Here’s Why Chewy Succeeded Where Pets.Com Failed

Personalized customer service, as well as timing, helped founders Ryan Cohen and Michael Day create what is now one of the most valuable specialty pet retailers in the U.S.

Pets and online retail seem like a natural fit — buying 30-pound bags of specialty food for Fido is a lot easier to do over the internet than in person. But before Chewy came on the scene, the market was best known for an epic failure.

That was Pets.com. The e-commerce site, which emerged in the late 1990s, is one of the most memorable debacles in Silicon Valley history.  Just nine months after the company raised $82.5 million in an IPO in 2000, it pulled the plug.

In hindsight, it’s not surprising that Pets.com didn’t survive. The pet food industry has notoriously slim margins. Pets.com had no real plan for overcoming that hurdle, and burned through millions of dollars on advertising and branding. 

Where Pets.com faltered, though, Chewy has been soaring. The Dania Beach, Florida-based company is now publicly traded with a market capitalization of $31 billion — several times larger than Petco.

How did that happen? As with most startups, success came together through a solid plan, the right timing and help from a little serendipity.

One day in 2011, co-founder Ryan Cohen was standing in a pet food store with his poodle talking to an employee about food options when he had a revelation: There were millions of people across the globe that had pets and cared about what their pets ate. At the time he was planning on launching an online jewelry business with his friend Michael Day. They already had the website, the jewelry, and the delivery systems for their new jewelry business. They even had a safe in their office to store the inventory. 

But that day in that pet store, Cohen realized he didn’t want to sell jewelry. He wanted to sell pet food. Cohen and Day were a week away from launching their jewelry business. Instead, they sold the inventory and the safe and immersed themselves in learning about the pet food industry. Chewy.com was born.

Cohen and Day launched Chewy.com in 2011 using their own cash and several small loans. However, it was Cohen’s plan to build a large business and in order to do that, he would need investments from venture capital firms. Cohen flew from his home base in Florida to Silicon Valley and approached dozens of VC firms. Everyone turned him down because they didn’t think Chewy could compete with Amazon. (The fate of Pets.com also weighed heavily in many minds.)

Then, in late September 2013, an investor who had initially passed took a second look. He had heard the company had blown past the sales projections that had been cited to him six months earlier. He immediately wrote a $15 million check to Cohen and Day to invest in Chewy.

Cohen came away from that experience with a clear lesson: under-promise and over-deliver. He used that tactic in every round of funding from that point forward. 

Unsurprisingly, Cohen has often fielded questions about Chewy ($CHWY) reinventing what Pets.com tried to do in 1999-2000.  He has also encountered many people who thought Amazon would crush his company.

Cohen and Day believed that customer service had to be king in their business. They poured resources into their call center team, live chat representatives, and employees who responded to customer emails. 

Much of the first $15 million investment went into developing technology systems and personnel to grow the company. The company was growing at a blistering pace of 300% per year. They had to get fulfillment up and running and work out logistical kinks. Within a few months,  the company owned a 400,000-square-foot fulfillment center in Mechaniscsburg, Pennsylvania that enabled Chewy to ship via overnight delivery to customers in the Northeast.

Not everything went so smoothly. Staffing up took a long time. Scanner guns were buggy. The wifi kept going out. Cohen and Day kept plugging, though.

On the marketing side, Chewy eschewed expensive Super Bowl ads (part of what led to the downfall of Pets.com), and focused on direct response ads.  The plan worked. Sales more than doubled from $205 million in 2014 to $423 million in 2015. In 2016, Chewy did it again and sales grew to $901 million. The company did six rounds of funding and raised more than $350 million before beginning to plot an IPO.

Strategy was solid, but clearly the retailer was also in the right place and the right time. Pet owners have increasingly spent lavishly on better-quality food for their cats and dogs. They also appreciated Chewy’s customer service, which routinely goes above and beyond the call of duty. For instance, people who cancel their auto-ship orders because of the death of a pet receive condolence flowers from the retailer. 

Since the beginning, Chewy has promised its customers round-the-clock customer service via phone, email and live chat where they could speak to someone who was educated about the company’s products. If you needed information about anti-itch sprays for your pet’s hot spot at 3 a.m., Chewy was there.

On its way to an IPO, Chewy started getting interest from the big pet retail chains. Petco approached Cohen and Day with an offer for a merger. The founders didn’t like the terms, though, and passed. 

Then in early 2017, PetSmart inquired about making a bid to acquire Chewy. Cohen made it clear he and Day were looking for an all-cash deal that allowed Chewy to remain a separate business or else they’d proceed with the IPO. In April 2017, Cohen and Day sold Chewy to PetSmart for $3.35 billion. The deal was the largest e-commerce acquisition in history at the time.

But that wasn’t the end of the story for Chewy. Since the acquisition, it has steadily grown, even surpassing PetSmart.  In 2019, Chewy was spun off into its own publicly traded business with a value of $9 billion — nearly three times the sale price in 2017. Just two years later, its value has tripled again.

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Originally Posted on November 17, 2021 – If You Own A Pet You’ve Heard of Chewy — Here’s Why The $31 Billion Site Succeeded Where Pets.Com Failed