Do micro distribution points (AKA stores) give Petco an edge over Chewy and Amazon?

Photo: Petco
May 26, 2021

Petco believes its expansive store base not only offers differentiation against its online competitors, including Chewy and, but will ultimately help accelerate its online growth.

“Our structural advantage of 1,453 micro distribution points through our Pet Care Centers is a strategic differentiator versus pure-play online competitors,” said Ron Coughlin, chairman and CEO, last week on its first quarter investor call. “We can get to the customer faster for lower cost than shipping from a DC.”

Stores fulfill about 83 percent of Petco’s online orders when you include ship-from-store, in-store/curbside pickup and same-day delivery services.

“We’re actively shifting customer expectations to same-day delivery, something pure-play online competitors will be challenged to replicate nationally,” added Mr. Coughlin.

Finally, categories such as fresh food, he contends, are “much more costly” to ship from distribution centers.

“Giving a personal example, when my order of Just Food for Dogs, fish and sweet potatoes comes from one of our Pet Care Centers two miles from my house, it comes in a simple bag versus a pack box with cardboard with dry ice with foam packaging that online pure-play competitors use for comparable products,” said Mr. Coughlin. “Clearly, we have an advantage here.”

Having stores also supports expanding opportunities in services (i.e., training, grooming) and veterinary clinics, as well as Petco’s recent repositioning as a pet health & wellness company.

Petco’s digital market share in the first quarter increased more than 50 percent year-over-year and more than doubled on a two-year basis. The retailer’s share is dwarfed by Chewy, however, which controlled half of the online pet marketplace in 2019 before its sales surged during the pandemic.

For its part, Chewy last fall opened its first automated and high-velocity fulfillment centers and introduced telehealth and Connect with a Vet chat services as it saw pet healthcare and services shifting online.

On Chewy’s fourth quarter investor call, Sumit Singh, CEO, said he believes his company will continue to prosper. He cited estimates predicting overall online penetration rates for the pet category climbing to 53 percent by 2025, up from 30 percent in 2020.

We believe this shift in favor of e-commerce channels are durable and largely permanent,” Mr. Singh said.

DISCUSSION QUESTIONS: How can Petco best tap its large store base as a competitive advantage against Chewy and Amazon? How big a role do you expect Petco’s stores to play in determining the retailer’s digital sales growth?

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28 Comments on "Do micro distribution points (AKA stores) give Petco an edge over Chewy and Amazon?"

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Neil Saunders

Petco’s stores are an advantage inasmuch as they do allow it to fulfill in a more cost effective fashion. They can probably given it a speed advantage over Chewy, although not necessarily over Amazon which now has same-day delivery in quite a few markets. However does the customer always need speed? For something purchased regularly like pet food, probably not. Many customers have subscriptions to such products so deliveries are scheduled at regular intervals. Moreover, to win online Petco will need to pull shoppers away from Chewy which, given the loyalty to the Chewy brand, will not be easy. However when it comes to all the in-person things people need and want for their pets, Petco does have an advantage it can build on.

Jeff Sward

Great point on speed when it comes to pet food. Reliability and consistency are what count.

Georganne Bender

I can tell you that from my perspective Petco is killing it. We rescued two cats last month and I initially stocked up at Petco. Now the retailer sends me highly personalized emails with reminders and offers that can be delivered to my home the same day, often within hours. I like that my orders are filled and delivered by people who live in my own community; that I can walk into the store and the associates who also fill my orders can have a real conversation with me about my cats. It’s a perfect world.

Jeff Weidauer

Having a brick-and-mortar base along with a robust online platform provides a significant competitive advantage for any retailer. In Petco’s case – as with most retailers – the online/offline integration has not been optimized and there is much work to be done.

Nikki Baird

I see more and more retailers – especially with a widespread store base – turning to stores as fulfillment centers. Not only does it provide an opportunity to be faster simply because the inventory is closer, but it provides flexibility in leveraging the store as a pickup point. I know it’s the most expensive real estate in the chain for holding inventory, but given the lack of available warehousing space and also the earlier and earlier cutoff dates for expedited shipping during holiday rushes, I think smart retailers can turn that expensive real estate into both fast service levels for consumers and profit in charging expedited rates for inventory that won’t have to actually be expedited to reach the consumer in time.

Shep Hyken

When physical retail stores can also serve as distribution centers, you have double the opportunity. This works well for Petco. By the way, one of the reason Amazon wanted Whole Foods was because of the retail outlets serving as distribution centers. Back to Petco… They have recognized a strategy that is keeping them competitive with Amazon and Chewy. Good for them!

