StoreFront

ake no bones about it—PETsMART is in a retail category all its own.

Realizing through its own research that the average dog owner could spend in excess of $15,000 over the lifetime of their pet if they purchased all available services, the Phoenix-based company has embarked on a program to develop a long-term relationship with its target audience. Called the "Engaging the Enthusiast" strategy, the program is designed to provide pet owners with all the lifetime needs of their pets in a one-stop, pet-friendly destination.

"People we call pet enthusiasts are those consumers who are passionately committed to their pets," says Philip Francis, chairman/president/ CEO of PETsMART. "Those individuals whose cat or dog sleeps on the bed, not in the garage or outside, and are brand loyal on premium food."

According to the research, the pet enthusiast segment plus complementary adjacent segments constitute nearly 71 percent of the available revenue and 74 percent of the total pet-market profit pools. PETsMART plans to provide a coordinated suite of medical, training, grooming, preventative and ancillary services as well as food, toys and educational products.

The company estimates that looking at the business through total cost of ownership, it can more than triple the size of the total potential market—to nearly $100 billion compared with the current $31 billion. The goal of becoming the preferred provider of services and solutions for the lifetime needs of pets is designed not only to meet the needs of PETsMART's preferred consumer—the pet enthusiast—but to also enhance the PETsMART brand in order to drive sales and ultimately increase shareholder value.

During the course of the strategic realignment, PETsMART, which prefers its real estate to be located in regional power centers, will be reducing its average square footage. The average square footage of the current portfolio is slightly more than 22,000. Moving forward, the average will be condensed to about 19,000 square feet.

With sales leveling off this year because of increased competition, many retail analysts say that PETsMART could show a loss in 2000. They point to store size as a sore point in the company's financial health.

"The dominant store size we will open this year is 19,000 square feet," says Francis. "However, in some city environments, we will have 15,000 square-foot stores."

The restructuring also involves a new store prototype. Currently, all of the consumables—food, cat litter and aquatic items—are generally located in the front of the store on the left. Hard goods such as toys, bird feeders and aquarium equipment are in the front of the store as you walk in, while the bigger, bulkier items are located in the back of the store.

Beginning later this year, PETsMART will experiment with a new store format in four existing stores. The dog and cat products will be segregated distinctly to try to create a store-within-a-store environment for dog and cat owners respectively. In the present format, dog and cat products are close together. In the new store format the dog owner will be able to go to one location and find every type of product for dogs and a different location containing everything for cats.

"In addition to the four existing stores that will be remerchandised later this year, two of our new stores will be developed from the start with that concept," says Francis. "We'll move forward from there depending upon consumer reaction. Following the pilot testing, if the results are good, we can take what we learned and extend the new format to many more stores in 2001."

While PETsMART's target customer may be the pet enthusiast, the chain appeals to just about everyone, including what it labels the "just an errand" consumer, the shopper who isn't passionately committed to their pet like the enthusiasts. These pets are not considered "members of the family" and tend to sleep in garages or basements, and spend most of their time outdoors. The "just an errand" consumer shops in PETsMART, according to Francis, either because it is convenient or the consumer likes the services.

The 12,000-plus assortment of pet food and pet supplies features an array of national brands, corporate brands, premium quality brands as well as value-priced products. PETsMART carries all the brands a grocery store carries as well as all the brands a specialty store carries—amounting to about 28 brands of dog food alone. About one-third of the sales are generated from corporate brands. PETsMART's corporate brands include Sophista Cat, Top Paw, Proquatics, Authority, Premier and Top Fin.

Everyday low pricing is the dominant pricing strategy. PETsMART runs promotions often, offering an extra case, cans, and pounds in the bag or a toy with the food.

"We don't do much straight price off because generally, in food items, our pricing policy is to have the grocer's sale price as our regular price," says Francis.

