Pet Food Retailer Chewy.com Has Seen Fantastic Frowth. But Can it Keep Up the Pace?
The leading online purveyor of pet food and supplies almost never was. That’s because the founders of Broward-based Chewy.com originally planned to go into the online jewelry business.
“We had actually bought jewelry inventory, and we were literally days away from launching the website,” says Ryan Cohen, Chewy’s 31-year-old chief executive officer. “We bought about $150,000 worth of jewelry. So we were that close to starting to sell jewelry.”
Cohen and Michael “Blake” Day, who met in an online chat room about computer programming, had pooled their money for the jewelry venture. They decided to sell everything at 80 to 90 cents on the dollar after Cohen convinced his business partner that pets had better market potential. Cohen came to that realization while shopping for his toy poodle, Tylee.
“I always wanted to do something with pets, but I couldn’t figure out how to monetize it,” he said. “So I was going to the pet store and realized the market online was really under-penetrated. I said, ‘This jewelry idea, we’re not passionate about what we’re doing. This is a much better opportunity.’ I understand the customer — because it’s myself. So we built the company.”
Cohen and Day redirected their finances and co-founded the company. Neither holds a college degree, and at the start they lacked a business plan. But they had faith in their abilities, both having extensive experience with computers since their teens, Cohen said. They launched the company in 2011, along with Alan Attal, one of Cohen’s childhood friends from Montreal.
The privately-held company registered $26 million in sales during its first full year in business. Chewy has since grown to 3,700 employees and is projected to increase revenues to nearly $2 billion this year — nearly a 7,600 percent growth spurt in just six years.
According to 1010Data, Chewy.com rules the online sales of pet food, with nearly 51 percent of the online market, including 40.5 percent in direct sales and 10.2 percent in subscription sales. The nearest competitor isn’t even close. Amazon.com cornered nearly 35 percent of the market, with 23.5 percent in direct sales, 7.6 percent in subscriptions and 3.6 percent at retail. By comparison, Walmart.com has less than 1 percent of the online market share.
Cohen has aggressively pursued the No. 1 position for online sales, but what he really wants is more of the overall market for pet food and supplies. According to the American Pet Products Association, pet owners in the United States spent an estimated $62.75 billion on their animals last year, with $24.01 billion on food and $14.98 billion in supplies and over-the-counter medicine, making their target market roughly $40 billion. At $2 billion in sales, Chewy would command roughly 5 percent of the market.
“So if you look at where we are today in the business,” Cohen said, “we’re still scratching the surface in terms of the total addressable market. We want to be No. 1. We’re No. 1 online. We want to be the largest pet retailer in the world.”
That’s an admirable goal, but Chewy might need to diversify its sales approach to attain it, advised Steve Kirn, a lecturer in retail management at the University of Florida’s Warrington College of Business. Kirn pointed out that brick-and-mortar companies such as Petco and PetSmart dominate the field with more than half the overall market, even though their online presence is minimal, with 3.1 percent for Petco.com and 2.2 percent for Petsmart.com, respectively.
“The people who are going to be winners are the omni-channel or multi-channel people who can satisfy you in a store, online, mobile, maybe even with a mail-order catalog,” Kirn said, explaining that brick-and-mortar stores offer services that online stores cannot match, such as grooming and training. There’s also the social aspect of shopping. Kirn even lets his border collie, Myka, partake of the experience.
“When we go to the pet store, our dog really likes to go along with us, and she sniffs around at all the toys and maybe she’ll land on one that she really likes,” he said. “We give her a little bit of a role in picking it out. This dog is a border collie, and she has a very clear point of view about things. We’ve ordered some things online, but generally we’ll go to PetSmart or Petco.”
Online shopping is a convenience, but the majority of sales still take place in the stores, he pointed out. While online sales are increasing as much as 20 percent per year, depending upon the category, as much as 90 percent of all purchases are still made in bricks and mortar stores, Kirn said. He also pointed out the inherent risks of growing too big too quickly.
“It’s very hard to sustain over time this type of frenetic growth,” he said. Others have tried and failed, he cautioned. Case in point is Pets.com, which famously featured a sock puppet singing off-key to K.C. and the Sunshine Band’s “Please Don’t Go.” The TV ad aired during the 2000 Super Bowl and drove home the point that people could spend more time with their pets if they ordered their supplies online. The company went out of business in November 2000, just 268 days after going public.
