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Shares of Chewy and Petco are down by around 49% and 64%, respectively, in 2023 as pet adoptions have declined and the pet category has proven to be less resistant to macroeconomic pressures than predicted.
"Whether economies are up or down, the pet market tends to be pretty recession-proof," Petco CEO and Chairman Ron Coughlin told Fox Business in March 2022.
Coughlin’s comments came as the pandemic drove a surge in pet adoptions and the “humanization” of pets, which has seen owners increasingly treat their “fur-babies” similar to or even better than their children when it comes to spending. However, with inflation on pet food in the early summer soaring two times higher than human “food at home” coupled with economic pressures, pet spending has surprisingly slowed.
“In times of recession or economic stress, first you trade down on your own food, then your kid’s food and then your dog’s food. That’s what history would suggest,” Max Gumport, a U.S. packaged foods analyst at BNP Paribas, told the Wall Street Journal. “This time is appearing to be different.”
A 16% decline in pet adoptions this year is also weighing on spending, according to Chewy CEO Sumit Singh. He said last week on the retailer’s third-quarter analyst call, "Right now, pet household formation is muted, and it's muted because of the high kind of pressures that consumers are seeing from every direction.”
Petco’s third-quarter results underperformed expectations as pressures on discretionary spending continued from the second quarter. In response, Petco recently added the pet category’s “largest nationally available value brands” in food and treats for dogs and cats — including Friskies, Pedigree, Purina 1, Beneful, Temptations, and Milkbone — to help drive traffic.
“While we remain committed to being a leader in the still rapidly growing premium, super premium, and fresh frozen categories, this is about choice. Bringing as many pets as possible into our health and wellness ecosystem,” Coughlin said on Petco’s third-quarter analyst call. “Whether chosen because of price sensitivity, brand preference, a picky eater, or a combination of these, we believe in the current environment it’s important that no pet is excluded.”
He also said Petco has taken “targeted pricing actions to address competitive gaps in key traffic driving brands” that helped the chain return to customer growth in the quarter.
Chewy reported that its active customer count slipped for the second straight quarter and lowered its revenue outlook for the year, but Singh still believes Chewy is set to gain share in the current environment. Chewy’s sales in Q3 grew 8% against industry growth in the low single digits, helped by strong demand for its autoship subscription program and strong pricing across non-discretionary food and healthcare items.
Singh said, “While consumer spending behavior remains opportunistic in the current environment, our results illustrate that Chewy's value proposition continues to resonate loudly and will prevail when consumer demand and industry inputs improve.”