What made Chewy successful?

In early internet years, Pets.com was a giant example of failure of online pet foods. Why did Chewy succeed in 2019? what was the business model?

Chewy was established in 2011 and went public in 2019. It made more than 25 million dollars in the first year of operations. You’ve probably heard of Chewy.com once or twice before. If you have pets, you might even order supplies from them. They offer 24/7 support line with 1000 brands, with typical orders arriving in 1-2 days. Chances are, you’ve at least considered it a few times, especially when you go to the store to buy your pet’s favorite food, only to find that they are out of stock yet again. It can become extremely frustrating when you end up driving all over town just to find a bag of food. Therefore, ordering from a place like Chewy.com can provide some bona fide benefits, such as knowing that you’ll be able to get the food that you want when you need it as opposed to driving all over the place looking for it, all to no avail.
When Chewy went IPO in 2019, Chewy (CHWY), online pet supply retailer IPOed on Friday, June 14. At a price range of $19-21 per share, the company plans to sell up to $112 million, while controlling shareholder PetSmart plans to sell an additional $720 million. At the midpoint of the IPO price range, CHWY will have an expected market cap of ~$8 billion and currently earns a very unattractive rating.
According to the company’s S-1, Chewy was founded in 2011 with the goal of being “the most trusted and convenient online destination for pet parents everywhere.” The company has scaled rapidly, going from just $2 million in sales in 2011 to over $3.5 billion in 2018. Chewy accounts for 55% of online pet food sales and ~35% of online pet supply sales overall.
There are many nuances about the company that you might not know even if you currently order from them.
1. The PetSmart name is strong connection
In 2017, the company owners sold the company to PetsSmart. Currently, the company is owned by PetSmart but operates as an independent subsidiary. This is something that automatically makes a lot of pet owners feel better, because many individuals rely on PetSmart for just about everything for their pets, from training all the way up to the pharmacy. Obviously, the PetSmart name is something that’s going to go a long way with most pet parents.
2. There are centers strategically located in the US
Chewy claims that its “high-touch” customer service model sets it apart from the competition. There are 7000 employees at several distribution centers that are strategically located in different states around the country. This over-the-top dedication to customer service means that Chewy hires an unusually large number of customer service representatives. Chewy has almost as many employees (~10,000) as fellow online retailer Wayfair (~12,000) despite earning only about half as much revenue. As a result of its high employee count, Chewy has incurred significant losses throughout its history. The after-tax operating loss (NOPAT) has been ~$260 million in 2017-18. Customers who had signed up for automatic recurring shipments made up 66% of Chewy’s sales in 2018, according to a securities filing. That’s the result of Mr. Cohen’s fanatical devotion to customer service.

3. Chewy's technical advantage is SaaS prediction models
Chewy also resembles a SaaS company in its ability to generate a high amount of revenue from very little invested capital. The company’s fixed assets – mostly comprised of $234 million in operating lease commitments– are relatively small, and it has negative working capital. As a result, Chewy generated $3.5 billion in revenue from just $77 million in average invested capital in 2018. The company’s average invested capital turns of 46 is the highest of any Consumer Cyclicals company under coverage.

Pet owners like the company because it makes things more convenient. You want the best for your dog or cat, but you also lead a busy lifestyle. Sometimes, something as simple as getting a bag of dog food can turn into a major ordeal. This simplifies everything and it means that you’re not out there trying to track down something yourself when you already have 15 other things to do. Instead, all you need to do is place your order, sit back and relax. It’ll be at your doorstep in a day or two. This can be especially beneficial if you use a type of dog food that is particularly difficult to find, such as some specialty foods. It’s much easier in these cases to order what you need instead of stressing out about finding it every time you start running low.

Even if you’re a more hands-on type of individual, this can still be beneficial to you. Some people aren’t very supportive of the idea of ordering things online because they want to be able to look at it for themselves before they purchase it. They want to be able to touch it and look at all the different qualities that it has. That being said, ordering from a place like Chewy can really save you a lot of time and money if you already know what you want.

Obviously, the founder of the Chewy company was rather shrewd. They did it 11 years after the failure of Pets.com, and it is a very heavy industry with supply chain and storage issues. There is also a giant bear in the room - Amazon. Apparently, this is the business that even Amazon does not want to do.

Ryan Cohen cofounded online pet food and supplies store Chewy.com at the age of 25. He sold the company to PetSmart for $3.35 billion in 2017 and stepped down as CEO in 2018. The company went public earlier this year. The cofounder is Michael Day. Cohen believed the company has benefited from a trend in pet owners feeding their pets human-grade food and spending more money on them. Ryan Cohen was just weeks away from launching an online jewelry business when he was out shopping in his neighborhood pet store and a new idea dawned on him: What if he could set up an online platform that replicated the experience of shopping in a pet store like this, without the inconvenience of having to actually go there?

As the owner of a toy poodle, Tylee, Cohen was well aware of how fragmented the market was at that point and how underpenetrated it was online. He saw an opportunity to fix it.

"I thought if I could deliver the same kind of personalized experience as the neighborhood pet store, but do it online and deliver a really convenient value proposition, that we could build a really big business," 34-year-old Cohen told Business Insider in a recent phone conversation, recalling his thoughts in 2011.

Within a few months, Cohen and his cofounder, Michael Day, had pivoted from jewelry and were selling pet food online under the name of Mr. Chewy, which later became Chewy.com. In the 10 years that followed, the duo defied their critics and built up a $10.2 billion company that is now publicly listed. He told Business Insider that the key to the company's success was providing an online service that Amazon wasn't, and understanding the emotional connection that pet owners have with their animals.
(link: https://www.businessinsider.com/chewy-cofounder-how-he-created-multibillion-dollar-empire-2019-11)

No one believed in Cohen. “When Mr. Cohen initially sought backers, he was met with skepticism, he recalls. Most venture-capital firms he approached for his first round of funding thought he was crazy to go head-to-head with Amazon. “I went door-to-door on Sand Hill Road, cold-calling investors,” Mr. Cohen says, referring to the address of many venture-capital firms in Silicon Valley.

https://www.volitioncapital.com/news/venture-capitalists-talk-about-the-big-investments-they-didnt-make-sw6me/

Marketing to first-time customers is also an expensive business for the company. While Cohen would not comment on these numbers, industry publication Pet Business reported that Chewy.com spent $68 in marketing and advertising spend on each new customer in 2017. By 2019, this leapt up to around $148 per person.

However, there are voices against Chewy. Some believe that Petsmart is a company with poor record on animal rights.

How was Chewy able to beat the odd and succeed in the shadow of Pets.com failure? In the year 2000, the Super Bowl featured a commercial that starred a sock puppet. That puppet was the mascot for Pets.com, the poster child of Dot Com busts. Pets.com did everything right – if you evaluated them by traditional business methodologies. They did vast amounts of market research, formed a large sophisticated supply chain, had a nice looking organizational chart, and had a killer marketing campaign. A lot of people knew of Pets.com after that Super Bowl ad. There was great “market penetration.” So what was the problem? Amazon has proven that people will buy anything online, including pet supplies, so that isn’t it. The problem was that they did everything right, for a non-internet world. Emerging internet technology introduced so much uncertainty into our cultural realities that no amount of market research was going to validate their idea without them actually trying it first.
The fascinating thing about Pets.com is that the whole thing—from launch to liquidation—lasted 27 months.WebMagic’s founder, Greg McLemore, was early to the online game. Before he started pets.com, he ran toys.com, which billed itself as “the Internet’s largest online toy store” upon its 1996 launch. (It was bought by eToys soon after.) He didn’t do anything with his pet-related domain right away, instead using it as a forwarding site for his other amazing domain name, but there was a persistent Harvard Business School student that nudged him to try to build a business from it. Carolyn Everson had a seed of an idea, and wanted to build out an online pet store. McLemore didn’t want to sell the domain, but he was willing to work with Everson on building out the idea—to bring the (at the time) $23 billion pet product category to the internet. Soon, they secured venture capital funding, and a CEO was hired on. That CEO, Julie Wainwright, happened to know Amazon founder Jeff Bezos. Not long after that, Amazon took a 50 percent ownership stake and threw in even more money.

After a company named PetFlow was written up by Business Insider with the headline “ Someone is Trying the Pets.com Idea Again,” Wainwright—frustrated that PetFlow co-founder Alex Zhardanovsky dinged her former company for selling products below cost—spoke up in the comments section.

Her comments are insightful, if defensive. She noted that startups these days have numerous advantages available that Pets.com didn’t have way back when, which drove up the costs severely.

“There were no plug and play solutions for e-commerce/warehouse management and customer service that could scale, which means that we had to employ 40+ engineers,” she noted. “Cloud computing did not exist, which means that we had to have a server farm and several IT people to [ensure] that the site did not go down.”

And while numerous other companies that filed for bankruptcy, like Webvan, had massive losses before shutting their doors, Pets.com, she says, did the noble thing: Realizing it wouldn’t get the investments it needed to move forward due to the venture capital market’s collapse, it shut down operations, liquidated its assets, and gave the money back to the investors.

That meant selling off the domain name (which PetSmart bought in December 2000 for an undisclosed price) and the sock puppet (which, in a nice bit of foreshadowing for the next bubble, went to a firm that sells subprime loans— subprime auto loans, to be specific).

https://tedium.co/2017/01/12/pets-dot-com-failure-history/

Pets.com was an early runner but failed, despite 50% stake by Amazon. Eventually they could not scale the company, and had to sell the domain name to Petsmart, which eventually bought Chewy.com for 3 billion and spun it on IPO for 10.

Assignment 1

Assignment 1

Assignment 1

Further questions

Please write a business plan for the founder in 2011. Do you think Chewy would also succeed in other countries?

We Like To Hear From You

 Address. 548 Provident Avenue, Chicago, IL 60093

Tel. 224-213-6831

Email. changliu8888@gmail

© 2020 by TeenSharks Startup 101.