Chewy Company Analysis

Key Results

The online pet store Chewy prides itself on the customer care it provides. It considers both the pets and the pet parents essential to its functions. It prides itself on being able to meet customer demand, exceeding expectations, and having an in-depth understanding of the emerging needs of pets and pet parents in pandemic-driven market conditions. They promise to deliver a personalized service experience every time a customer interacts with them. They were able to analyze the changing market needs during the pandemic and were able to maintain inventory to avoid shortages. In the first quarter of 2020, they realized the importance of the strategic placement of their fulfilment centres when they had a 20 million dollar expense in splitting shipments and covering longer delivery routes. As of the third quarter of the year 2020, Chewy operated through 11 fulfilment centres that covered about seven million square feet of the area used for its storage and operations (Cosgrove, 2020). It is with this strategic infrastructure that Chewy was able to reduce costs and meet its promise of 2-day delivery to 100% of its orders (Kilgore, 2019).

With the first few months of the pandemic being educational for Chewy, they learned about the increasing customer demand and the trends of these demands. As pet grooming services closed and the pet health facilities became either closed or limited, Chewy was able to capitalize on this newly created demand. By increasing its fulfilment centres and stocking up, Chewy’s sales and customers both increased. Chewy increased its revenue by 47.4%, amounting to approximately 1.70 billion dollars in the second quarter of 2020 compared to 2019 in the same period (Chewy-Q2_2020_ShareholderLetter.Pdf, 2020.). Continuing on the same trend, Chewy showed 46.2% revenue growth in the first fiscal quarter of 2021, which ended in May, amounting to 2.21 billion dollars. Chewy also reported an increase in its customers by 1.6 million (Chewy, Inc. – Financials, 2020). At the end of quarter 3 for the fiscal year 2021, Chewy had 20.4 million customers and a 15% growth in the year (Sheth, 2021).

Chewy’s increased revenues were a result of a key feature on the website known as “Autoship.” This feature provides pet parents with the ease of scheduling their pets’ regular products. Once the feature is checked the customer gets a 40% discount to a maximum value of $20 and with every recurring purchase a 5% discount on their favorite brands (Autoship & Save, n.d.). This feature increased revenue by 26.7%, which equated to 1.56 billion dollars, roughly 70% of net sales in the third quarter of the fiscal year 2021. Autoship Customer Sales

Increased revenue has helped Chewy in reducing its losses from $252 million (2019) to 32 million dollars in 2021 (Q3-2021-Shareholder-Letter.Pdf, n.d.). Even though Chewy has been proactive and has tried to make the best of the pandemic situation, it is still not able to generate profits, which also impacts share profits. The projected quarter 4 and 2022 are expected to generate profits for the business.

Chewy operates with the promise of delivering personalized services to customers. One of its highly perceived services is a surprise pet portrait for its loyal customers. Even during the tough times of the COVID-19 pandemic, Chewy delivered these portraits. Also, during the pandemic, pet health services were subjected to limited availability, closure, or lockdowns. Chewy initiated a service called “Connect with a vet” on its website to provide pet parents with a platform to connect with a licensed vet. The service was aimed at providing unparalleled customer service and care. Understanding the need that was generated in the special circumstances, Chewy was able to deliver, creating brand loyalty in return. Launched in 2020, the service received a 10/10 score in quality, which led to its expansion in both service hours and days.

The last key result is Chewy’s value and profit on investment in shares. At the start of the year 2021 (14th January), the company’s stock was valued as high as $112 (Chewy, Inc. (CHWY) Stock Historical Prices & Data – Yahoo Finance, 2021). However, the recent inflation, shortage of labour, increased cost of labour, and increased advertisement costs have once again increased market uncertainty. The stock is currently valued at $55 as of December 16, 2021.

Strategy & Recommendations

Chewy keeps customers at the centre of its operations. They have been strategizing all their operations, promotions, and functions to increase customer satisfaction and provide unmatched service.

