The Next Chapter for Petco

Well, it looks like the marriage between Petco and PetSmart simply was not meant to be—at least not yet. This does not come as much of a surprise, as the stars seemed aligned against a possible merger between the two big-box pet specialty chains from the start. What may be more surprising is that this could actually end up making Petco a more...

Well, it looks like the marriage between Petco and PetSmart simply was not meant to be—at least not yet.

This does not come as much of a surprise, as the stars seemed aligned against a possible merger between the two big-box pet specialty chains from the start. What may be more surprising is that this could actually end up making Petco a more formidable competitor for independent pet stores.

As reported in the November issue of Pet Business magazine, even as the big boxes sat down to discuss a possible union in the third quarter of 2015, there were any number of hurdles facing the deal—not the least of which was the potential for antitrust intervention from the Federal Trade Commission (FTC). Apparently, it was a fear of FTC action that ultimately stymied the discussions, as Petco’s ownership reportedly balked when asked to compensate PetSmart if regulators demanded excessive store closures that would prevent the deal from going through.

Instead, Petco’s now-former private-equity investors, Leonard Green & Partners and TPG Capital, decided to sell the pet retail powerhouse to private equity funds affiliated with CVC Capital Partners and Canada Pension Plan Investment Board for a reported $4.7 billion. While that does not come close to the $8.7 billion that PetSmart was sold for a year ago, it is not a bad haul, considering Leonard Green and TPG acquired the company for $1.8 billion in 2006.

So, what comes next for Petco under its new ownership? To gauge the possibilities, I reached out to several industry officials to get their opinions.

The general consensus among the people I spoke with was that the biggest change will probably be in Petco’s leadership. As Bryan Jaffe, managing director at Seattle-based investment bank Cascadia Capital, puts it, “Seldom do deals at this level in the food chain involve the status quo in the C-suite.”

A leadership reset not withstanding, many in the industry do not expect many changes in Petco’s approach. Prior to this most recent change, the company was actually doing pretty well, especially compared to PetSmart, which went through some much-publicized struggles before key investors pushed for its sale in 2014.

Petco’s Unleashed small-store concept has been a particular strength over the past several years, accounting for a significant number of the chain’s new store openings, so we can probably expect the company to continue being aggressive with the format. That will mean further penetration into urban markets—some of the few places that have not already been saturated by the big-boxes—where Unleashed by Petco’s reduced footprint has been instrumental.

This will also likely mean the company will focus on trying to compete head-to-head with small, independent retailers by casting the Unleashed locations as neighborhood pet shops, rather than trying to out-big-box the mass players like Walmart and Target. Those outside players have been slowly but steadily stealing business from the larger-format pet stores by leveraging pricing that even Petco and PetSmart do not have the size to emulate.

But do not expect Petco to abandon the big-box concept altogether. Some in the industry believe that, having seen the success that some of the mid-sized pet specialty chains have had with creating one-stop pet centers, the company may become more aggressive in incorporating a variety of services alongside their retail offerings.

All in all, Petco’s next chapter should be an interesting one. If executed properly, all of the avenues that industry officials believe the company could go down are likely to result in a stronger, more diversified competitor in the pet retail marketplace.

The real question is, how will independent retailers respond?

Source: www.petbusiness.com