Dave Bruno

The Petco story is yet another example of why stores represent such a competitive advantage over the online-only giants. And also yet another reason why comp store sales is an almost irrelevant metric…

Richard Hernandez

Petco is where the pets go and this just strengthens that proposition. Micro-fulfillment centers will work to their advantage for sure but, as mentioned already, Chewy has an established clientele that will be hard to get to change over. Petco realizes, however, that you have to keep up in order to survive.

Liza Amlani

Petco is at an advantage because of its large store base – physical stores with an existing loyal customer. The fact that customers can buy online and pick up in store gives Petco the opportunity to upsell and continue to build a relationship with their customer which will directly translate to customer loyalty. It’s also a fact that during the pandemic, fostering and adopting of animals was at all time high. Knowledgeable sales associates who can answer pet owners’ questions are the differentiator to help build customer loyalty.

No one is going to beat Amazon and Chewy on assortment choice and Prime Delivery BUT what retailers can do is continue to build on a hyper-localization strategy to target customers. By using insights from the data they capture with both digital and physical engagement to enhance their customer journey they will build that customer loyalty even deeper.

David Naumann

Similar to Walmart, Petco’s large base of local stores offers an advantage of faster and lower-cost delivery over pure-play online pet stores. Using stores as distribution centers is a growing trend as some retailers are fulfilling 90 percent of online orders from their stores. The challenge for Petco is to increase customer awareness of their online capabilities and demonstrate their advantages over Chewy (speed of delivery). However as Neil Saunders pointed out, speed of delivery is often not expected or needed for pet products.

Suresh Chaganti

For retailers that are agile and able to invest, stores are a huge asset as Petco is trying to demonstrate in this case. Even then execution is a different ballgame altogether. Retrofitting stores to also operate as DCs is expensive. Holding the right inventory needs a transformative shift in mindset to use data-driven insights and actual investments in those capabilities. With such a decentralized distribution, the inventory carrying costs will certainly increase.

Stores are an asset for sure. But it is far less certain that Petco can utilize that asset effectively, to the extent that it becomes a competitive advantage against Amazon and Chewy.

Ken Morris

Petco is already discounting 25 percent for orders of $50 or more picked up via BOPIS, so it’s clear they’re feeling lots of pain from the online competition. I believe Petco’s store base will be key to their digital sales growth and overall success. Their micro-fulfillment center (MFC) strategy is key here, and their market positioning of pet wellness is spot on, and their commercials leave a lasting impression scoring high brand awareness. Adding automation to the MFC could be the ticket to higher profits and market share.

Paula Rosenblum
Unlike Georganne, I stopped buying at Petco because they were ALWAYS out of stock on the stuff I need. I had three cats with simple yet specific tastes (one passed last year, so now there are two). Petco was literally ALWAYS out of stock on those two varieties of Fancy Feast. I would beg them to order a case of each for me, and I’d get them the day they show up. They’re not exotic flavors – classic Fancy Feast. I finally gave up, went with Amazon for a short while, but got tired of bashed in cans because they weren’t handled well or packaged correctly, and switched to Chewy. I have never looked back. The only thing I get from Petco is kitty litter because it feels unconscionable to ship kitty litter on a plane. And they pretty much are always in stock on that. So maybe they’ve solved their inventory management problems, but I left for a reason. So if they want the stores to be a competitive advantage, the company ought to… Read more »
1 year 2 months ago

Petco discontinued Fancy Feast (along with other mainstream cat food brands like Sheba, Friskies, etc.). That is why it kept being out of stock.

Petco only wants to sell high margin “natural” pet foods that cost twice as much. Petco stores in my area are empty of customers since this move.

Ben Ball

The term customer experience (CX) is way overworked in recent retail literature. But in this case it is the crux of the matter. For physical locations to be a competitive advantage for any retailer today they absolutely must offer some highly differentiated and deeply meaningful enhanced customer experience versus online shopping. OK, I know I used a lot of adjectives in that last sentence — technically not good business writing. But in 40 years of CPG marketing the one biggest foible of our profession I have found is over estimating the importance of our ideas to consumers. I don’t know how many times I have given my “lime-lemon is not a meaningful difference versus lemon-lime” lecture, but it is in the hundreds I’m sure. So, the $64 question (my late father’s phrase) is — what is Petco going to do for me in the store that I can’t do more conveniently in my robe at home?

Jeff Sward

Store fulfillment — er, excuse me — micro-distribution points. Seems like Target already taught us this lesson, from both a customer relationship point of view and a financial point of view. Retailers can absolutely evolve and leverage their brick-and-mortar stores. Micro whatever.

Ron Margulis

I may be giving away a great idea here, but I wonder why there isn’t a company that has worked with veterinarian offices to sell pet food and supplies on a large scale (not just the pills and a few cans of food). They have more than 50 times the locations as Petco or PetSmart and a much more trusting relationship with the pet owners. A few large regional DCs and deliveries a few times a week so not much extra space is required and the vet has a great revenue stream.