Before diving into the recommendations, it is important to understand that Chewy has probably been able to have an advantage in the past two years. It is the ability to foresee that when people spend more time with their pets, they will spend more on them. This understanding benefitted in terms of high revenues and increased number of customers as Covid imposed restrictions closed brick and motor businesses temporarily and, in some cases, permanently. With the economies around the world opening up and people getting vaccinated, physical stores are opening up. Materials and products are getting restocked. Hence, the initial advantage of high sales may be impacted in the next fiscal year. The new customers who had purchased from Chewy during the pandemic or people who prefer physical stores may shift back to their usual suppliers, impacting the net sales of the company (Tatevosian, 2021). It is, therefore, crucial for Chewy to exercise insight into changing market trends.

For the business to retain its customers, it needs to deliver on its service promise and ensure high-level performance as it has done in the past. Especially for its most profitable subscription feature of “Autoship” which has generated recurring sales the business needs to plan strategically. This means that stock, especially the products that are prebooked or subscribed, should be delivered as per schedule to meet pet parents’ expectations and retain them as loyal customers of the business. In case of stock and delivery shortfall, Chewy will see customers switching as many options will be open once again.

The company’s feature of “connect with a vet” may be highly beneficial in retaining customers. Just as humans, once they find a good physician or a paediatrician for their child, they will not switch to a new doctor without reason. Similarly, pets, for most people, are part of the family as a child. If pet parents are satisfied with the consultation and advice they are given, they will find Chewy to be a one-roof operation that creates ease and accessibility. On the other hand, Chewy’s B2B partnership with veterinarians can also keep customer traffic high, as it would be recommended by the vet.

Since 2019, Chewy has reduced its losses year by year by advertising with the purpose of cutting the cost of operations and, importantly, the cost of product delivery. However, the biggest challenge of balancing losses and earning profits remains. With the current economic constraints, Chewy will have to respond proactively. With shipping bottle-neck, every business in the world is impacted by shortages and higher costs of transportation. To add to this, labour shortage and increased labour costs are further adding to the cost of business operations, reducing profits. With existing, high debt-equity, further decisions to sell stocks may be risky.

Conclusion

The online pet business market is highly opportune as it is yet to reach a saturation level. However, the businesses of today’s world are operating in a very volatile environment. There are increased market constraints because of the pandemic, from which the world has still not recovered. In this situation, Chey has made some strategic and profitable business decisions that have paid off. The company has a large, profitable number of loyal customers, and the business wants to convert its new customers into loyal ones as well. It has devised services at the right time to address the functional and emotional needs of the customers. In an interview, Singh emphasized the fact that the pet business was a sustainable category, and his company has shown sound growth because of its value proposition of customer service and care (Sheth, 2021).

References

Autoship & Save. (n.d.). Retrieved December 16, 2021, from https://www.chewy.com/b/autoship-save-15682

Chewy, Inc. – Financials. (2020, September 10). https://investor.chewy.com/financials/quarterly-results/default.aspx

Chewy, Inc. (CHWY) Stock Historical Prices & Data—Yahoo Finance. (2021). Yahoo! Finance. https://finance.yahoo.com/quote/CHWY/history/

Chewy-Q2_2020_ShareholderLetter.pdf. (n.d.). Retrieved December 16, 2021, from https://s23.q4cdn.com/610444331/files/doc_financials/2020/q2/Chewy-Q2_2020_ShareholderLetter.pdf

Cosgrove, E. (2020, September 15). Chewy’s new limited-SKU warehouse is just for volume surges. Supply Chain Dive. https://www.supplychaindive.com/news/chewys-limited-sku-warehouse-inventory/585101/

Kilgore, T. (2019, June 14). Chewy IPO: 5 things to know about the ‘pet humanization’ products seller. MarketWatch. https://www.marketwatch.com/story/chewy-is-going-public-5-things-to-know-about-the-pet-humanization-products-seller-2019-05-03

Q3-2021-Shareholder-Letter.pdf. (n.d.). Retrieved December 16, 2021, from https://s23.q4cdn.com/610444331/files/doc_financials/2021/q3/Q3-2021-Shareholder-Letter.pdf

Sheth, S. (2021, December 10). Chewy Posts Wider-Than-Expected Q3 Loss; Shares Fall. https://www.nasdaq.com/articles/chewy-posts-wider-than-expected-q3-loss-shares-fall

Tatevosian, P. (2021, October 16). 3 Reasons Why Chewy Stock Is Out of Favor With the Market. The Motley Fool. https://www.fool.com/investing/2021/10/16/3-reasons-why-chewy-stock-is-out-of-favor-with-the/