Chewy has at least one advantage over Pets.com: It saves on production costs by producing all its commercials and You Tube videos in-house.
When asked about the biggest potential pitfall Chewy faces, Kirn narrowed it down to money. “Making money,” he said. “Expanding so fast and acquiring debt, even with the sales that they have, they probably are not generating enough to support all the infrastructure for the business that they have to do. So, they’re going to be borrowing money. So, their borrowing costs will go up. And that’s why they’ll have to grow the business really fast, to be able to meet their obligations on their notes.”
Cohen recognizes that the company needs to grow to provide his customers with fast and efficient service. Before the company ramped up by first renting, and then purchasing warehouses for distribution, Cohen says the company hired another company to handle that side of the business. Now Chewy is making the capital investment to ultimately reduce that cost by doing everything in-house. A network of warehouses in key parts of the country will enable the company to reduce both transport costs and delivery time. The company currently provides overnight delivery for more than 60 percent of its customers. The goal, he said, is to increase that to 80 percent by early next year.
Delivery, which is currently handled by FedEx ground, could prove an expensive proposition, especially to provide for those living in far-flung places, including one remote Texas town that a customer described as, “Honey, I live so far out in the woods there’s not even a Chipotle.” Kirn asked, “Do the economies of doing this home delivery work out? It tends to work out in densely populated areas because it’s more efficient. You don’t have to go driving all over creation to deliver stuff. Places like New York or Chicago or Miami have the kind of population density where I think it can work out. But if you truly want to be a national service, delivering to everyone, you’ve got a problem.”
Cohen is aware of the many stumbling blocks strewn in the way of his dream. To date, the company has yet to register a profit, using investor money to support the increase in staff and capital improvements. The company currently serves more than 2 million customers nationwide, with the highest concentration of customers in the densest populations such as California and New York. His team is constantly scaling the business model to generate revenues that exceed costs.
“It is a business where the barriers to entry are relatively low, but in order to be successful, the execution is really more difficult and complex,” Cohen acknowledged. “Anyone can go and build a Walmart, but it’s hard to do. It can be done. The blueprint is there, but it’s hard to actually execute and to get to that scale to be as successful as they are.”
It’s difficult to sustain, let alone grow, Kirn said. “Walmart did about half a trillion dollars in sales last year,” he said. “So, if they wanted to grow the business by 5 percent in one year, they would have to grow by $25 billion. They would have to grow by a company the size of Macy’s just to get a 5 percent growth.”
Chewy has grown so rapidly that it needed several infusions of cash to support its infrastructure. Investors appear willing to assist. The company supplied a list: Volition Capital, T. Rowe Price New Horizons Fund, BlackRock, Allen & Co., Verlinvest, Greenspring and Mark Vadon.
“We’ve raised five rounds of financing — $236 million over five different rounds from five different investors — between 2013 and now,” Cohen said. “In the beginning, it was difficult to raise, but as we’ve scaled, we have a track record of success. It’s made it easier, and today it’s much easier to finance the business than when we were a lot smaller.”
On Feb. 1, Wells Fargo Capital Finance became the latest investor, announcing an agreement to lend $90 million over the next five years to Chewy, Inc. The loan will assist the company as it continues its expansion.
Chewy currently operates three distribution centers — including a 567,000-square-foot warehouse in Reno and two similar-sized facilities, one just outside of Hershey, Pennsylvania, and the other in Indiana. By this time next year, Cohen says, his company plans to have doubled its distribution centers. Plans call for opening a warehouse in Dallas and another in northeastern Pennsylvania this year. In February 2018, the firm is also opening a 611,000-square-foot warehouse in Ocala.
That’s roughly four hours from Chewy’s headquarters in Dania Beach. Cohen calls himself a snowbird who fled the Canadian winters for Florida, where he has family. He established Chewy in the office complex that houses the Design Center of the Americas. Designers looking for the latest in luxury furnishings may do a double-take as members of the Chewy staff stroll in with their pets in tow. Aside from the usual complement of cats and dogs, the Chewy pet family includes the occasional ferret, parrot, lizard, snake and sugar glider (which resembles a flying squirrel with a striped face and big brown eyes). Samantha Rassner even brings her wolf to work. Known simply as The Wolf, the cream-colored tundra wolf with a mohawk, is so gentle that he even lets strangers pet him.
Rassner, the company’s vice president of software development, credits The Wolf with landing her a job at Chewy. Before joining Chewy some 16 months ago, Rassner said, she ran a local startup focused on home and marine automation. While looking for additional talent at a tech meet-up, she met the Chewy recruiters, who also were looking to hire. “I walked up and was like, I love you guys; I just wanted to talk to you and to say thank you for everything that you do,” she said. “I’m a huge customer, a huge fan.” The Wolf was with her and so they started talking about him and how she rescued him and nursed him back to health after his original owner had left him for dead, tied to a stake in an open field. That chance encounter led to a job interview with the three friends who were with the company from the start: CEO Cohen, Chief Technology Officer Day, and Chief Operating Officer Attal.
“It was definitely key, that meant-to-be match,” Rassner said. “When I went in the next day I didn’t bring The Wolf with me, but I was talking with Alan and Ryan and Blake and told them all about The Wolf and they were, ‘Bring him in. Why didn’t you bring him?’ So, there was never a question of if I could bring him in. It was just how soon I could get him in there.”
Rassner said she joined Chewy with the express mandate to turn the company into a full-fledged software development company. Under her watch, she estimates the department has more than quadrupled in size, with some 50 software developers that oversee warehouse management, e-commerce and mobile apps.
In January, the team expanded into Boston, where Chewy leased a 20,000-square-foot space for software developers, designers and recruiters. Boston is also home to one of Chewy’s earliest backers, Volition Capital, which reportedly pumped $15 million into the company in late 2013.
Larry Cheng, managing partner at Volition, sits on Chewy’s board of directors, as do Mark Vadon and Kevin Hofmann. Vadon, one of Forbes’ newest-named billionaires, is an online retailing guru who is a founder of online retailers Blue Nile and Zulily. Hofmann serves as chief marketing officer for Home Depot and president of its online business. Building on the success of other company models, Cohen said, “We’ve hired folks from many different companies, including Petsmart, Amazon, and Whole Foods.”
Chewy is also following the model of superior customer service pioneered online retailer Zappos. Chewy set a goal of answering the phone within five seconds — and with a live person — who is knowledgeable about the entire line of products the company offers its customers.
“From the beginning,” Cohen said, “we came in saying that we want to provide pet parents with the most amazing customer experience. Period.” His aim is to build a bond based on trust, where customers recognize that Chewy personnel know their products and are not looking so much to make a sale as to satisfy the needs of the customer. “Being able to establish that trust is an amazing thing, because pet parents, like myself, are very vocal, and if we could do a good job at building that trust, then they will stay loyal.”
For Kelli Durkin, vice president of customer service, sometimes building that trust involves sending a card at Christmas or on a pet’s birthday, or even a small portrait of the family pet. Sometimes, it involves simply listening to a caller. A flat-screen monitor in the center of the call center on the third floor of the DCOTA building electronically tracks all incoming calls and their duration, with no time limit on the calls. The call center is open around the clock, and on any given day, as many as 12,000 calls come in.
Those handling the customer calls are encouraged to get creative in their efforts to awe the customer.
“The goal is with every interaction there’s a ‘wow’ experience,” Durkin said. “So, that customer should hang up the phone and go, ‘Did that really just happen?’”
Chewy surprised one customer with a computer keyboard after he called to place his order, explaining that he only did so because his keyboard was broken. Another customer, whose house had just burned down, kept talking about how the bedsheets they had just purchased for their children had burned in the fire. They were theme sheets from the Disney movie “Frozen.” The customer service operator handling the call, surprised the customer by replacing the bedsheets as a way to comfort his daughters.
Durkin wanted to send a burrito to the Texan who lived in such a remote area outside the orbit of a Chipotle. Instead, she sent a gift card for the restaurant, with a note that said, “Next time you’re in the big city, get yourself a burrito on Chewy.” “He loved it, and I’m sure he’s still a customer,” as is the 73-year-old woman who Durkin said called to say, “I just received flowers to my home because my dog passed away. This is the second time in my life that I’ve ever received flowers, and I need to thank someone.”
It’s that kind of interaction with his customers that Cohen seeks. His goal is to build a company that is intimate enough to cherish its individual customers and large enough to make a profit while saturating the market. “We wanted to create a business that could be a household name,” he said, and he’s well on his way.