Chewy recently released its much anticipated first earnings report as a public company. CEO Sumit Singh announced that net sales for Q1 grew 45% year-over-year to reach $1.1 billion. While the success of their Autoship program was a major focus of the call, Gifted brand Chewy’s quest for growth still faces challenges as the digital pet industry continues to expand.
Chewy has long been a marketing leader, aggressively spending on Google Search. In 2018 Chewy far outpaced Petco, Petsmart and Amazon in text ad visibility against vendor brand keywords, often capturing customers looking for branded pet products on the search engine. These investments have helped Chewy sustain traffic increases since 2017.
Chewy’s focus on maximizing revenue from loyal customers has seen strong results from its Autoship program, which drove 67% of net sales in Q1 2019. The program is a subscription-based service that allows customers to select preferred brands for their pets at a discount and determine the delivery frequency, locking customers into easy fulfillment. The $743.9 million in revenue from Autoshipping in Q1, 2019 represents an increase of 56% from $477.4 million in Q1, 2018.
In an effort to connect with customers and sustain this growth, Chewy is establishing new technology to drive more revenue and solidify long term value from its existing customers. The brand has implemented customization on its app that allows users to upload pet pictures to profiles and photos in product reviews, creating a more visually captivating app experience. Additionally, the app works to streamline the Autoship program, and focus on the channel has ramped up in 2019 as total app downloads and active users in the last 6 months has doubled.
Yet the shadow of Pets.com looms as a warning of expansion in a relatively nascent online pet category. Pets.com famously expanded too quickly into the digital pet industry before it reached a critical mass of online customers, joining a pile of dot com busts in 2002. While the pet industry has grown since Pets.com’s exit, producing $72 billion in revenue in 2018, only 17% of sales were converted online. Of the estimated $12.24 billion done in online sales, Chewy took home a relatively sizeable $3.53 billion. Chewy, however, has still operated at a loss, and while forecasts place 26% of the industry online by 2023, Chewy’s anticipated growth (32-34% for this year) may outgrow the slower development of available online revenue.
As Chewy hopes to shift spend from offline to online, it must continue to develop its programs and assets into homes for longstanding and new pet lovers alike or risk reaching the end of its proverbial leash sooner than expected.