How Chewy and Amazon Are Poised to Shake Up Pet Retailing Yet Again
Could Amazon’s purchase of PillPack presage an expansion into pet medications?
Nearly two decades later, the U.S. pet industry has yet to top Nestlé’s $10.4 billion acquisition of Ralston Purina. But the past few years of the twenty-teens saw five billion-dollar-plus acquisitions that together totaled almost $30 billion:
• In January 2017, Mars acquired leading U.S. veterinary hospital operator VCA for approximately $9.1 billion.
• In April 2017, PetSmart purchased Chewy.com for $3.3 billion.
• In February 2018, General Mills paid $8 billion for Blue Buffalo.
• In April 2018, J.M. Smucker shelled out $1.9 billion for Ainsworth/Rachael Ray.
• In August 2019, Elanco purchased Bayer’s Animal Health business unit for $7.6 billion.
Also of note, in May 2019, pet medication and animal wellness specialist PetIQ paid $185 million for Perrigo, whose brand lines include PetArmor, Sentry and Sergeant’s. Massive investments like these illustrate vital pet industry trends, including the deepening involvement of pet food companies in veterinary services, of human food makers in pet food, and of brick-and-mortar-based retailers in e-commerce, as well as the ever-growing importance of pet health products and services, including medications.
Compared with the previous two years, 2019 was slower M&A-wise for the pet industry. But there is good reason to expect the U.S. pet industry to yield ample investment activity during the first years of the 2020s, along with realignments stemming from the events of the past few. The most important shifts may well have to do with the rapid expansion of e-commerce and the integration of e-commerce and brick-and-mortar operations. Poised to shake up pet retailing dramatically are:
Chewy and PetSmart
When PetSmart announced its intention to buy Chewy.com in early 2017, and for a couple of years after, the high-ticket purchase was viewed with harsh skepticism by many in the financial community because Chewy had yet to achieve profitability (and even still today) and required PetSmart to take on massive debt even as its brick-and-mortar future appeared to be in question.
Chewy’s June 2019 IPO has gone a long way toward proving the naysayers wrong, bringing in nearly $10 billion in paper gains on day one of trading. Still, the question remains: What will ultimately become of PetSmart? After shelling out $8 billion for the big-box retailer in 2015, BC Partners will be looking to turn a profit with an eventual sale, but brick-and-mortar retailers are low on investors’ list, and PetSmart’s future is tied to Chewy’s.
As reported by The Wall Street Journal on Oct. 1, 2019, “PetSmart still owns about 87 percent of Chewy and its ultimate return will depend on whether it manages to sell down the stake profitably,” one possible scenario being to merge PetSmart with Petco, which “would likely afford ample opportunities to shave overlapping costs … Regulators who could otherwise oppose a deal combining the No. 1 and 2 physical players might allow such a move given the heft of Chewy and Amazon in the business and the sale of pet food and supplies through big-box stores such as Walmart Inc. The business could then be sold or taken public.”
Another scenario could involve integrating the still separately operated Chewy and PetSmart by subsuming the latter under the Chewy moniker to create rebranded and revamped physical stores and online shopping hubs, similar to what Amazon has been doing with Whole Foods.
Amazon and PillPack (and Petco?)
Pet medications are coming on strong in the virtual realm, with both Chewy and Walmart having entered the online pet medications space in the past two years in July 2018 and May 2019, respectively. Rather surprisingly, Amazon has yet to follow suit. But in June 2018, Amazon quietly paid $753 million for PillPack, a company that pre-sorts into packets and home delivers prescription medications for people. At the time, PillPack was projecting revenues of $299 million for 2018, $635 million for 2019 and $1.2 billion for 2020. Amazon generated total sales of more than $230 billion in 2018, so even PillPack sales at the 2020 level are a splash in the bucket.
But the e-commerce kingpin is looking at the bigger picture: The average PillPack user is worth $5,000 per year (compared with less than $1,500 for the average Amazon Prime member) and comprises an older demographic ripe for reverse marketing (targeting with other products). Similar advantages will also apply to pet medications when—and not if, bet on it—Amazon/PillPack expands into pet medications.
Moreover, it seems naïve to assume that Amazon is done with brick-and-mortar acquisitions. Even more seismic to pet retailing than a PetSmart/Petco merger would be an Amazon acquisition of Petco, which might be even more appealing given Petco’s focus on natural (à la Whole Foods). More than e-commerce alone, seamlessly integrated e-commerce/brick-and-mortar—aka omnichannel—is going to be the thing during the 2020s, and it’s hard to think of a more formidable challenger to Chewy/PetSmart than Amazon/Petco.
David Lummis is the lead pet market analyst for Packaged Facts, a division of MarketResearch.com, and author of Packaged Facts’ annual U.S. Pet Market Outlook report.