Speaker 1: I'm Carol Master with our cover story this week, and
Speaker 1: about two thirds of US households have pets and their
Speaker 1: cuddling owners will spend a record nine billion dollars on
Speaker 1: them this year. That's according to the American Pet Products Association.
Speaker 1: With animal adoptions soaring in many places and pet owners
Speaker 1: shifting their spending to online deliveries, business has boomed for Chewy,
Speaker 1: an online retailer of food, toys, apparel, and medicine for pets.
Speaker 1: From February to July, the company added more customers than
Speaker 1: in all of fiscal Its shares, which traded at about
Speaker 1: thirty dollars early this year, shot up to seventy two
Speaker 1: dollars in October, valuing nine year old Chewy, which has
Speaker 1: yet to post a profitable quarter at almost thirty billion dollars.
Speaker 1: Even the most lovable pet can soil the carpet, though,
Speaker 1: and there's been a whiff of unpleasantness at Chewy. The
Speaker 1: drama is reminiscent of a young Amazon, with its ferocious
Speaker 1: focus on long term growth at the expense of short
Speaker 1: term profits. You wouldn't bank your future on someone you
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Speaker 1: gets to know you. That's what City National Bank believes.
Speaker 1: The better they know you, the better they can help
Speaker 1: you achieve your goals. See what personal can do for
Speaker 1: you at CNB dot com. Who's a good business model?
Speaker 1: It's you, Yes, it is. You're such a good business model.
Speaker 1: Yes you are. Lockdown Americans are pampering their pets like
Speaker 1: never before, and Chewy is reaping the benefits. By enders
Speaker 1: Melon and Brian Gruley, the usual suspects, topped the list
Speaker 1: of the best paid executives in the US published by
Speaker 1: Bloomberg News in July. Number one was Tesla's Elon Musk
Speaker 1: with the nineteen pay day of nearly six hundred million dollars,
Speaker 1: followed by Apples Tim Cook at four million dollars. The
Speaker 1: top ten also included bosses at Intel, Alphabet, and Blackstone.
Speaker 1: The list did contain one surprise. At number five stood
Speaker 1: one Sumit Singh, chief executive officer of Chewy, an online
Speaker 1: retailer of food, toys, apparel and medicine for pets. Singh
Speaker 1: joint Chewy in seventeen, was elevated to CEO after seven months,
Speaker 1: and in twenty nineteen, his first full year on the job,
Speaker 1: earned a hundred and eight point two million dollars in salary,
Speaker 1: bonus and stock grants. That sum was even more remarkable
Speaker 1: given that Chewy, in nine years of existence, has yet
Speaker 1: to post a profitable quarter. But Singh's hall is another
Speaker 1: indicator among many of the company's rise as a force
Speaker 1: in e commerce. In the fiscal year ended February second,
Speaker 1: it sold products to thirteen point five million customers, up
Speaker 1: twenty seven percent for the year, while revenue jumped thirty
Speaker 1: seven percent to four point nine billion dollars. Then came
Speaker 1: the coronavirus, and thanks for Chewy got even better. About
Speaker 1: two thirds of US households have pets, and they're coddling owners.
Speaker 1: Pet parents, as Chewi calls them, will spend a record
Speaker 1: billion dollars on them this year, according to the American
Speaker 1: Pet Products Association. With these pet moms and pet dads
Speaker 1: avoiding walk in stores and animal adoptions soaring in many places,
Speaker 1: Chewy's business has boomed. From February to July, the company
Speaker 1: added more customers than in all of fiscal Its shares,
Speaker 1: which traded at about thirty dollars early this year, shot
Speaker 1: up to seventy two dollars in October valuing Chewy at
Speaker 1: almost thirty billion dollars. Even the most lovable pet can
Speaker 1: soil the carpet, though, and there's been a whiff of
Speaker 1: unpleasantness at Chewy since pet Smart bought it for a
Speaker 1: three point thirty five billion dollars in The founders and
Speaker 1: several executives have departed, partly over disagreements about Chewy's culture
Speaker 1: and direction. A last minute rewrite of pre I p
Speaker 1: O equity awards rankled some at the company, who griped
Speaker 1: that Ing didn't deserve to stand with Musk and cook.
