Facing threats from larger online competitors like Amazon and Chewy, Petco says it is streamlining operations to focus on the core Petco business. Drs. Foster and Smith was the biggest online retailer of pet supplies when Petco bought it in 2015.

Petco Animal Supplies Stores Inc. is permanently closing all operations of Drs. Foster and Smith, the cataloger turned leading pet supplies e-retailer it acquired in early 2015 for $158.8 million.

DrsFosterSmith.com’s customer care team sent an email to customers Feb. 19 directing them to Petco.com and offering a 20% off coupon. A subsequent visit to DrsFosterSmith.com redirected to Petco.com.

A filing from Petco to the Wisconsin Department of Workforce Development dated January 9 says all Drs. Foster and Smith operations will close, effective March 10, resulting in the layoffs of 289 employees from Drs. Foster and Smith’s base in Rhinelander, Wisconsin. Employees in customer service and fulfillment account for about two-thirds of the staff.

The filing, signed by Brock Weatherup, Petco’s chief strategic innovation and digital experience officer, provides some context for the closure. “Since Petco acquired DFS in 2015, consumer needs and preferences have continued to shift with technology, and the pet retail industry as a whole has continued to evolve at a rapid pace to keep up with these dynamics. Taking into account the needs of modern pet parents, ever-changing consumer demands and the ongoing evolution of the Petco brand, we believe the closure of DFS will enable us to streamline operations and better focus on our core business and customer.”

High-growth retailers and consolidation take a toll

The pet product market, particularly the online market, has changed in recent years, with new high-growth entrants and consolidation. When Petco bought Drs. Foster and Smith in 2015, it was buying the largest online retailer of pet supplies. DrsFosterSmith.com had more than $220 million in online sales and was ranked No. 148 in the 2015 edition of the Top 500 Guide, outpacing Petco’s online sales by more than $130 million and more than 120 spots in the ranking—Petco was No. 275.

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Drs. Foster and Smith was founded by veterinarians as a mail-order catalog company in the early 1980s and was among the first catalog companies to embrace ecommerce. It started selling online in 1998—the same year the ill-fated Pets.com launched. By 2003, the year Internet Retailer started tracking the sales of leading online retailers, Pets.com was long gone and DrsFosterSmith.com was generating nearly $70 million in revenue—about 45% of its total sales at the time—online.

Petco began selling online three years later in 2001. Its acquisition of Drs. Foster and Smith expanded its online business substantially, with online sales ballooning from about $83 million in 2014 to about $320 million in 2015, after it bought Drs. Foster and Smith, according to Top500Guide.com.

Petco, which itself was subsequently acquired in 2016 in a $4.6 billion deal with private equity firms, is currently No. 110 in the Top 500 rankings, with less than $450 million in online sales, according to Internet Retailer estimates. The vast majority of its sales come from its more than 1,500 stores in the United States and Mexico.

Petco in recent years has made investments to meet customer expectations for speed and convenience. Petco.com shoppers can order online and pick up their orders in store, or order via PetcoNow, whereby Petco works with Instacart for same-day delivery. “We’re focused on transforming our business with differentiated products and services, both in-store and online,” a Petco spokesperson says in an emailed statement to Internet Retailer. “In 2018, we saw continued positive consumer response to our buy-online, pick-up-in-store, ship-from-store, as well as our same-day and repeat-delivery offerings; and we achieved double-digit growth in ecommerce.”

Amazon and others move in on the pet supplies market

But competing retail chain PetSmart Inc., now ranked No. 50, one-upped Petco with its headline-grabbing acquisition of  web-only high-growth pet supplies startup Chewy.com in 2017 for an estimated $3 billion. Chewy.com launched in 2011 and generated $900 million in sales in 2016. Chewy was by far PetSmart’s largest ecommerce investment, but it wasn’t its first. PetSmart acquired Pet360, a network of pet-related information and ecommerce sites, in a deal valued at $160 million in 2014, just months before Petco bought Drs. Foster and Smith. Today, Pet360.com redirects to Chewy.com.

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PetSmart, now with more than $1.1 billion in web sales, is the largest pet supplies-focused online merchant. However, Amazon.com Inc. (No. 1), as in many product categories, outsells PetSmart in pet supplies online by a substantial margin. Amazon does not break down sales by category, but recent estimates put Amazon’s 2017 sales in the pet category at more than $2 billion, according to Packaged Facts.

Further, a consumer survey fielded by Packaged Facts in the first quarter of 2018 found 55% of online pet product buyers purchased pet products on Amazon.com. Chewy.com was No. 2, with 26%, followed by PetSmart.com with 19% and Petco.com at 17%. 3% said DrsFosterSmith.com.

Amazon is giving the pet supplies category more attention. In 2018, it added a private-label pet food brand called Wag and says it will add non-food pet supplies to that brand. It also has added an array of pet products under the AmazonBasics brand. Amazon customers also can create profiles for their pets and Amazon populates these with recommended products based on the profile information. To entice customers to buy dog food and cat litter with Amazon, Amazon offers 40% off a customer’s first “subscribe and save” order of these items. Subscribe and save is Amazon’s program to supply products that need replenishing, like food and litter, on a schedule.

Amazon’s attention to the pet supplies category and consumers’ increasing propensity to make Amazon their first stop for online shopping is affecting other merchants of pet supplies. No. 193-ranked PetMed Express Inc.’s online sales grew less than 10% in 2017, according to Top500Guide.com, less than the e-retail average.

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Estimates from the American Pet Products Association say U.S. pet owners spent $72.1 billion on pet supplies in 2018, up about 4% from 2017, and Amazon is in the position to capture the increased sales.

 

 

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