In addition to beefing up its digital experiences, Chewy is earmarking investments toward the labor shortages that are making staffing its expanding fleet of fulfillment centers a challenge.
As the pet retailer aims to convert its growing base of new customers into loyal ones, it’s also taking steps to improve merchandising and product discoverability, as well as connect them with a host of new pet services, including via video chat.
Chewy recorded net sales of $2.14 billion in the first quarter, a year-over-year increase of 31.7%. It grew active customers by nearly 32%, adding 4.7 million to total 19.8 million customers. New customer additions remained above pre-pandemic levels, said CEO Sumit Singh, and moderated against the peak pandemic levels of this past year.
The company, which offers an automated fulfillment service known as Autoship that lets consumers schedule regular home deliveries, has grown its active customer base by 75% over the past two years. Chewy customers historically spend more than $400 in their second year, said Singh, about $700 in their fifth year and almost $900 in their ninth year.
The company opened its 12th fulfillment center at the end of the quarter, while its 13th fulfillment center — which will also mark its third automated fulfillment center — is slated to open in Reno, NV, next year. The company’s automated fulfillment centers combine associate and robotic manpower to pick and pack orders, intended to increase efficiency, order accuracy and worker safety.
However, the company is navigating labor shortages within its FCs, and so it invested $60 million in higher wages and short-term incentives this quarter, which helped “to some degree,” said Singh during an investors call. The company may invest an additional $30 million in recruiting and hiring incentives over the next two quarters.
To further manage these hurdles, Chewy has developed algorithms that enabled real-time improvements in inventory receipts and order allocation, which in turn increased density in pick and pack across the fulfillment center network. It’s also added part-time shifts to better optimize interval-level labor forecasting.
“Although we expect these types of expenses to be temporary in nature, that ultimately depends on how labor markets respond to the end of extended unemployment benefits in September,” said CFO Mario Marte.
The company relaunched the Chewy.com homepage this quarter, as well as other sections of its website, one in a series of longer-term initiatives to upgrade its tech stack and architecture. These upgrades enable the company to offer more targeted and customized shopping experiences, with the new features, once fully implemented across the website, providing hyperlocal and enhanced personalized recommendations.
The upgrades improve Chewy’s ability to target customers and personalize experiences by displaying dynamic and relevant content to consumers — accounting for such things as the type and breed of their pet and what similar owners are buying — and represent the company’s shift to provide data- and behavior-driven digital experiences vs. unauthenticated ones.
The company, which was recently named the leader in retail customer experience by Forrester, is also expanding its products and services, entering the fresh and prepared pet food space with both third-party and owned brands, and beta-testing new sustainable packaging.
In expanding its Chewy Health services offering, it’s added video chat functionality and grown the reach of its proprietary tele-health solution, Connect a Vet, making it available via text or video chat seven days a week, 365 days a year. In addition to telehealth, the company also offers OTC medicine, vet diet, pharmacy and compounding services, the latter of which has added both SKUs and types of animals serviced.
“Approximately two-thirds of our compounding customers are new to Chewy Health, including over 20% that are new to Chewy overall,” said Singh. “As anticipated, compounding is also emerging as a strong recurring revenue driver, with over 60% of outbound shipments already going through Autoship.”
It also launched a nationwide pet adoption service where consumers can find and adopt pets directly through the Chewy website, tapping into a network of more than 6,000 shelters and rescues. The service integrates with the company’s Wish List feature, enabling shelter and rescues to list needed supplies so consumers can donate and have them shipped directly to the shelter.
Marte cautioned that elevated out-of-stock levels are a stronger headwind this year than in 2020. “While macro conditions are clearly improving on the pandemic front as vaccination levels increase, predicting how exactly consumers will behave post-pandemic is not yet fully clear,” he noted.
And while there are no signs of these out-of-stocks yet abating, Singh said investments by Chewy suppliers into incremental capacity are expected to show improvement by the back half of the year.