Taking Chewy to the Moooooooon!

TLDR;

- Did you know ‘Black Friday’ originated as a Police term?

- Turning Chewy into the Amazon for Pets

LBAB Community: The Origins of Black Friday

I love writing this email as my inbox is flooding with BFCM promos. If you’ve already kicked off, may your sales be popping and orders overflowing. If you haven’t yet, run through everything one last time and get in the arena!!!!! 

An est. $9.12B dollars will be spent on Black Friday this year across all channels. Let’s get as many dollars as possible into your pocket as possible. 

As I’m thinking about how obsessed we all are with this weekend, I got curious how we got here. So I decided to do a little research.

“Black Friday” was coined by the Philadelphia police in the 60s to describe the horrible post-Thanksgiving traffic where suburbanites flooded the streets looking for deals on Holiday gifts.

In good ole Philly (and American) fashion, the slightly demeaning phrase was turned into one of pride and the American spirit. 

Naturally, bizs noticed the trend and ran with it.

They rebranded the chaotic and overcrowded days into “blockbuster deals you need to show up first thing in the morning for.” An OG growth hack to own more of the customer wallet. Of course, a deal war emerged as everyone started competing to own more of that wallet share.

Back then the deal was the primary marketing vehicle. Retailers would run these ads in newspapers, magazines, and TV spots. But the true lift came from capturing more foot traffic around the store itself. A virtually free marketing channel.

Enter the internet. Deals become accessible with the click of a button. We can run promos for longer, to more people. Audiences turned from local communities to anyone with Wi-Fi + a credit card. Price comparison turns from a simple practice to a fanatical exercise.

The practice goes international with the rest of eCom Big 4 (Can, UK and AUS), extending into Europe and South America as well.

We fast forward to today where most eCom bizs have extended this to BFCM month/season where deals go live as soon as late October and run up until Mid-Dec Shipping cutoffs.

It’s a crazy competitive, wonderful time where we all cut our teeth as sellers and shoppers getting the best deals of the year.

Just make sure you actually profit off of it. I hope it’s an amazing week for you.

Now, let’s get to the meat of the matter. After analyzing countless failed Amazon clones, I think I’ve found our next Amazon: Chewy.

Let’s Examine This Biz

Chewy is a fantastic example of a great eCom biz that has gotten pounded by the change in investor sentiment. It’s trading at $20.52/share, -41% from its Jun ‘19 IPO price, with a $8.8B market cap, a Rev multiple of 0.88x, but also a 178 P/E ratio.

It’s trading at <1x it’s revenue but 178x it’s earnings…

The real reason we are seeing so many crazy trends with this stock is that it’s the perfect example of a stock that used to be traded on a multiple of Rev growth. Now, it’s measured on profits. And investors haven’t quite found the sweet spot for the stock yet.

They definitely had a COVID boom, but the company is improving its financials. Plus, the pet industry is strong. The overall market CAGR from 2022 - 2026 is projected to be 6.9%. 

We’re going long on Chewy, buying a major stake, and opening up the margins on this biz to throw off massive amounts of cash in a decade.

TLDR Analysis: Great Bones for an Empire

• Better than average top-line growth

• Customer base -1% YoY but Sales/Customer +13% YoY 

• 73% of customers are on Autoship (+17.5% YoY 😍)

• Strong margin expansion

• SG&A is growing faster than Sales and COGS, but not by much. 

• Big win: turning losses into baby profits YoY. 

Now, let’s buy this biz and compound those small but growing profits.

Let’s Save You Money (Sponsored Section)

If you’re doing 1k orders/mo and freight products from Asia, I'll unlock ~40% of your Gross Margins + better cash flow today. 

From the most important tax code you don’t know about: Section 321. 

I call it the ‘Temu Rule.”

In support of developing nations, the US has a tax code where the importer (you) doesn’t have to pay taxes/duties on individual product shipments worth <$800. 