In addition to pet food and basic pet supplies such as leashes, litter, litter boxes, bird and hamster cages, aquariums, and pet books and magazines, PETsMART offers a wide selection of nontraditional items. Such atypical products include clothing and costumes for all the holidays, notebooks featuring dogs and cats, pet-themed greeting cards and Oops—a three-ply paper towel with a plastic backing on one side for cleaning up accidents. The back of the product reads: "So you don't have to become so personally involved with your pet's mistakes."

"We take care of anything the pet owner could need to express their passion for their pet," says Francis. "We try very hard, as new items are introduced, to be first with the best because we think our primary customer—the pet enthusiast—expects that of us."

Perhaps what distinguishes PETsMART the most among pet retailers are its pet services and dedication to the animal community.

Studies have shown that obedience problems are the number one reason people relinquish their pets to shelters. In an effort to reduce pet homelessness, PETsMART offers obedience education classes for consumers and their puppies or adult dogs.

The chain also has a full-service grooming salon in most stores. Pet owners can watch the grooming process through windows surrounding the shop. Services include bathing, brushing, stripping, shaving and styling, as well as nail clipping. Prices vary by breed, animal size and coat type.

PETsMART also offers VETsMART, a full-service vet hospital located inside the stores. The pet care hospitals focus on wellness and preventive pet care to extend the lives of animals, in addition to spaying and neutering services.

PETsMART's most significant program is its Luv-A-Pet Adoption Centers. The retailer made a conscious decision not to sell dogs and cats because of the hundreds of thousands of dogs and cats that are euthanized each year. To help address pet overpopulation, PETsMART donates space inside its stores to local humane societies and animal shelters for them to display homeless animals. Exhibiting the animals in front of PETsMART's core customers offers humane societies/animal shelters a more active and aggressive opportunity for pet adoption.

"Humane societies/animal shelters are often located in tertiary real estate that people never go to, so we subsidize locations for them, which they do not pay any rent for," says Francis. "Our consumers are the best customers for humane societies."

PETsMART is also unique in the fact that it is the only pet retailer that has a presence in all channels of distribution—brick-and-mortar stores, e-commerce and catalog.

The chain operates more than 500 stores in 44 states and 20 stores in Canada, and plans to open 50 stores this year. Through its subsidiaries, the company is a direct marketer of pet-related and equine products. PETsMART Direct and its affiliates sell pet supplies and products for animals to individuals and small businesses through five catalogs.

The other subsidiary, State Line Tack is a catalog retailer that specializes in discount brand name tack, riding apparel and equine supplies. Both subsidiaries also sell products via the Internet.

PETsMART.com, a private company, was launched in June 1999 and PETsMART retains a 49.9 percent equity interest in it. The site has quickly become one of the most visited pet sites online.

"We have the largest number of sales, and we're the only one with a common brand name," says Francis. "A couple of years ago the industry was saying e-commerce was going to 'rule the world.' Now, it's the multi-channel strategy—retailers that have the synergies between the channels are the ones experiencing the most growth."

Founded in Phoenix in 1987, PETsMART Inc. embarked on a slow growth plan, amounting to only 10 stores by 1990. The chain went public in 1993.

With the benefit of hindsight, company executives attribute the bump in the road to "too much growth too quickly." Over the last several years, company officials have been reworking the infrastructure and reshaping the strategic vision to broaden the reach of the company. After closing under-performing stores and implementing a "back-to-basics" approach, PETsMART returned to profitability in 1998.

"Last year [fiscal 1999] was a year of stabilization and recovery and we're beginning to demonstrate some improvement," says Francis, adding that the company has sustained a modest growth rate the last several years. Earnings in 1999 were 33 cents per share, up from 20 cents in the prior year, and comparable store sales grew 4.6 percent.

Part of the recovery period included implementing a change in the distribution system. The original distribution system primarily utilized a back-door delivery system rather than self-delivery. Under the restructuring, the company developed a plan that features five regionally based distribution centers.

"We opened the first and it's been open long enough for us to validate that we get both lower inventory investment and a better in-stock position from that," says Francis.

Two more distribution centers open this fall and two more open in spring 2001.