Year of the Pet

From February to July, the company added more customers than in all of fiscal Its shares, which traded at about thirty dollars early this year, shot up to seventy two dollars in October, valuing nine year old Chewy, which has yet to post a profitable quarter at almost thirty billion dollars. Even the most lovable pet can soil the carpet, though,

and there's been a whiff of unpleasantness at Chewy. The drama is reminiscent of a young Amazon, with its ferocious focus on long term growth at the expense of short term profits. You wouldn't bank your future on someone you don't know. Financial advice is simply better when your banker gets to know you. That's what City National Bank believes. The better they know you, the better they can help you achieve your goals. See what personal can do for you at CNB dot com. Who's a good business model?

It's you, Yes, it is. You're such a good business model. Yes you are. Lockdown Americans are pampering their pets like never before, and Chewy is reaping the benefits. By enders Melon and Brian Gruley, the usual suspects, topped the list of the best paid executives in the US published by Bloomberg News in July. Number one was Tesla's Elon Musk with the nineteen pay day of nearly six hundred million dollars,

followed by Apples Tim Cook at four million dollars. The top ten also included bosses at Intel, Alphabet, and Blackstone. The list did contain one surprise. At number five stood one Sumit Singh, chief executive officer of Chewy, an online retailer of food, toys, apparel and medicine for pets. Singh joint Chewy in seventeen, was elevated to CEO after seven months, and in twenty nineteen, his first full year on the job, earned a hundred and eight point two million dollars in salary,

bonus and stock grants. That sum was even more remarkable given that Chewy, in nine years of existence, has yet to post a profitable quarter. But Singh's hall is another indicator among many of the company's rise as a force in e commerce. In the fiscal year ended February second, it sold products to thirteen point five million customers, up twenty seven percent for the year, while revenue jumped thirty seven percent to four point nine billion dollars. Then came

the coronavirus, and thanks for Chewy got even better. About two thirds of US households have pets, and they're coddling owners. Pet parents, as Chewi calls them, will spend a record billion dollars on them this year, according to the American Pet Products Association. With these pet moms and pet dads avoiding walk in stores and animal adoptions soaring in many places,

Chewy's business has boomed. From February to July, the company added more customers than in all of fiscal Its shares, which traded at about thirty dollars early this year, shot up to seventy two dollars in October valuing Chewy at

almost thirty billion dollars. Even the most lovable pet can soil the carpet, though, and there's been a whiff of unpleasantness at Chewy since pet Smart bought it for a three point thirty five billion dollars in The founders and several executives have departed, partly over disagreements about Chewy's culture and direction. A last minute rewrite of pre I p O equity awards rankled some at the company, who griped that Ing didn't deserve to stand with Musk and cook.

In some ways, Chewy is reminiscent of a young Amazon dot com with a ferocious focus on long term growth at the expense of short term profits. To me, the story of Chewy is one of taking a beautiful start up and scaling it to become a world class institution, says Singh, himself and Amazon alumnus. I believe that we have a clear path to profitability in the not so

distant future. So we're building something amazing here. The New York Stock Exchange opening bell rattled THEO, the white labradoodle reluctantly occupying the exchange's famous podium on June a Chewy executive cradled the dog and patted him on the back. The company's shares were about to start trading, Saying beamed

as he claimed the bell. Watching from the exchange floor were Ryan Cohen and Michael Day, friends who co founded Chewy in a dingy North Miami Beach office eleven the night before the I p O. Cohen had sat on the street outside the exchange, talking on the phone with his father and weeping about his baby becoming such a success. Neither he nor Day were with the company or owned a single share anymore. It was surreal, Cohen recalls, it

really was the American dream. Ten years ago, he and Day were twenty somethings with a knack for writing code and using Google AdWords to sell stuff. They'd met in a chat room and decided to start an e commerce business. Teaming up with Alan at All, a friend of Cohen's, they settled on jewelry. Then, shortly before the launch, Cohen had an epiphany while shopping for his teacup poodle Tilely

