(tense tonal music)
- [Narrator] This is an artist painting a portrait of a cat.
She wasn't hired by this cat's owner,
but by Chewy, the online pet supply store.
The company has set out tens of thousands
of these surprise pet portraits over the past eight years.
And during the pandemic,
Chewy customers have shared them across social media.
The same time, the company's business has been booming.
In 2020, Chewy gained over 5 1/2 million active customers.
- We took action pretty quickly, actually, in our opinion,
and the strategy looking back was really communicate,
innovate and persevere.
- [Narrator] Here's how Chewy seized the pandemic pet craze
and ignited investor enthusiasm.
And why some analysts think its success is built to last.
When the pandemic took hold in 2020,
millions of people were forced to work from home
and with more time on their hands, they adopted new pets.
Analysts estimate that more than 11 million pets
found new homes during the pandemic.
And while pet owners were stuck at home,
many turned to the internet to buy supplies.
According to a recent report,
consumers bought 30% of their pet food
and supplies online last year, up from 23% in 2019.
This added up to about $5 billion increase
in online pet spending.
Laurent Schenk,
who analyzes the pet industry for Morgan Stanley,
says this increase was a big benefit for retailers.
- We do believe that the pet industry is better positioned
than some other e-commerce categories
to retain the gains that it saw in 2020
given the sticky-like nature
of not only the product in pet food,
but also the customers themselves
which tend to be very loyal to specific retailers.
- [Narrator] With the influx of new pet owners,
retailers like Target and Amazon
all gained more shoppers over the past year.
But sitting at the top of the dog pile? Chewy.
Morgan Stanley says the company
has the #1 market share position for online pet retail.
- Chewy has performed exceptionally well
during the pandemic,
obviously a beneficiary of the shift
from offline to online as it relates to e-commerce.
But they also benefited
from the structural increase in pet ownership.
- [Narrator] But Chewy's success wasn't just timing.
Analysts say it had a lot to do
with how management at the company
handled the demand from the pandemic pet boom.
When COVID-19 first first took hold in the US in March 2020,
Chewy, like many other companies,
was overwhelmed with orders.
The surge in e-commerce demand strained postal services
and this caused week-long delays
that put even more pressure on retailers.
Sumit Singh, the CEO of Chewy,
explains how this impacted his company.
- When industry-wide supply chains were disrupted,
what was going on was that we weren't receiving products
optimally across the fulfillment center.
Number two, because fulfillment center backlog was so high,
typically we deliver product
between one and two days to customers reliably.
Our shipping times went up to seven to 10 days.
- [Narrator] Competitors like Amazon faced similar issues.
But at this key moment, Chewy made strategic decisions.
To handle the increase in demand,
it hired thousands of new workers
while protecting shipments
for its core subscription customers.
The company also invested in shipping packages by air
to ensure timely delivery.
- Across a combination of these three mechanisms,
we were able to sort of control our situation.
- [Narrator] While these investments were expensive,
Schenk says they were the right move.
- For businesses that can retain these customers,
which we think Chewy can,
this should ultimately pay off dividends
over the course of the next several years.
- [Narrator] Over the past year,
Chewy rolled out a number of new products
with a focus on pet health.
In October, the company released
its own pet telehealth service called Connect with a Vet.
The company's CEO says the platform was launched
in response to the demand for vet care
while clinics were impacted by global shutdowns.
- We internally said, "Okay, how about we develop a solution
"that allows us to connect customers and veterinarians
"in a time of crisis?"
And we did exactly that.
- [Narrator] Chewy continued
to lean into its healthcare business.
The company announced that it would be manufacturing
its own compounded medications,
which analysts say is a competitive advantage.
But rolling out new products is expensive
and this cut into Chewy's profits.
Analysts say these product investments,
along with other pandemic-related expenses,
are part of why the company
has yet to show an annual profit.
- Any time you make an investment, yes,
you're committing to generating a healthy return
over the longterm.
And we are very longterm focused.
As it incidentally happens, this particular service,
Connect with a Vet, yes, it is currently a cost center
because we're not monetizing it.
It's free for customers.
- [Narrator] Still, analysts say some investors
have concerns.
- One of the things that investors
have also been a little bit concerned about
is the fact that Chewy's flow-through has been smaller,
lighter than some other e-commerce retailer's experience
during the pandemic,
and I think part of that reason
was the incremental cleaning costs and the shipping costs,
but also the fact that they did open
a new distribution center.
- [Narrator] The company's stock saw pullback
over recent weeks.
- The cost that we've invested
in the health and safety of our team members,
we are not looking to roll those costs back 100%.
We believe 80% of those costs
will actually remain in network in 2021.
Once inventory balances are better in check and controlled,
we believe that logistics costs
and inventory freight fulfillment costs
and all of that stuff
will actually start becoming a little less of a concern.
- [Narrator] Despite challenges during the pandemic,
analysts say the future of the company looks positive.
On March 30th,
Chewy reported its first quarterly net profit ever
along with a 47% increase in sales over the past year.
Analysts expect Chewy to have its first full year
of profitability in 2021.
But they say that it's rate of growth will likely slow down.
- This was a major structural shift
in e-commerce penetration that is, we think,
unlikely to revert.
So we do think 2021 e-commerce growth decelerates
versus what we saw in 2020,
but we don't think you actually give back
any of the share shift.
So we think this is structural, this is permanent.
- [Narrator] Experts say the growth
e-commerce companies like Chewy have experienced
are likely to be the most significant
and lasting effects of the pandemic
on the pet care industry.
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