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  • (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.

  • (tense tonal music)

(tense tonal music)

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How Chewy Harnessed the Pandemic Pet Boom | WSJ

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    joey joey posted on 2021/06/08
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