☝️is how dropshippers/the Shein/Temus of the world have been able to sell + ship products at rock bottom prices to the US.

They’re saving on:

1. Taxes/Duties at the border

2. 3PL/Warehousing costs by shipping directly from your Manufacturer -> USPS. 

3. Remove up to 7 stops between freight forwarders, ports, & 3PLs. 

Customers receive their order within 4-8 biz days, directly from the manufacturer.

That’s why you have to check out today’s sponsor Portless. They handle everything from your Asian manufacturer to customer delivery. 

The fastest growing Shopify brands like Jolie and Lalo are using them to save up to 40% of their Margins by cutting out freight, 3PLs, and Duties. 

And you know I’m always going to get you a deal…

If you sign up before 12/19 and mention Let's Buy A Biz! or Jeremy Horowitz you'll get $0.20 off for your pick-pack fees for every order for your first 3 months. 

If you're doing 10k orders/month, that’s $2k/month ($6k total), but you have to sign up before 12/19.

Get 40% off your margin and weeks of your cashflow back in the bank. 

Talk to their team today.

Let’s Scale This Biz

Here’s my 3-step plan to scale Chewy to tha moon.

1) Own Everything in the Box

Chewy has done an excellent job at nailing 3 hard biz problems:

• Becoming the go-to pet-everything store

• Getting the same customers to buy more. 

• Getting the vast majority of their customers on the Autoship plan. (They own the monthly shipment to 20m+ households!) 

The next step? Own everything in the box.

Whether they build the brands or acquire the best sellers, the more they own, the more profits they make. 

Here’s how we’ll do it:

Dedicate a $60m slush fund (out of the $350 million in Operating Cash) to acquire or build new private label brands.

ID the best sellers: buy the best and clone the rest

1. Buy: Brands that are difficult to replicate, with high brand equity, loyal customers, and healthy margin expansion 

2. Clone: Simpler products that customers are less discerning about. What are the products essentially thrown in the box?

Focus on acquisitions to save time and resources. Turn the operating cash into increased margins A$AP, fueling the operating cash flywheel.

Takeaway: Mo’ Margins, mo’ profit, without having to acquire mo’ customers

2) Automate International Expansion

The new or shiny object is always the wrong answer.

If you have a model that works, dial it in, scale it up, and take your best hits on the road.

Chewy already has the model. The problem: it’s only in the US. 

I hope you know where we’re going with this one.

Clone the Playbook that has worked so well in the US and expand to as many countries as possible.

For a brand doing $10B topline, they’ve JUST started their international expansion. They haven’t even meaningfully sold to the other eCom Big 4. There’s big money waiting for them overseas.

What allowed them to scale to $10B in one market and provide incredible service to 20m subscribers?

Answer: An automated supply chain that allows them to operate more efficiently than the competition and provide incredible value to the end consumer.

Is someone finally going to be the vertical-specific Amazon?

This is a slow, unsexy process that will require a lot of CAPEX, but for the patient partner (cough cough us), this will be the 10-year play that makes this a $100B+ Biz.

Their biggest win of the last 2 years is decreasing SG&A with “import routing, inventory planning and placement, and middle mile.” Basically using optimization to improve their Supply Chain efficiency.

Saving a few % here and there = a MASSIVE impact on the bottom line. 

What has made Amazon so successful is the investment in their Supply chain, which became so sophisticated that they can move virtually any product through it.

Chewy is building something similar, just specifically in the Food/Supplement category. The current market they operate in is Pets.

Why couldn’t they expand into other markets once they scale into their current operational demand?

Takeaway: Truly know what biz you run. Master its ops. Marketing + Product will follow.

3) From Telehealth Support -> Vet Marketplace

Chewy is currently working with ~1k vets in the US and offering their “Connect with a Vet” service to their Autoship customers for free.

This is a smart play, but we’re just getting started. There are 28k–32k Vets in the US alone. Chewy’s 1k is 3% of them.

