Petco: A Pet Retailer Facing Headwinds in a Competitive Market

Initial Overview:

Everyone in America knows Petco. They are the second largest pet retailer in the US (behind PetSmart) and they are a name synomous with that time you thought it would be cool to buy an iguana. Petco brings back that memory of leaving with a plastic bag containing a gold fish, and for that, we love them.

Unlike many retailers, who’ve been crushed by Amazon due to speed, cost, and convenience, pet retailers are in a safer space. In many ways, you can think about Petco as a deeply local business - where the ecosystem of your animal is still mostly in-person.

If you strip away the products, Petco brings global logistics to local towns. They can handle anything and everything your pet needs within a large big-box store.

If we imagine a world where all pet food was purchased online, Petco would have to double down on other locational-focused pet plays. Fortunately, there are many.

This is not the case with clothing retailers. You may not need to see that red blouse or white Hanes tee in person, Amazon has eaten that meal. But with pets, Amazon has yet to solve the local demands of grooming, training, pet insurance, vets, and even purchasing of pets.

So what is happening with their business?

Business Summary:

Petco Health and Wellness Company, Inc. is a category-defining pet health and wellness company founded in 1965. With over 55 years of experience, Petco has established itself as a major player in the $90+ billion pet care industry.

Key Facts:

• Headquarters: San Diego, California

• Operations: Over 1,500 pet care centers across the U.S., Mexico, and Puerto Rico

• Employees: Approximately 29,000

• Services: Retail, grooming, training, veterinary care, and pet insurance

Business Model:

Petco offers a comprehensive range of pet products and services, including:

• Premium pet food and supplies

• Grooming and training services

• Veterinary care through in-store hospitals and mobile clinics

• Pet insurance through partnerships

• Digital offerings via petco.com and the Petco app

However, recent financial results and market trends indicate that the company is struggling to maintain its market position and profitability. This has caused the stock to sink, down 87% since its IPO. More concerning, the divergence versus the S&P is ~150%.

Who Screwed the Pooch:

Below is the general business analysis of where Petco exists and what bears are saying about the firm.

1. Eroding Market Share: Petco's market share has declined from 7% in 2015 to approximately 4% in 2024, primarily due to competition from online retailers like Amazon and Chewy, as well as mass-market players such as Walmart.

2. Financial Performance: The company reported a net loss of $22.6 million in Q4 2023, compared to a net income of $32.7 million in the same period the previous year. Full-year 2023 revenue grew by 3.6% to $6.3 billion, but profitability remains a concern.

3. Competitive Pressures: The pet care market has become increasingly saturated, with online and mass-market retailers offering more convenient and often cheaper alternatives to Petco's offerings.

4. Strategic Challenges: While Petco has attempted to differentiate itself through initiatives like in-store veterinary clinics and premium product offerings, the company has struggled to fully capitalize on these strategies.

5. Consumer Spending Shifts: Post-pandemic normalization of pet ownership rates and inflationary pressures have impacted discretionary spending in the pet care sector, affecting Petco's sales growth.

Strategy & Recommendations:

This is a weird one because if you asked me ‘how is Petco doing,’ without seeing their stock price, I would feel bullish. The pet market and consumers desire for pets is still growing. Your pet is an extension of your self and we all spend mightely for their care. I hear, ‘my dog eats better than I do,’ more often than I’d like to admit.

But this is all established and known - it’s priced in. Today, there’s three segments that need to be addressed by Petco.

1. Online retailers like Chewy and Farmers’ Dog.

2. Growth of higher end pet care centers

3. Veteraniary vertical integration

Let’s break them down separately and think about the solutions wholly.

1) Online retailers like Chewy and Farmers’ Dog

20 years ago, if you thought Amazon would be on par with WalMart, you would have been laughed out of the room.

But today, they dominate their spaces separately. Both stay in their lane. No matter how much money or acquisitions WalMart throw at the problem, they cannot grow an online retailer on par with Amazon.

Petco has the same systemic flaws: razor-focus on in-person retail with a myopic lens on the macro space. Chewy and Farmers’ Dog will continue to dominate in e-commerce, both due to their higher-end products and better logistics.

And why is that? The underlying value proposition of Petco is upselling to people in-store. With online retailers, it’s mostly recurring revenue. Upselling works but not as well.

The Pet industry, as seen by EMarketer, is about 50% ‘Food and treats.’

In the past, you would enter Petco, buy food and then they would convince you to buy a treat too. If you order through Chewy (and why not, it’s automatic and convenient) now, that visit won’t exist for some percentage of people. No more dog toy upsales as your point of sale never existed.

Second, Farmers’ Dog and a few other players have completely changed the game. The ‘higher-end luxury pet food’ space has catapulted it to the fourth fastest growing retail segment in 2024 (6.1%!). I cannot think of a company with a better ad than the Farmer’s Dogs commercial during the Super Bowl.

