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December 11, 2024
Petco Focuses on Best Sellers and Value
Providing an update on Petco Health and Wellness Co.’s repositioning efforts, Joel Anderson, the pet chain’s recently appointed CEO, said that “merchandise remains the greatest near-term opportunity for us to strengthen profitability.”
Among the merchandise changes being made, Anderson, who formerly led Five Below, told analysts on the company’s third-quarter conference call that following a detailed review of assortments, SKUs of faster-turning products are being added, while shelf space for slower sellers is being reduced “to simplify the customers’ decision-making process.”
He said, “We’re optimizing our assortment to be aligned more closely with customer demand and make it easier for them to shop with us.”
Anderson also said he’s met one-on-one with several key vendors to provide customers “the value they’re looking for” as they remain budget-conscious. Prior to Anderson taking over as CEO in late July, Petco was already emphasizing value in the inflationary climate, such as by reintroducing a number of value-oriented pet brands — including Friskies, Pedigree, Purina Beneful, Temptations, and Milkbone — that have lower price points.
“We’ve implemented new processes to deliver timely product resets that allow us to offer more exciting products,” said Anderson. “We’re also sharpening our approach to pricing to remain competitive in the market and drive financial outcomes for Petco. To date, we put in place stronger pricing guardrails, implemented more robust reviews of our pricing gaps, and established processes for promo assessments.”
Other initiatives in play to drive improvement include reducing back-office duties in stores to allow employees to spend more time with customers, leveraging automation to standardize in-store fulfillment of online orders, and driving down costs across in-store labor, vendor buys, and logistics.
Anderson also said Petco’s vet offering “remains a key growth driver and differentiator,” with sales expanding 9% due to ongoing strength in vet hospitals, mobile clinics, and grooming. Anderson added, “We’re leveraging our vet customer data to better understand their purchasing patterns, inform how we engage with them, and ultimately drive greater wallet share.”
Overall comp sales grew 1.8% in the third quarter, and a 5% gain in services and other business and a 2.7% increase in consumables offset a 2.8% decline in supplies (accessories, toys) and live pets. The pet category has been slowed by a decline in pet adoptions after seeing a surge during the pandemic.
Petco’s Q3 results slightly topped analyst estimates, although guidance came in lower than expected.
Petco’s in-store service offerings have long been touted as a key differentiator, but the chain is seen losing share due to the continued online shift in pet-related purchases, led by Chewy, Amazon, and Walmart. According to Statista, nearly a third of the pet category’s sales made worldwide are projected to be e-commerce sales in 2025, up from 20% in 2020.
A recent survey of 1,540 pet owners in the U.S. from RBC Capital Market found that 88.9% bought supplies online this year, up from 82.3% in 2023 and 78.4% in 2022, with Amazon found to be particularly gaining share. Of those buying pet products, 79.6% shopped from Amazon, 53.1% from Chewy, 32.9% from Walmart, 31.4% from Petco, 29.4% from PetSmart, and 27.9% from Target.
Discussion Questions
Does prioritizing top-selling SKUs at the expense of slow-selling SKUs offer more upside than downside for Petco?
How should Petco be communicating “value” when increasingly competing in the pet category against the online reach of Amazon, Chewy, and Walmart?
Poll
Loading …BrainTrust
Dick Seesel
Principal, Retailing In Focus LLC
Brad Halverson
Principal, Clearbrand CX
Gail Rodwell-Simon
Strategic Retail Advisor, SPARX Advisory Group
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Petco isn’t a terrible business, but there is a lot of room for operational improvement. Stores are too cluttered, and the assortment is too scattergun. There isn’t enough inspiration in stores, while customer service could be better. There seems to be a plan afoot to correct a lot of these things, especially now Joel Anderson has taken the helm. If executed properly the plans will allow Petco to improve profitability and hopefully grow sales in what is now a much more competitive category. Driving more volume through fewer SKUs is also a way to sharpening prices which is what a lot of pet owners are now focused on.
“Stock more of what sells and less of what doesn’t” isn’t likely to draw much opposition here on RW; that having been said, it’s very ruch a reactive strategy – literally “trial and error”- so they’re going to lose out to competitors who can anticipate hot items without having to have them customer-vetted first.
It’s a pretty obvious idea: Carry more of what customers want, and less (or none) of what they don’t. Some might call it “Retail 101.” The challenge now for Petco is to leverage improved assortment planning into a better shopping experience and more negotiating power with fewer vendors.
Petco’s middle-of-the-road approach with everyday and value brands is a safe place to be during economic times like this. But stores are looking a little tattered, with seemingly lack of focus or priorities in merchandising. One opportunities they could consider under new leadership is to add more products and brands which reflect the communities where they are located. In some cases, they have stores near higher income neighborhoods. Online competitor Chewy is a threat here, with a wider variety and selection, including free shipping, and a subscribe and save option for additional savings.
Petco’s approach, allocating nearly all the store’s space to the top sellers, is nothing new, and has been tried, with variable success, at Target, Walmart, and other retailers.
That approach, which basically is sku rationalization, takes place most often in recessions, or in economic downturns. But there are issues with this approach.
Retailers need to carry plenty of “non top sellers,” regarded as niche, premium, innovations, new items from smaller manufacturers, licensed, and other specialties. Why is this important?
Customers will leave the store and shop somewhere else if your store fails to have destination items, which more times than not, are not top sellers.
The non-top sellers are where the penny profits come from. Shoppers go in to stores looking for the specialty item, and do the rest of their shopping while they are there.
The best assortments involve art and science/logic and magic. Bestsellers only leads to a very dry customer experience. Where’s the theater and aspirational demand creation? Have personally seen and heard about an overwhelming abundance of pet products available in discounters which indicates an assumption that pet owners will continue to increase…dog beds anyone? That growth curve has leveled if not headed down which leads to a requirement for robust merchandise planning systems and practices utilizing AI to forecast inventory investment and manage margins. Time to buckle down.
I think the focus here on getting the basics right is spot on and gets to the retail fundamentals. Ensuring a customer focused assortment while also delivering on the in store experience and services as key points of differentiation can help them build out and defend their value equation.
For real growth Petco needs to work on modernizing their digital commerce ecosystem. Promoting best sellers is table stakes.
Petco’s prioritizing top-selling SKUs will improve profitability and it’s an upside. It appeals to a broader audience that can organically migrate to the more specialized products or services. Petco should not upset its niche customers; rather, it should add additional customers to that segment.
A bigger challenge will be how Petco differentiates itself now that it has broadened its appeal. The in-store vet Clinic will not provide that differentiation it seeks, but it does have an opportunity to become known as a customer-service-centric pet supplies retailer.
While Petco should continue their online offerings, focusing on improving the in-store experience could help them stand out from the online giants. Enhancing customer service, offering more personalized shopping, and simplifying the process could really set them apart.
Between online competition, Petsmart competition and smaller (and better run) smaller chains like Hollywood Feed, I fear that the time to really correct this businesses path is already past.
Further, in my neighborhood the Petsmart is 5 miles away while a Hollywood feed is less than a mile away and Chewy is literally available on my laptop. No reason to even consider going to Petsmart.