Here’s how we 30x penetration and turn the telehealth perk into a full-blown Vet Marketplace: 

Invest in the infrastructure to turn a free service -> full blown acquisition vehicle (cough cough Chewy “Prime”).

In other words, create a marketplace where Chewy customers can be directly connected with local vets. Think Yelp for Vets.

If I’m a parent of a sick pet, and I need help now:

1. Connect with a Vet is great for the simple over the phone stuff.

2. But if my dog is puking on the carpet (more than usual), I want to see someone immediately. 

Why go to Google to do a ton of frantic research when I can go to my trusted source, Chewy, to get connected with a Vet IRL?

Bonus points if they directly sync my Chewy order historiy to the Vet. Bypass the basic questions in the “Figure out what’s going on” process. 

From here, it becomes how much of the Vet biz model can we eat with software. Similar to the SDC play.

Move beyond telehealth and integrate directly with Vets backend infrastrcutre in a model that offers the following services:

• Connect with a local vet -> book an in-person appointment

• Use the Chewy App to take photos/videos + track relevant data to pass to the Vet.

• It’s only a matter of time before Pet Wearables become a thing.

  • Sync that data as well to better inform not only the Vet but future Chewy orders, too. Who wants to build the Apple watch (Apple Pawtch?) for your pet? We’ll Buy That Biz.

• Local Vets provide Chewy samples when patients come in → Graduate to Autoship.

These would all start as value-added free services for Autoship customers, but eventually be valuable enough to charge the consumers and Vets for the services.

Now, you won’t just see ads on Chewy.com for specific brands but from service providers, too. 

Once Vets are in the mix, insurance companies will want to spend big bucks capturing as many customers in this growing market as well. This is where is gets fun.

3 new core biz initiatives:

1. Turn the 30k vets into IRL Chewy resellers who aren’t on payroll 

2. Offer online-to-offline and offline-to-online buying without having to invest in any physical retail locations.

3. Build into a 3-sided biz model:

   1. B2C Physical product + services offering

   2. Massive ad biz within the B2C experience

   3. B2B SaaS biz with multiple product offerings to allow Vets to build their biz. 

Takeaway: Go fast, Go alone. Go far, Go together.

Final Thought

I don’t want to count our chickens, but after watching countless DTC brands that are Amazon wannabees, we may have actually found the next Amazon. 

So how did Chewy position itself to have that potential growth story?

They’re a Marketplace/Digital Retailer, not a DTC brand. This distinction REALLY matters. The biz’s entire focus has not been on the products it sold but how it sold them.

When you are a brand, obsessing over product is all that matters. If you create a strong enough product/brand, it doesn’t matter what channel you sell through. The goal is to have a product so good it transcends how people buy in each channel.

For Marketplaces like Chewy and Amazon, it’s the exact opposite. 

Curating good products is important, but Chewy could throw anything in that box that suits the customers needs. That isn’t why they buy. 

Customers buy from Chewy because of the experience they get. Knowing that they are going to get a consistent experience no matter what’s in the box is why their customers buy. 

Really, Chewy is a logistics and supply chain company. The focus is all on operations because they aren’t a Brand. They don’t need to focus on product quality and marketing as much.

Everyone sees Amazon as the shining example in eCom because they’re the largest and most successful, and we can see ourselves in them.

Consumers haven’t shifted enough of their wallet share to eCom for those outcomes to be common yet. For now, the inspiration should still be a mix of classic brands who grew in Retail and those that were able to scale big in eCom. 

For the next decade, a blend of both is what will determine a successful brand.

🧠 The Takeaways

Chewy can go all in on their operations and service offering because that is what they do. Automation is the future of this industry.

1. Owning routine shipments is the best channel. The more you own, the larger (+ more profitable) your biz.

2. Internationalization is overlooked, but that’s usually the best route for growth once you’ve nailed an offering + saturated a market.

3. Always look for who else could sell your product. The best way for them to send you leads is for you to send them leads first.