If Petco is not leading the market here, they are losing market share and growth is going to take a hit. We'‘ll provide the recommendations with topic #3 later.

2) Growth of Higher-end Pet Care centers

This is harder to solve. In much of the world, there’s this conversation of decentralized versus centralized. They have their tradeoffs.

Decentralized (small, autonomous businesses) typically outperform at the tails whereas centralized (large, systemic organizations) outperform in the averages.

In layman’s terms: visit a local pizza place and it is either excellent or terrible. But visit a Dominoe’s and it will always taste the same.

Humans seek out both excellence and uniformity.

When you’re traveling cross-country and want food at a rest stop, you seek uniformity. You are content with McDonalds. You’re not expecting Carbone; averages are the objective. Generally, uniformity is better when complexity and variance increase.

When it comes to pet care, consumers prefer excellence over uniformity.

Your Petco employee is making minimum wage and highly uninvested compared to their local pet business owner. My local pet groomer has raised show dogs for decades and knows more about dog-care than just about anyone in our surrounding area. She would never work for a big retailer when she could start her own business.

So how does Petco compete against her?

Typically, price and convenience - both benefits of centralization. But consumers are price inelastic with their pets…a slightly cheaper dog food doesn’t really matter!

So convenience is the only way to win here. As variance increases, humans seek uniformity.

What does that mean for pets: more ‘dog grooming at home’ and services that benefit the ‘working professional.’ My local groomer simply cannot visit hundreds of homes a month - she requires real estate to simplify her processes.

If I were Petco I would immediately partner with companies who know logistics and delivery (UPS, FedEx, Uber, etc) to enable pet grooming in a sharing economy play. Even if it drives zero profit, brand awareness and long-term market share will be captured. Mom and pop shops simply cannot build out the logistics and Petco will also provide employment for hundreds of thousands.

3) Veteraniary vertical integration

This has been a fascinating segment to watch. Both Emergency and traditional veteraniary clinics have seen an absolute boom. Private Equity salivated over their financials and aggressively bought up pop-and-pop clinics.

Why? Owning point of care matters. You get the ‘buy some food or toys’ game that retail stores are famous for along with a healthcare risk of return. But unlike human healthcare, the government and insurance have much less of a say. Raise rates 15% YoY on healthcare and you’ll be persona non grata for a Senator. Raise it on pets and, frankly, no one in Capitol Hill cares.

People also trust Vets. Petco is a large conglomerate, it doesn’t feel trustworthy.

But your vet is a real person with a degree, they live in the community, and have skin in the game. The fact your local Vet’s clinic is now run by a large conglomerate like Apollo or Blackrock is unlikely to matter.

The largest owner of veteraniry clinics in the US? Below, the Atlantic did amazing work explaining Mars Inc actually owns the most!

^{“In the United States, corporations and private-equity funds have been rolling up smaller chains and previously independent practices. Mars Inc., of Skittles and Snickers fame, is, oddly, the largest owner of stand-alone veterinary clinics in the United States, operating more than 2,000 practices under the names Banfield, VCA, and BluePearl. JAB Holding Company, the owner of National Veterinary Associates’ 1,000-plus hospitals (not to mention Panera and Espresso House), also holds multiple pet-insurance lines in its portfolio. Shore Capital Partners, which owns several human health-care companies, controls Mission Veterinary Partners and Southern Veterinary Partners.}

^{As a result, your local vet may well be directed by a multinational shop that views caring for your fur baby as a healthy component of a diversified revenue stream. Veterinary-industry insiders now estimate that 25 to 30 percent of practices in the United States are under large corporate umbrellas, up from 8 percent a little more than a decade ago. For specialty clinics, the number is closer to three out of four.”}

Now, the problem with engaging Mars or JAB is they are more than 20x larger than Petco. If your goal is competing with them, you will lose. But, what if people started becoming aware that they own 2,000 vet clinics! Well, that would be unsavory for the chocolate business.

Public Relations

This is where I’d spend $10M and aggressively attack the PR angle.

Run commercials, ads, and awareness campaigns. Get customers to start questioning whether that Snicker’s bar is worth when they just shelled out $2,500 for Sparky’s surgery. Get a senator involved - nothing tears at the heart strings more than your pet.

Plus, vets are such a small percentage of revenue that Mars (or JAB) will gladly sell their stake if they start feeling the pain. From there, and with 2,000 clinics, you’re well on your way to better compete versus Chewy, PetSmart, and Farmer’s Dog.

You get to vertically integrate Petco products into clinics, you establish a much more stable business segment, and you own an exhaustive part of the value chain.

That’s all for today - what did I get right or wrong. Let me know by responding directly to this!

Stay Nimble,

Justin