PetSmart has agreed to acquire online pet retailer Chewy.com in the latest deal by a brick-and-mortar titan for an e-commerce upstart.
On Tuesday, PetSmart—which was acquired a few years ago for $8.7 billion in a private equity backed leveraged buyout—said it agreed to buy Chewy.com to accelerate the company's efforts to sell pet products and services both in physical stores and online in North America. The deal is expected to close by the end of PetSmart's second fiscal quarter of 2017.
While terms of the transaction weren't disclosed by the parties, Recode—citing multiple sources—put the acquisition price at $3.35 billion in cash and near the $3 billion Wal-Mart Stores (WMT, -1.55%) paid for e-commerce startup Jet.com last year. A source with knowledge of the deal told Fortune that price was "inaccurate."
Regardless of the price, the acquisition is yet further proof that brick-and-mortar retailers want to get serious about how to compete in a world where more consumer spending is gravitating to online sources. That pivot in spending has resulted in retail bankruptcies at a pace that hasn't been seen since the financial crisis and hundreds of store closures. The surviving chains are quickly realizing that a compelling e-commerce strategy is needed to better compete. And while many brick-and-mortar chains have bulked up on their own internally developed operations, e-commerce startups like Chewy.com have in many ways been more savvy and have successfully stolen market share.
Chewy.com was only founded in 2011 but it already grew to generate over $880 million in sales in 2016 and the company was projecting to achieve over $1.5 billion this year.
"Retailer and e-commerce is all about execution. The barriers to entry are pretty low," Chewy CEO Ryan Cohen told Bloomberg in an interview last year. "We obsess over of customers and we know the products better than any other pet store."
Cohen had said that his goal was to build Chewy.com into a $10 billion business, though now, he will have to aim for that target under PetSmart's watchful eye. Following the closing of the deal, PetSmart said Chewy.com will still be led by Cohen and will operate "largely" as an independent subsidiary.
Chewy.com was often rumored to be a potential candidate for an initial public offering in 2017. The takeover eliminates that exit path, though other pet-focused companies have gone public in recent years, including Blue Buffalo Pet Products and Freshpet. PetSmart's main brick-and-mortar rival Petco also considered going public, but instead sold itself for around $4.6 billion in late 2015.