at his neighborhood pet store. They should ditch jewelry and start a pet food retailer that could marry low prices and fast chipping with the expert service offered in a local shop at All who had a Chihuahua named Ruby and Day concurred. In June twenty eleven, they launched Chewy, a name Cohen had tested on pet owners in a pet Smart parking lot. Their inspiration and primary rival were

one and the same. Amazon. Skeptics asked whether Chewy wasn't just another pets dot com, the doomed startup that went public in early two thousand and shut down before the year was out. But byn online shopping had become part of everyday American life. There were plug and play options for warehousing, shipping, and cloud computing. US households were spending more on higher quality food and veterinary visits for their pets, which they increasingly considered part of the family. Chewy was

determined to outdo Amazon in serving customers. When a customer phoned, a representative said hello within six seconds. Emails were answered within an hour. Messed up orders were replaced without question or cost. Customers received greeting cards on their pets birthday and flowers when their pets passed away. Those who email pet pictures were sent free hand painted portraits. It was

all from the beginning about wowing customers. Cohen says, we can surprise the customer with a portrait, and all of a sudden, they're a customer for life. By early twelve, Chewy was posting monthly sales in the range of one million dollars, which would grow in under two years to more than ten million dollars. Still, investors remained dubious. Cohen went door to door in Silicon Valley without raising a

penny of venture capital. Then in September, Larry Chang, co founder of Volition Capital and owner of a labordoodle named Coco, agreed to invest fifteen million dollars. Chewy was the great untold story, Chang says, back in that day, people were talking about Casper and Warby Parker, and we all knew Chewi was doing way better than all those companies. Chewy's path to success was all about scale, getting big as

fast as possible. If we were going to be able to survive Amazon, we needed to build a larger pet business than they did. Cohen says, Chewy spent heavily on ad words and later on television and direct mail to attract customers. Some companies will pay suppliers up front in exchange for a price discount. Chewy, following Amazon's lead, chose instead to pay full price a few weeks later, gaining

in effect a short term interest free loan. It could plow into customer acquisition as long as new customers kept shopping and even in many cases, subscribed to regular, periodic purchases of food and other staples. The model worked. Chewy's existing customers generated a profit, but that income was funneled directly into attracting new customers, which consistently led to financial losses. The approach was a facsimile of Amazon's vaunted flywheel model

for growing. By twenty sixteen, Chewy was averaging two point five million dollars a day in sales for an annual take of nine hundred million dollars, never mind that it lost a hundred and seven million dollars that year. At any point, Cohen says he could have turned off the marketings. Pigot and Chewy would have become profitable, but it would be a smaller business today. Early in sev Cohen became a father for the first time, and his own father

suffered a major heart attack. The latter event really shook me to my core, he says. Around the same time, he received an email from Raymond Spider, chairman of BC Partners, a private equity firm in London. Two years earlier, b C had bought pet Smart, which had four hundred stores in the US. Pet Smart executives had noticed Chewy eating into their market share, and Spider, who owns Siberian cats named Pearl and Kashmere, was now interested in buying the startup.

Cohen told him he was plotting an I P O, but he'd consider an all cash bid if it came fast. That April, BC and pet Smart agreed to buy Chewy and what was then the biggest e commerce deal ever. Cohen and his co founders each pocketed hundreds of millions of dollars. As part of the deal. Chewy's executives and some senior employees got golden handcuffs prophets interest units, a type of equity that was set to vest over five years.

If a recipient left Chewie before the end of May nineteen, b C could buy back his or her securities at a fraction of their value. Late one evening in March, Cohen sent an email announcing his immediate resignation. The news came as a surprise, though a few of his colleagues were aware that Cohen was frustrated with the new owner's questioning of some of his decisions, according to former executives. Cohen later wrote in Harvard Business Review, I felt I had done all I had set out to do, and

