1 rating and negative outlook from Moody’s, making it a high risk of defaulting on debt. 

And over the years, Petco underwent a number of private equity buyouts, and it entered — and exited — the public markets several times. 

But now, the retailer appears to be on a different path.

“It’s really a reconceived strategy around services and around the importance of omnichannel. Those are the two big changes to this company under CEO Ron Coughlin,” Wedbush analyst Seth Basham told Retail Dive.

Coughlin joined Petco in 2018 and in the years since has helped reshape the retailer into a health and wellness destination for pet parents, adding vet hospitals and introducing healthier food brands to its shelves, among other things.

The retailer has introduced a number of initiatives to secure its place in the sector and in 2021 re-entered the public markets for the third time. Is Petco now positioned for long-term growth?

Prioritizing health and wellness

Petco in 2020 announced it was repositioning itself as a health and wellness company for pets. The move coincided with a growing trend around the humanization of pets. More and more, pet owners have viewed their animals as extensions of their family and have begun to treat them as such, including by seeking out better-for-you options when it comes to foods.

“Pet owners put more effort and investment into the care for their fur babies, and pet owners are prepared to spend extra on the special food category for their animal,” Inna Kuznetsova, CEO of 1010data, said. “We see Petco recognizing and addressing” those needs, she added. 

The retailer in 2018 announced it would no longer sell products on its shelves that were made with artificial ingredients, and made good on that promise the following year. Petco has put an emphasis on more fresh and frozen foods, even opening a Just Food For Dogs kitchen in its New York City flagship in 2019.

But Petco hasn’t just addressed more health-conscious consumers through the products it sells, but also through the services it has introduced over the years.

Petco has put an emphasis on more fresh foods.

Courtesy of Petco


The retailer runs thousands of mobile vet clinics and has some 200 vet hospitals, opening 24 in the fourth quarter of 2021 alone. Last month, Petco announced it purchased the remaining stake in its pet hospital joint venture with Thrive Pet Healthcare, which operates around 100 vet hospitals in Petco stores under the Thrive name. The companies initially formed the strategic joint venture in May 2017.

“The pet hospital rollout — 60 to 70 per year — that’s going to give them a boost to comparable store sales of anywhere from 200 to 300 basis points in the next few years, as we see that ramp continue to build,” Basham said. 

Petco in 2020 introduced Vital Care, a paid annual membership program that gives pet owners access to services like unlimited vet exams, nail trims and teeth brushing, as well as a rewards program. The company last month announced it enhanced the program, including by creating a program tailored to cats.

“It’s a recognition of where they’re taking the company and it’s not just selling pet food and supplies, but being a one-stop shop for all pet care needs,” Basham said. “The health and wellness of pets — driven not just through food supplies, but also grooming, training and of course veterinarian care — I think are key aspects of how they want consumers to view their company.”

The focus on wellness complements Petco’s other services, including grooming, training and boarding, which executives recently said have been reinvigorated.

Providing services in stores “helps, certainly, create some stickiness, more reason for the consumer to come back to the store or the pet hospital on a regular basis,” Basham said. “Then to wrap it in with subscription programs like Vital Care, I think is also very valuable to hold on to that customer that they may have gained during the pandemic.”

Petco offers a variety of health services for pets.

Courtesy of Petco


But, as Basham notes, these building blocks were in place well before the pandemic took hold, putting Petco in a good position when demand suddenly spiked in 2020.

The pandemic helped accelerate Petco’s growth. The pet sector as a whole experienced a boost as more consumers adopted pets to provide a sense of comfort and relief during a time when much of everyday life seemed uncertain.

Petco in particular experienced an 11% net sales increase during 2020 and an 18% year over year increase on top of that in 2021. The retailer also swung to a profit last year, of $159.8 million, after years of losses.

“Petco has well capitalized on the overall growth of the pet food space online during the pandemic,” Kuznetsova said. “They created very good visibility, and presence, and sales, and marketing that led to them growing higher than the market.”

The total online pet food market in 2020 grew 42.3% year over year, according to 1010data. But Petco far outpaced that, growing 110.3% during the same period. While growth slowed in the category in 2021, the retailer continued to outperform the market, growing 27.7% year over year compared to the total market’s 15.9% growth.

The competitive advantage

As demand for pet products grows, so has the competition specialty pet retailers face, namely from mass merchants.

Amazon in 2018 launched its Wag private label. Walmart in 2019 announced plans to open 100 in-store vet clinics as well as carry prescriptions for dogs, cats, horses and livestock from over 300 brands at And Target last year rolled out a private label pet food brand, dubbed Kindfull.

But despite these efforts, Wedbush’s Basham still thinks there’s a place in the market for specialty pet retailers. Petco has “a lot of brands that are still exclusive to the specialty pet bricks-and-mortar channel. They have some differentiated private label brands — Reddy being first and foremost — that helped from a merchandising standpoint, and then you layer on the services,” he said. “They have so many options that make it attractive to certain segments of customers.”

Petco appears to be making a big bet on its Reddy brand, which features high-quality, functional and sustainably made products. The retailer in October opened a flagship dedicated to the brand in New York City’s SoHo neighborhood.

Petco in October opened its Reddy flagship in New York’s SoHo neighborhood.

Courtesy of Petco


Reddy appears to be going after a more affluent customer.

Courtesy of Petco


“It’s more about attracting new customers, showcasing what they have — high-end private label pet care products — and seeing the kind of interest there is from that type of high-end consumer that’s shopping in SoHo. It’s potentially an opportunity for them,” Basham said, noting that while the Reddy store may not become a widespread concept for the retailer, it serves as a testing ground for new products to see what resonates well with consumers. 

The store, which is situated down the street from high-end brands like Loewe, Marc Jacobs and Ted Baker, appears to be going after a more affluent urban consumer.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *