Stifel Stifel analyst Martin Landry expects U.S. online retailer Chewy Inc. (CHEW-N) to expand into Canada in the coming quarters, leading to increase competition in the pet food industry and ultimately poising a significant challenge to Pet Valu Holdings Ltd.
Plantation, Fla.-based Chewy revealed its plan to grow internationally plans during a fourth-quarter earnings call on March 22 with CEO Sumit Singh telling analysts the company is “actively building the capabilities and team to launch our first international market over the next few quarters.” Further details are likely to come in May.
“Launched in 2011, Chewy is a large online pet food retailer, offering more than 3,500 brands and 110,000 products and generating more than US$10-billion in annual sales in the United States, representing roughly 7-8 per cent of the total U.S. pet industry,” said Mr. Landry. “Since 2018, the company has grown its sales by a CAGR [compound annual growth rate] of 30 per cent, significantly outpacing the industry growth of approximately 11 per cent. “Chewy has a popular autoship program, allowing customers to automatically receive their pet essentials on a recurring schedule of their choice, which generated 73 per cent of total company sales in 2022.”
Mr. Landry expects Canadian expansion to come in stage with an initial focus on urban centres, calling it “a difficult country to service online given that it has wide geographic area that is sparsely populated.”
“Such a scenario would likely reduce the impact of Chewy on the Canadian pet industry,” he said.
“In a survey we carried in December 2021 with 240 Canadians, only 8 per cent chose online as their preferred option to purchase pet food, while 44 per cent chose their local pet food store. According to Fusion Analytics, Amazon.ca had an 8-per-cent market share of the spending on pet in Canada in 2022. We estimate that online sales represent less than 15 per cent of total pet food sales in Canada, a lower proportion than other retail categories. This may be due to the bulky and heavy nature of pet food in relation to its value, making shipping costs prohibitive in some instances. In addition, pet owners enjoy the interaction and advice from their local pet stores. Nonetheless, we believe that the shift online will continue to impact brick & mortar retailers in the pet food industry and that the arrival of Chewy may accelerate this.”
Mr. Landry thinks Pet Valu is “better prepared to face increased competition online” after increasing its omnichannel capabilities and adding several loyalty programs.
“Longer-term, Chewy’s entrance into Canada should increase competition and could put downward pressure on profitability of the industry,” he added. “While we believe that Pet Valu is well entrenched in Canada with strong customer loyalty, we nonetheless see this development as negative for PET.”
Maintaining a “buy” recommendation for its shares, Mr. Landry trimmed his target by $2 to $42 to “reflect expected increased competition.” The average is $46.14.