I didn't want a boss. He did want to spend more time with his new son and with his father, who died last December. Singh, who had been hired by Cohen as chief operating officer less than a year before, was named the new CEO. When Singh, who owns a Shitsu named d, took over, the company counted ten thousand employees. Cohen had laid out a step by step plan for

board members for achieving profitability in a few years. According to internal company documents reviewed by Bloomberg Business Week, sales of private label products, which carry higher margins than third

party brands, were growing. A pet, health care and pharmacy business was almost ready for launch, and the company had laid groundwork for an I p O. But as Singh saw it, Chewy needed more structure, better data analytics, a greater product assortment, and stronger inventory and supply chain management. Despite the plan prior management set out, Singh says there wasn't a road map for sustained growth. How do you

take the company from two billion dollars to twenty billion dollars. Singh, who grew up in India, has a master's degree in engineering from the University of Texas and an m b a from the University of Chicago. After ten years with Dell Technologies, he helped build Amazon's grocery delivery business in the US and three other countries. Those who interviewed him to be Chewy's operating chief saw a brainy data geek with a strong background in operations and experience working at

large organizations. Singh improved Chewy's automated forecasting and supply chain management with machine learning, and expanded a tech centric office in Boston. The company's product catalog increased by more than half to sixty seven thousand items, Again mimicking Amazon, sing banned power points and told staff to argue their cases in narrative prose. He also identified key metrics and held executives to them during weekly, monthly, and quarterly reviews. It's

a relentless focus on data and experience. That allows us to do hard things well, he says. Last year, Sing learned that Chewi was getting a disproportionate number of complaints about catletter boxes being damaged and delivery. Cat litter is heavy and a small problem can make a big mess, but customers need to reorder it periodically. Fitting with Chewy's focus on recurring purchases, A small team at Chewy gathered data and tracked down the warehouses, delivery roots, and zip

codes with the most botched deliveries. The team worked with suppliers to create better packaging, set up fulfillment center prep stations for packages prone to sustaining damage, and took other steps to reduce the likelihood of problems in transit. If you're living in New York on the thirty six floor and your cat litter came open on your expensive hardwood floor, you're never going to order for me again, Singh says. Some longtime employees struggled to get along with the new boss.

The abundantly confident Sing struck a different chord than Cohen, an unassuming Canadian who had never worked at a big company before founding Chewy, saying personally involved himself in matters. Cohen it delegated, and he encouraged executives to openly challenge each other during meetings, which some say created an atmosphere of competition that made some employees reluctant to speak up.

His apparent obsession with data, big meetings and Amazonian six pager memos graded on some underlings, particularly those who joined Chewy because the founders scrappy, just get it done approach

wasn't like that of a large corporation. We all knew we were just a pet store, but we really believed we were making a big difference in the lives of pets and people, says Andrea Wolf, Chewy's former vice president of marketing, who left in late It was more than just meeting numbers and building efficiency With sume it, you could tell he was just a numbers guy. In Singh's view, it's all unnecessary part of getting bigger. As Chewy continues to scale, it is critical to combine our spirit of

innovation with data and insights, he says. We believe that practices like metrics and data have made us better, faster, and more scrappy. This approach, Singh says, allows the come penny to automate routine tasks and shortened meetings and promotes critical thinking. Early in his CEO tenure, Saying questioned a number of practices that had been fundamental to chewy success.

For instance, in the summer of Amazon rolled out at discount for new customers placing subscription orders for pet products, besting Chewy's standard markdown. Singh resisted immediately matching the deal, even as his lieutenants argued that the company's growth stemmed in part from its commitment to having the lowest prices. Singh suspected customers value the subscription service enough that they

didn't need a big price cut. After a week's long analysis and debate, Chewi eventually installed a discount of thirty A year after Singh became CEO, Chewy prepared to go public. The profits interest units that senior employees had received when pet Smart bought Chewy were scheduled to be forty invested at the end of May, but Singh told employees the unit were being canceled because of the impending June I p O. The value of the units was tied to how much Chewy and pet Smart would have been worth

if they went public together. That no longer applied because pet Smart wasn't participating in the i p O. The employees instead received restricted shares in Chewy, only ten percent

