by Zachary Corson
The online retailer Chewy came out of nowhere starting in 2011, to fill a gap in the online retail pet industry. Moving quickly with a level of customer service not seen elsewhere by online pet retail and the ability to keep prices low, Chewy quickly took second place to Amazon in online pet sales. Chewy has yet to be profitable, though their sales were close to $1 Billion in 2016 and continue to grow quickly.
On the other side is PetSmart, who went private in 2015 when BC Partners spent $8.7 Billion to acquire them. BC Partners is known for cost cutting. Many manufacturers that I have spoken with have said they have felt the impact of the PetSmart acquisition as PetSmart has changed the way they buy their inventory. Also, PetSmart has changed who they buy from.
PetSmart’s $3.35 Billion acquisition of Chewy is the largest price paid for an E-Commerce company, besting even Walmart’s acquisition of Jet.com! Even though the culture of these two companies is extremely different, it is still valuable to both sides. PetSmart gains significant advantage on E-Commerce in the Pet industry, along with Chewy’s reputation for excellent customer care. Chewy gets a larger distribution channel with presence in brick and mortar retail, giving Chewy greater name exposure.
The PetSmart acquisition of Chewy shows the market strength the Pet industry continues to maintain in M&A. BC Partners, like many other private equity groups, realize there is still strong growth potential. The humanization of pets that has been so widely discussed, fuels this strong growth and has led to the abnormally high valuations pet companies have been seeing for a few years now. On top of that, private equity itself has grown tremendously with low interest rates and strong returns pushing more investors’ dollars into private equity. However, M&A in the Pet industry may be hard pressed to maintain this much strength in five years as the pet industry growth will eventually level off, and interest rates will almost certainly rise.
The market is superb for pet products today, and sellers may be well-advised to think twice about long delays.