Chewy, the online pet product startup that rocketed to nearly $1 billion in reported sales in the space of five years, may have just set a record for the richest acquisition in Internet history. Earlier today we reported Chewy’s sale to brick and mortar rival PetSmart, the nation’s largest pet store chain, for an undisclosed sum. (Forbes wrote about Chewy in January: “The Man Who Found Gold In Dog Food.”) Now tech news site Recode is reporting that “multiple sources familiar with the deal” say the price is $3.35 billion. That would edge Chewy above the previous record, set when Wal-Mart bought Jet last August for $3.3 billion.
Neither company is commenting beyond a press release from Phoenix-based PetSmart, which touts the deal as “a critical milestone in [PetSmart’s] transformational journey.” With $7 billion in revenue and more than 1,500 stores, 30-year-old privately held PetSmart opened 73 net new stores last year, but its same store sales, and same store sales at rival Petco, have been flat, according to a competitor who didn’t want to be quoted critiquing a rival. Chewy, fueled by $236 million in venture capital, was siphoning off sales of bulk items like 40-lb. bags of dog food, which it offers to new customers at a discount, with free shipping. In recent months, Chewy said its revenue had exceeded $100 million a month.
While PetSmart still attracts customers with services like grooming and on-site veterinarians, it can’t ignore competition from online pet product sellers, says retail consultant Sucharita Mulpuru. That includes Amazon and Jet, both of which have been posting strong pet product sales. “The large players are all really eager to figure out how to win in digital,” she says. “They see upstarts coming out of nowhere, executing really well. To acquire them leapfrogs them to a level of digital excellence.” One of Chewy’s strengths is its 24-hour customer service, which 31-year-old Chewy cofounder and CEO Ryan Cohen has described as “Zappos on steroids.”
Chewy was growing at a breakneck pace, with a headcount of 3,400 at its 70,000-square-foot Dania, Fla. headquarters. As recently as 2012, cofounder Cohen, a college dropout from Montreal, was fielding rejections from Silicon Valley venture firms. But in late 2013, Boston’s Volition Capital, which seeks fast-growing ecommerce plays, invested $15 million in Chewy, followed by five more investors including BlackRock and T. Rowe Price. Chewy plowed the cash into staff and infrastructure, including a 600,000-square-foot fulfillment center in Mechanicsburg, Pa., opened in mid-2014.
At most fast-growing startups, notes Mulpuru, “entrepreneurs have a very, very inflated sense of self,” and no matter what the price they are offered, they prefer to push ahead on their own. “We want to be the No. 1 pet retailer in the world,” Cohen told Forbes late last year. The most dramatic example of a founder turning down a big deal: Groupon CEO Andrew Mason’s refusal to sell his daily deal site to Google for $6 billion in 2010.
When Forbes wrote about Chewy in January, Mulpuru pegged its value at $4 billion. Now she wonders whether the $3.35 billion price tag is too high. Though Cohen maintained that Chewy’s unit economics were in the black, the company wasn’t yet profitable and a pet industry veteran who knew three people familiar with Chewy’s finances, was skeptical it ever would be, given customer acquisition costs that he pegged as high as $200 each. “I would have thought it was a great acquisition at less than $1 billion,” says Mulpuru, but at $3.35 billion, Chewy may not be worth the price. She points to eBay’s $2.6 billion purchase of Skype in 2005, which it wrote down by $1.4 billion two years later. “Just because you buy an Internet darling, there is not always a path to profitability,” she says. “If there’s no path to profitability, then you’ve bought a dog–no pun intended.”
According to the release from PetSmart, Cohen will remain at Chewy as CEO and Chewy will “operate largely as an independent subsidiary.”