of which would be vested when the company went public. Yet, when Chewy's registration statement became public, it showed that Singh's award had its own vesting schedule he could pocket of his shares on the day of the I p O. In an internal email reviewed by Bloomberg Business Week, Singh told his team he'd fought very hard for them in negotiations with Chewy's controlling shareholder, BC Partners. He also said

his own vesting was justified. The payout depended on factors beyond his control, such as the stock hitting certain price thresholds, but other executives payouts were tied to the same benchmarks. The company says the new plan has generated exponent sol returns for shareholders and employees alike. On the day of the offering, Chewy's shares jumped fifty to thirty five dollars, temporarily ballooning the paper value of Sing's equity award to

on thirty nine million dollars. Chewy says Bloomberg's calculation of Sing's twenty nineteen compensation is inflated because it includes shares that have yet to vest. The shares slid back and hovered at about thirty dollars until the coronavirus invaded the US. Singh was attending his daughter's school fair on February nine when he took an urgent call from his chief supply

chain officer. Customer demand had spiked over the past two days, even though Chewy wasn't running special deals okay, Singh says he thought something is about to break loose. Over the next few weeks, Inventories that were normally stocked suddenly declined by as much as twenty It was like the holiday season had arrived unannounced. Our backlog levels were higher, Singh says,

our customer service level started degrading. Grooming products, for example, were in especially heavy demand because groomers had closed their doors and owners were opting to wash and clip their pets themselves. Lucky for Chewy, it had stalked up in late to prepare for the Chinese New Year in January, when factories in China that supply those and other goods would shut down. Chewy also regularly reserves ample stocks for its subscription or auto ship clients. Which effectively shielded about

two thirds of the company's business from acute shortages. Algorithms were tweaked so customers could more easily find different brands and sizes if their preferred choices weren't available. That had the added benefit of attracting fresh eyes to Chewi's private label offerings. The company also created a free online chat service that connected auto ship customers with veterinarians. Shipping was

the monster. Singh says the company might have something a customer wanted but in a warehouse on the other side of the country. During April and May, deliveries were taking as long as nine days. Chewy started splitting orders into multiple boxes, using express shipping, and taking other measures. The added cost was about twenty million dollars. All of this was done to protect the company's relationships with customers. Singh says it worked when new ones complained on Facebook, longtime

customers jumped to Chewy's defense. Six thousand workers joined Chewy this spring. The company says it temporarily increased wages and benefits to attract new people, most of whom were deployed in the warehouses. Some shifts doubled in size. Chewy projects its sales for the current fiscal year will approach seven billion dollars, up more than from twenty nineteen and about what Cohen forecast before he left. The obvious question is

when Chewi will turn a bottom line profit. In an email to Bloomberg Business Week, addressing that, saying attached to photo of a diagram he'd drawn on a whiteboard with blue and red markers, a big circle labeled growth and profit. Flywheel illustrated the cycle of existing customers generating cash to learn new ones and expand offerings. An arrow pointed to a word and read profitable. It doesn't indicate when, but

Singh says the company is on its way. The cost of marketing relative to revenue has been falling, the private label and pharmacy businesses are thriving, and Chewi has said it could post a profit for fiscal of as much as twenty point four million dollars, albeit without counting charges for interest, taxes, depreciation, and amortization. That would presumably be good for shareholders, including Singh. As of November sixte his equity award had swelled in value to two hundred and

fifty six million dollars. And that is our cover story. This week. Check out more in the current issue of Bloomberg Business Week magazine. It's on newsstands, online at Bloomberg dot com and on the Bloomberg I'm Carol Masser. The Bloomberg Sustainable Business Summit Global will bring together business leaders to drive innovation and scale best practices in sustainable business

and finance. Join us November thirty through December one to hear from experts at Duke Energy, Intel, Walmart, the Ford Foundation, M I T. Blackstone and Moore Summit Adviser's A D. M. Ballcorp. B M O E Y and Schroeder's participating sponsor, Qatar Foundation. Register at Bloomberg Live dot com, Slash SPS Global, Slash Radio