“In my 25 plus years in the industry, this is the first time I can say, I don’t know what is going to happen;  I don’t have a good answer.”

run to the lightGiven the proximity to Interzoo and Global Pet Expo, this year’s SuperZoo trade show allowed for more shop talk than in prior years. Given the heat nobody wanted to move anyway, so the conversations were fulsome, as opposed to being fleeting in nature. The topic du jour, so to speak, was the future of PetSmart, and to a lesser extent Petco.  Adding fuel to the fire was recent data indicating pet food sales in major pet specialty had been down over 10% in the past four weeks, a trend that was accelerating as opposed to contracting. The italiziced statement above was made in that context, and its concerning given that it came from a very smart, very seasoned, pragmatic industry executive whose predictive capabilities over the years have proven to quite accurate.

The pet industry needs a healthy national retail ecosystem and its major retailers are, well, reeling. The cure for what ails them is not obvious. That said, both Petco and PetSmart are not standing still, with both organizations appointing new CEOs in the past 45 days. More changes are likely on their way, whether they be structural (Chewy.com spinoff?), strategic, or modestly tactical.

Below are some summary thoughts on my conversations in Las Vegas:

Petco Animal Supplies

With respect to Petco, most people I talked to put a lot of stock in the hiring of Ron Coughlin, the former President of HP’s personal computer business.  When you read the narratives of those who have written, most with excitement, about his hiring, they put considerable weight behind his ability to develop strategies that connect with emerging consumer cohorts, such as Millennials.  While Ron is new to me, his real value appears to be in driving sales and differentiation against a backdrop of product commoditization. Connecting with Millennials, and subsequent generations, is a strength of Apple, not HP.  That said, Ron’s experience at PepsiCo, should be valuable assuming Petco continues to double down on its private label strategy, as his marketing credentials are meaningful.  He seems like a great hire.

The other strategy that received some attention at the bar, was related to the fate of Unleashed. Once a key differentiator, and a darling for emerging brands that were seeking to bridge the gap from independent pet specialty to major pet specialty, it appears that Unleashed has become a drag, at least to manufacturers. Many brands indicated allocating funds to support online efforts were yielding much greater results than promo spend and exclusives in Petco’s smaller boxes. Essentially, the professionalized box chains (Chuck & Don, Kriser’s, Pet Food Express, etc.) have siphoned off the customer Unleashed was meant to target, and Petco has not maintained the strategic differentiation between its core box and its smaller cousin.  Some suggested spinning off the box chain a la Petsense.

Finally, there was the natural discussion about the private label brands, and their future.  Most people I spoke to did not expect a tactical departure from the current strategy, but likened it to a secondary line of business – i.e., pick up some kibble after your dog is done at the groomer. What this says is that Petco has more work to do to make its brands traffic drivers and find a balance between house brands and third-party brands.  Petco is currently banking on its investments in engagement and services to drive brand attachment and store/online traffic. It certainly has a technology advantage, but it needs to translate that into traffic and transactions, and not let it languish as “potential”.

PetSmart

While most liken the Petco rehabilitation process to a home remodeling project, when people talk about PetSmart’s road back, the narrative is more akin to taking things down to the studs. Maybe it is the drama and intrigue that continues to be associated with the retailer, but more likely it is a function that people cannot clearly see the path out of the predicament the chain currently finds itself mired in. That is not a surprise, given the high stakes poker that has begun between PetSmart’s private equity owners and the company’s debt holders. After spinning off 36.5% of Chewy, PetSmart’s debt prices improved (see recent charts here), seeing the move as more benign than anticipated. However, the other lens through which it can be viewed is the asset stripping provides more fuel for a public listing of Chewy, the proceeds of which could be used to repurchase debt at a steep discount. The more salient question is whether the financial engineering machinations gets in the way of forging ahead with a new operational strategy. My assumption is that J.K. Symancyk would not have joined unless he felt he could begin effectively addressing PetSmart’s challenges against this backdrop.

With respect to that new operational strategy, the same general principles are commonly cited among third parties. First is the need to integrate Chewy on both the back and front end, enabling PetSmart to fully leverage the assets it acquired over a year ago. My long held assumption was that the only way to wring the benefits out of the transaction was to fully integrate the two businesses, but that any contingent consideration owed to Chewy stakeholders was going to inhibit that effort in the near term. With Ryan Cohen having now departed and likely any earnout potential lost, work can now begin in earnest. This includes both warehouse and inventory rationalizations, but also the technology work to enable Chewy to leverage PetSmart’s infrastructure to offer pick-up in store and delivery from store for added convenience. Additionally, PetSmart needs to implement technology strategies that enables them to have a complete picture of their customers across all their sales platforms, leveraging this knowledge to drive customers to the transaction venue that offers the most desirable outcome, whether that is tied to revenue, profitability, or retention.  A continual race to the bottom through escalating customer acquisition seems pointless to most.

The second most commonly discussed action is to change the mental paradigm as it relates to both suppliers and end customers. Historically, major pet specialty has viewed themselves as the customers advocate and educator, despite having a transient workforce. When costs were cut post take private this included spend on training these resources. As the primary retailer of pet food and supplies, major pet specialty retailers controlled access to product and the promotion of the product to pet owners. In this role, they leveraged their position to extract value from the brands to support their financial profile. While brands consistently complained the cost of doing business in these channels was onerous, it what was necessary. That is no longer the case, brands can find alternative sources of growth online and through professionalized chains. Therefore succeeding going forward for PetSmart requires a change to this paradigm. Pet food and supplies are now widely available and owners pursue product discovery in a variety of ways, not necessarily tied to the physical sale location.  This means finding a way to embrace emerging brands and offering them a financial paradigm that enables a win-win scenario, as opposed to offering them a loss of 10% – 15% of margin in addition to seeking meaningful promotional dollars.  This would likely involve trusting that these brands undertake the necessary effort to build a customer following and driving them to PetSmart’s sales venues, crediting them for marketing spend that drives awareness and transactions.  This trust is going to be necessary if there is going to be success in driving ROI for brands that might bring traffic and loyalty.

Finally, several people commented on the need for greater transparency — in everything they do for everyone they touch. This goes right down to the mission and speaks to culture. PetSmart has been historically insular, and that was successful until the access paradigm flattened and the knowledge paradigm multiplexed.  PetSmart need to seek to create relationships as opposed to adversaries.  Easier said than done, but trying will help mend fences.

The net of all of this is that there is work to be done.  Failure may lead to a consolidation of these boxes, while success will elevate the entire industry.  Mr. Symancyk and Mr. Coughlin, we wish you both well.  We all need you right now.  However, we should not fear that brighter days are ahead.  The industry has successfully navigated challenging periods and companies including Walmart and Target found their way against a similar backdrop, though they both had more levers to pull.  Collectively, we have to have faith.

/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.

 

 

 

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