Steve Montgomery

What gives Petco an edge over Chewy and Amazon is not speed of order fulfillment but all the other services it can offer at its stores. Chewy and Amazon may be able to get products to you in the same timeframe as Petco or even faster, but they can’t groom your pet, train your dog, or offer in person veterinary services. The question is, can Petco continue to find a way to offset the broader selection of products Chewy and Amazon can offer?

Andrew Blatherwick
Petco has a winning strategy here. They absolutely have an advantage with their “micro distribution centers.” The pure-play competition either have to create them, which is not easy to do and gain national coverage, or if they already have them, like Amazon, they typically don’t have the ability to handle fresh or short shelf life product. The biggest advantage this gives Petco is the cost of their supply chain. They do not have the expensive mileage to cover, they do not have the packaging costs and they already have the locations staff and, very importantly, the product to carry out the fulfillment. They already operate profitably as a traditional retailer so adding online through their stores just spreads the costs and makes them more efficient. The cost of inventory alone will make a huge difference to the bottom line – the staffing and capital costs of building distribution centers all adds up. Traditional retailers have always had this advantage, they just needed to catch up with the online strategy and mechanics, which Petco have done.… Read more »
Dick Seesel

I think PetSmart and Petco have roughly the same number of physical stores so I’m not sure one has the advantage over the other. But until PetSmart decided to spin off Chewy (if that deal is completed yet), it had an obvious competitive advantage as a full-blown omnichannel retailer. PetSmart still has the same ship-from-store capacity as Petco, so the competition between the two is far from settled.

Kevin Graff

Fulfilling from a store has so many advantages, as noted above from so many of the comments. Consider this: yesterday I ordered something online from a kitchen store located close to my office. They called me 10 minutes later saying it was ready to pick up! A win for the customer, and for the store as well.

Trevor Sumner

It’s not just speed, it’s cost. Local store fulfillment through its network of 1,500 stores will be more cost effective, especially for bulkier items like pet food. It’s less expensive to deliver locally than the standard shipping on Chewy below their transaction threshold. Moreover, pets are by definition an experiential product, and Petco’s strategy of launching more high-margin services in-store will deepen the customer relationship and make it more profitable. Ultimately, the test will be whether Petco can woo the online shopper, and their investments in CRM, personalization and improved digital commerce are the real test of whether it can convert in-store customers into omnichannel shoppers.

David Mascitto

Petco has a strong advantage over Amazon thanks to its network of stores that are being used as micro-fulfillment centers. Petco’s fulfillment and shipping costs are lower than Amazon’s due to their their proximity to the customer which also accelerates order delivery time. Add BOPIS/BOPAC into the equation and Petco’s formula will be hard to beat by DTCs.

James Tenser

Virtualization, centralization and automation create certain efficiencies for specialty e-commerce, but there can be offsetting disadvantages. Retail real estate is more costly per square foot versus industrial parks, but it is also much closer to where the customers are.

Any economic analysis must consider the total cost to fulfill — all the way to the pantry.

Petco’s “micro distribution points” (heh! heh!) provide two important types of added value that are unavailable in Chewy’s all-online model.

First is the ability to provide high-margin services on-site including grooming, pet training, and healthcare. I have even seen “pet adoption day” events on-site. These can be important sources of brand loyalty.

Second, stores are fixed marketing billboards that continuously promote the Petco brand in high-traffic shopping locations. Passing shoppers do not have to register their email addresses to step in for price check. A pure online retailer must invest in paid media to acquire new customers.

1 year 2 months ago

Petco in theory has an edge with its high store count but in the real world has little to no edge as Petco has a terrible selection after discontinuing most mainstream product brands of pet food, limited inventory levels, and the highest prices.

PetSmart has a better opportunity (since they have a larger product mix and better pricing), but given their previous affiliation with Chewy they don’t seem to be marketing their online offer much.

Ananda Chakravarty

Per their CIO, Petro’s $9B+ business is driven by services, most of which is in person: Petco offers grooming, day-care, training, and veterinary care. Their stores are the distribution channel for these services. Petco stores will continue to drive value because locally, that’s where customers can engage. The physical presence enabled the advantage over Chewy and Amazon precisely because customers can’t take their kids or in this case their dog for a haircut online. See this article: How PetSmart IT grooms the customer experience.

Craig Sundstrom

This is one of those “all else being equal” questions: obviously, all else being equal, more distribution points is better. But, of course, all else isn’t equal since there’s a cost to maintaining said points. This is a numbers question: if the stores can remain viable on their own, then it will be an advantage; if not, they will quickly become a big sunk cost liability.