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Pet Supplies Retail: Maximizing Its Physical Real Estate

RJ Hottovy
Jan 6, 2023
Pet Supplies Retail: Maximizing Its Physical Real Estate

It’s becoming apparent that retailers are looking to maximize returns on retail store assets in 2023. As we discussed in our “Retail Trends That Will Shape 2023” webinar last month, 2020 was a year of perseverance for the retail industry, followed by years of adjusting to changes in consumer behavior in 2021 and 2022. 2023 is shaping up to be the year of maximizing returns on physical retail store assets (which will be increasingly important with higher interest rates).

With that in mind, we’ve thought it was worth revisiting the pet retail category. We highlighted Petco as one of the “more unique post-COVID retail growth stories” last year, and that thesis remains fully intact as the company increases its number of unique customers, expands assortment of vet care services, and offers a wider range of exclusive merchandise. While pet supply retail has historically been a resilient category when looking at past cyclical downturns, it’s becoming clear that there is more to the category than just being more recession resistant during tough times. It’s also evident that Petco isn’t the only pet retailer that’s looking to greater utilization out of its physical stores, so we thought we’d check-in on the category.

  • Strong relative performance for pet retailers. With pet retailers essentially straddling the line between staples and discretionary retailers, it’s not surprising that pet retail was one of the more resilient categories in 2022, with visitation trends trailing just beauty & wellness among discretionary retail categories for much of the year until December. In its last quarterly update, Petco highlighted that 60% of its revenue mix came from non-discretionary categories like consumables and services (veterinary, grooming, training, insurance, prescription food and drug), both of which are growing at a double-digit clip. Most of the visitation pressures have been the result of discretionary purchases, although management believes that “a lot of the purchases today are being delayed and some of those purchases are going to come back.”
  • Category is adjusting to changes in consumer behavior. Visits per square foot for the three leading pet supply retailers (PetSmart, Petco, and Pet Supplies Plus) decreased by a high-single-digit clip in 3Q22 and by almost 10% in 4Q22 (below), although comparable-store sales continue to benefit from inflation (a trend we’ve seen across a number of categories). While visits have been negatively impacted by decreased spending on discretionary pet products and trip consolidation to some extent, services continue to make these retailers more resilient to cyclical downswings and improve the overall returns of the physical stores.  During 3Q22, Petco’s services revenue grew 14% YoY (38% over a two-year stacked basis), driven by vet and grooming services (helped by improvements to its online and in-store booking systems. Additionally, new subscription tiers–including Perks Grooming and Nutrition memberships (1.7M of Petco’s 25M active customers) and Vital Care (a comprehensive pet care membership platform with 400K enrolled customers, which grew 200% YoY)--are helping to drive more stable visitation trends and improve revenue per visit, which is evident in visit per square foot trends that remain ahead of pre-pandemic levels for each of the largest chains.
  • Emergent Retail Media Network opportunity. In our recent Retail Trends Forecast 2023 whitepaper, we discussed how retail media networks are increasingly becoming an important part of retailers’ plans to maximize the returns on their store assets. While Petco doesn’t have the same reach as mass merchants and grocers like Walmart, Target, Kroger, and Albertsons, the ability to target pet parents make it an attractive draw for key CPG companies like Nestlé and Colgate Palmolive. Given its ability to reach a “high value and health-conscious customer base both online and in store”, it’s not surprising that Petco’s advertising network posted double digit growth QoQ and triple digit growth YoY during 3Q22.
  • Pet Supplies Plus planning expansion through franchisees. Based on the positive tailwinds for the category, it’s not surprising that Pet Supplies Plus (and its secondary banner Wag N’ Wash) are also planning to accelerate retailing opening plans. Pet Supplies Plus (which currently operates 640 locations across 41 states) and Wag N’ Wash (14 locations) announced that they have a current pipeline of 115 franchise locations, with roughly half of the commitments coming from existing franchisees and the other half coming from new franchisees. Visitation trends for Pet Supplies Plus 2022 openings have been encouraging relative to its older stores, offering additional incentives to franchisees (on top of an already low royalty rate of 3.0%, compared to 4.5%-5.0% across most quick-service restaurant chains and 5%-7% for many fitness clubs).

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RJ Hottovy

Head of Analytical Research,

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for nearly 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank.

R.J. also brings a wealth of experience with early-stage investments as an investment committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he has advised over 50 foodservice and foodservice tech companies on more than $200 million in early-stage capital raises and M&A transactions.

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