Should Chewy Buy Petco?

In a comprehensive piece penned Aug. 26, Forbes contributor Richard Kestenbaum made the case for Chewy to acquire Petco — a superficially feasible play given that the former commands a market cap of $16.8 billion while the latter is pegged at just $892.8 million, as of this writing.

But Kestenbaum’s primary line of reasoning was made crystal clear.

Citing NeilsenIQ data indicating that 14.2% of pet sales revenue is derived from consumers who solely shop brick-and-mortar, and 3.8% from those who only shop online (with the former figure dropping and the latter rising YoY), he argued that with 82% of revenue coming from customers who shop both channels, it makes sense for Chewy and Petco to combine efforts to capture a wider consumer demographic.

Further, a mere 7.1% of Petco’s 2024 revenue came from online sales, with Petco showing weakness in terms of having the ability to convincingly capture that portion of the market.

“[These consumers] want to be ‘omni,’ shopping both online and in store. But Petco and Chewy customers find themselves unable to buy their pet food and supplies from the same merchant when they shift channels between online and in-store,” Kestenbaum wrote.

“That’s not what consumers want but it’s what they have. And that’s why the two should get together,” he added.

Other reasons provided for the hypothetical buyout:

• Both Chewy and Petco have seen their stock prices crash in the post-pandemic era, with Chewy shedding more than 60% of its value and Petco a more substantial 80%-plus. Kestenbaum saw a combination of the two companies as a beginning response to a “convergence of online and physical stores” and other challenges facing the pet supply and care retail segment.
• With Walmart, Target, and other competitors offering not only low prices but established phygital storefronts or marketplaces, Chewy is left in the lurch to compete without a brick-and-mortar presence. A timely acquisition of Petco could solve this problem, potentially.
• Given that both Chewy and Petco are publicly traded companies, Petco (with its business being “under a lot of stress,” per the Forbes contributor) would be forced to respond to any serious offer made by Chewy. And with Chewy seeing shares sell at 26.6x for each dollar of EBIDTA versus 9.8x for Petco, any acquisition of Petco would likely see Chewy stock trend upward.
• A combination of the pair’s resources provides exactly what consumers are looking for, and a post-merger Chewy-Petco would be “transformational,” in the author’s words.

Chewy’s Potential Buyout of Petco Remains Unlikely

Not everything is bright and sunny in Kestenbaum’s analysis, however, as he pointed out that this prospective deal was “most likely not” on the table, at least in the near future.

Both companies are expected to experience earnings growth ahead, adding a layer of disincentive to the mix. Given the large organizational structures of both retailers, decisions of this magnitude don’t exactly come about easily, nor quickly. Meanwhile, Chewy has made inroads into the Canadian market, as well as with vet clinics, meaning it’s already engaged in some form of expansion aside from a potential acquisition.

The buyout itself could be botched, facing a “universe of issues involving merchandising, technology, and strategy” which would have to be hurdled in order to stave off the loss of once-loyal customers, Kestenbaum concluded.

Nonetheless, he quoted Bob Rubin — CEO and Founder of pet industry advisory Breakaway Advisors — as saying that this move could be imperative for Chewy and Petco, should they want to maintain relevance and stave off successful competitors.

“If you really want to go up against PetSmart and Walmart and Amazon, you have to do something big like this,” Rubin said.