By Nathan Field
Pet pampering used to be the domain of Hollywood celebrities and eccentric socialites. Think Paris Hilton and her handbag Chihuahua, or the late Karl Lagerfeld whose Birman cat, Choupette, has two maids and is an heiress to his fortune. Now the trend has gone mainstream, as highlighted last week with the impressive Wall Street debut of online pet retailer, Chewy (CHWY).
Chewy is riding the global wave of pet humanisation, whereby pet owners regard their cats and dogs as family members and treat them like they would human children. Even New Zealand public officials are catching on to the trend, with Auckland recently joining Wellington in allowing pets on selected forms of public transportation.
Fur babies are for real
Millennials have been key to the fur baby phenomenon, particularly in developed countries where falling birth rates and delayed parenthood are boosting both the number of pets and the dollars spent on them. Historically speaking we’ve had one of the highest rates of cat and dog ownership in the world, but pet numbers have been tapering off in recent years. But even with the modest drop in pet numbers, the industry continues to thrive with Kiwis spending more on a per-pet basis than ever before.
Just pop inside your nearest Animates store to see where all that money is going. Coconut lime daily spritz for dogs. Grain-free chicken paté for cats. Not to mention the services such as wash and blow dry treatments, puppy preschool, and pet insurance. Chewy is like Animates online, on steroids. The range of products and brands on offer is truly mind-blowing. Do you want salad dressing for your pet tortoise? Yes, you do. Doggy pyjamas? They have forty-two different designs. I’m not even kidding.
The global pet care market: a solid investment?
A report last year by Grand View Research estimated the global pet care market will grow to more than US$200 billion (NZ$304 billion) by 2025, with pet food as the main driver. Many multinational consumer giants are heavily invested in pet food, such as Nestle with Purina (VT), Colgate-Palmolive (CL) with Hill's Pet Nutrition, and General Mills (GIS) with Blue Buffalo. Chewy sells all these brands and many more as well as its own private label products. But what's really driving their success story is the loyalty of its customers who buy their pet supplies automatically via subscription. Chewy understands that pets (and their dedicated owners) are special in a way that Amazon (AMZN) doesn't. Its growth has been spectacular thanks to this insight with revenues jumping 68 per cent to US$3.5b last year. Let’s put that in perspective against other recent IPO debuts: Chewy's sales are higher than Lyft (LYFT), Pinterest (PINS), and Beyond Meat (BYND) combined.
Doggone it! Chewy is different!
Like these recent IPOs, Chewy isn’t profitable yet, but the company's heavy investment in delivery, its strong customer loyalty, and its net margins are moving in the right direction. As a result, growth-hungry investors went crazy for the stock on its opening day, pushing Chewy's share price up 59% giving it a market value of roughly US$14b. The excitement is understandable given the trend of pet humanisation and the fact that the pet care industry has historically been relatively recession-proof. But you might remember another famously unprofitable pet retail company that listed almost 20 years ago. Pets.com collapsed within a few months of its listing in 2002, and its name (and sock-puppet mascot) came to be synonymous with the dotcom bust.
Chewy has a great brand, a proven management team, and has dominated customer service, but it's still selling third-party products online, which means the threat of Amazon will never really go away. I expect Chewy's pet-centric business will continue to evolve, but only time will tell whether its rampant top-line growth can translate into long term earnings expansion.
Nathan is the Portfolio Manager for the Global Thematic Fund at Kiwi Invest. Global Thematic is a portfolio of about 100 high-quality stocks selected for their exposure to secular growth themes. With almost 20 years’ experience in the investment industry, Nathan’s past roles include Senior Equity Analyst and Director at ABN Amro, and Asian Markets Adviser for Macquarie Bank. Nathan has a BA (Hons) in economics and a Post-Graduate Diploma in development studies from Massey University.
This blog is general in nature and should not be regarded as specific investment advice.