April 26, 2017

PetSmart, the nation’s largest pet store chain, recently announced it had agreed to acquire online pet retailer Chewy.com. PetSmart, which possesses more than 1,500 stores and was acquired a few years ago for $8.7 million in a private equity backed leveraged buyout, said in a press release that the idea, “which is subject to customary regulatory approvals, is expected to close by the end of PetSmart’s second fiscal quarter in 2017.”

Although exact terms of the acquisition were not disclosed by PetSmart or Chewy, multiple sources—including tech news site Recode—put the transaction price at slightly more than the $3.3 billion that WalMart paid for e-commerce startup Jet.com last year.

Chewy, which was founded in 2011 by Ryan Cohen and Michael Day, is fueled by more than $235 million in venture capital from investors that include Volition Capital, T. Rowe Price and BlackRock. Chewy, which operates out of a 70,000-square-foot headquarters in Dania, Florida, generated more than $880 million in sales in 2016 and was projected to generate more than $1.5 billion this year. PetSmart will reportedly allow Cohen to remain as CEO at Chewy, which will “operate largely as an independent subsidiary.” Earlier this year, Forbes valued Chewy at $4 billion.

According to its press release, PetSmart stated “Chewy’s extensive product selection and subscription model have attracted and retained a significant customer base that has contributed to the growth of customer purchasing through online channels.”

However, Tuffy’s Pet Foods, maker of NutriSource, Pure Vita and Natural Planet brands, immediately responded to the news of the PetSmart agreement to acquire Chewy by announcing in a press release that it was parting ways with Chewy. In its press release, Tuffy’s President Charlie Nelson and national sales manager Dan Schmitz wrote, “Our approach has been to focus on building strong relationships with independent pet specialty retailers and family-owned and operated businesses … While e-commerce sales have grown significantly over the past few years and will continue to grow—and no company can ignore this channel—it is our strong intent to continue with our current marketing plan focused on the independent specialty retailers and family-owned businesses.”

Frank Frattini, CEO of The Hungry Puppy in Farmingdale, New Jersey, said he was amused by the announcement and, as an independent retailer, considered it good news.

“I’ll be surprised if [Tuffy’s] is the only one to leave [Chewy’s],” he said. “It’s a slow-motion train wreck, and I can’t stop watching.”

Frattini felt PetSmart paid too much for Chewy’s, and he didn’t view the business model as a profitable one.

“I don’t know what the path to profitability will be,” he said. “For an online service, Chewy’s customer service is second to none. They’re either going to have to reduce their level of customer service or raise their prices, or it will be a combination of both. In the end, I think PetSmart took one for the team.”

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