fence jumperOn April 18th, PetSmart announced the acquisition of Chewy, Inc., owner and operator of the chewy.com website.  On April 21st, Tuffy’s Pet Food, a brand of KLN Family Brands, announced that it was terminating its partnership with Chewy in what was termed a “show of support for the independent pet specialty channel.”  As a result of the move, KLN received considerable positive press, and likely bolstered its standing among independent retailers.  The first mover often enjoys the disproportionate amount of the spoils.

While it is unlikely that anyone predicted Tuffy’s would be first to find the exit, let alone do it so quickly, undoubtedly the buyer and seller had to assume that there would be customer loss associated with a transaction of this nature.  The issue really was not whether Tuffy’s was going to stay or go, but whether widely distributed brands who generate a meaningful portion of their sales online would continue with the platform.  Other likely defectors were going to come from brands that call Petco home, and therefore have no existing distribution in PetSmart. There was established precedent here.  When PetSmart acquired Pet360, several brands opted out of the platform.

To the informed, this put the focus on Champion Petfoods, Fromm Family Foods, and Merrick Pet Care.  The later because it continued to be a Petco exclusive, even after its acquisition by Nestle Purina.  At issue for the former two was the fact that Chewy represented a significant customer, and likely its fastest growing.  On July 10th, both Champion and Fromm disclosed, through different mechanisms, that they had in fact exited their relationship with chewy.com due to their individual commitments to the independent pet specialty channel.  The Facebook pages of both brands lit up with comments expressing both adulation and disdain for the move.  Rumor is that Chewy was encouraging platform loyalists to express their displeasure online.

Reaction to the news was quick to fill up my inbox, suggesting that this was an unforeseen circumstance and would likely lead down the path of a write-down for PetSmart on its acquisition.  Given that both brands defected when PetSmart acquired Pet360, I suggest that this circumstance was likely known, or at the very least contemplated, from the outset.  If not, someone was negligent in doing their due diligence.  More than likely this impacts Chewy’s ability to earn any contingent consideration tied to revenue or customer retention.  Potentially it hastens Ryan Cohen’s path to exiting the business he founded and that made him wealthy, assuming he is only sticking around to get the last dollar out of the deal.

In sorting out the winners and loser of these decisions, there is less clarity than one might expect.  The impact would, to a large extent, depend on what you believe the physical and emotional substitutes are for the end customer.  If the customer is tied to the brand, the beneficiaries will be the independent retailers as the brands intended it to be.  These brands are staples of the independent channel and vital to their competitive advantage. However, if cost and convenience trump (no pun intended) brand loyalty, Chewy has the potential to transition pet owners to other premium and super premium brands that remain in their stable, including their own product set American Journey. Many of the comments on the Facebook pages of Champion and Fromm suggest customers are considering a switch, but that may be motivated by the catalyst above. I would also argue that Phillips Feed Service’s acquisition of Petflow looks better by the day. They should see owners transition to the petflow.com platform, as they are competitive on price with chewy.com, but it might also motivate independent pet stores to adopt their Endless Aisles solution set, seeking to step into the Chewy void for these brands.  However, if Champion and Fromm use this shake-up as an opportunity to begin directly selling their product to end customers, the end results may not be known for some time.

It is natural to seek to look at the above situation and try and paint Chewy and/or PetSmart as “the bad guy”.  However, I would argue that a healthy chewy.com is good for the entire pet industry offering consumers additional choice in the form of an alternative sales channel, and pushing back on price in an industry that has experienced considerable price inflation post-recession.  Without Chewy, the price of Champion and Fromm products is likely to increase, at least online, and that is not a favorable outcome for pet owners no matter how you slice up the pie.

/bryan

Note: This blog is for informational purposes only. The opinions expressed reflect my view as of the publishing date, which are subject to change. While this post utilizes data sources I consider reliable, I cannot guarantee the accuracy of any third party cited herein.