Speaker 1: In some ways, Chewy is reminiscent of a young Amazon
Speaker 1: dot com with a ferocious focus on long term growth
Speaker 1: at the expense of short term profits. To me, the
Speaker 1: story of Chewy is one of taking a beautiful start
Speaker 1: up and scaling it to become a world class institution,
Speaker 1: says Singh, himself and Amazon alumnus. I believe that we
Speaker 1: have a clear path to profitability in the not so
Speaker 1: distant future. So we're building something amazing here. The New
Speaker 1: York Stock Exchange opening bell rattled THEO, the white labradoodle
Speaker 1: reluctantly occupying the exchange's famous podium on June a Chewy
Speaker 1: executive cradled the dog and patted him on the back.
Speaker 1: The company's shares were about to start trading, Saying beamed
Speaker 1: as he claimed the bell. Watching from the exchange floor
Speaker 1: were Ryan Cohen and Michael Day, friends who co founded
Speaker 1: Chewy in a dingy North Miami Beach office eleven the
Speaker 1: night before the I p O. Cohen had sat on
Speaker 1: the street outside the exchange, talking on the phone with
Speaker 1: his father and weeping about his baby becoming such a success.
Speaker 1: Neither he nor Day were with the company or owned
Speaker 1: a single share anymore. It was surreal, Cohen recalls, it
Speaker 1: really was the American dream. Ten years ago, he and
Speaker 1: Day were twenty somethings with a knack for writing code
Speaker 1: and using Google AdWords to sell stuff. They'd met in
Speaker 1: a chat room and decided to start an e commerce business.
Speaker 1: Teaming up with Alan at All, a friend of Cohen's,
Speaker 1: they settled on jewelry. Then, shortly before the launch, Cohen
Speaker 1: had an epiphany while shopping for his teacup poodle Tilely
Speaker 1: at his neighborhood pet store. They should ditch jewelry and
Speaker 1: start a pet food retailer that could marry low prices
Speaker 1: and fast chipping with the expert service offered in a
Speaker 1: local shop at All who had a Chihuahua named Ruby
Speaker 1: and Day concurred. In June twenty eleven, they launched Chewy,
Speaker 1: a name Cohen had tested on pet owners in a
Speaker 1: pet Smart parking lot. Their inspiration and primary rival were
Speaker 1: one and the same. Amazon. Skeptics asked whether Chewy wasn't
Speaker 1: just another pets dot com, the doomed startup that went
Speaker 1: public in early two thousand and shut down before the
Speaker 1: year was out. But byn online shopping had become part
Speaker 1: of everyday American life. There were plug and play options
Speaker 1: for warehousing, shipping, and cloud computing. US households were spending
Speaker 1: more on higher quality food and veterinary visits for their pets,
Speaker 1: which they increasingly considered part of the family. Chewy was
Speaker 1: determined to outdo Amazon in serving customers. When a customer phoned,
Speaker 1: a representative said hello within six seconds. Emails were answered
Speaker 1: within an hour. Messed up orders were replaced without question
Speaker 1: or cost. Customers received greeting cards on their pets birthday
Speaker 1: and flowers when their pets passed away. Those who email
Speaker 1: pet pictures were sent free hand painted portraits. It was
Speaker 1: all from the beginning about wowing customers. Cohen says, we
Speaker 1: can surprise the customer with a portrait, and all of
Speaker 1: a sudden, they're a customer for life. By early twelve,
Speaker 1: Chewy was posting monthly sales in the range of one
Speaker 1: million dollars, which would grow in under two years to
Speaker 1: more than ten million dollars. Still, investors remained dubious. Cohen
Speaker 1: went door to door in Silicon Valley without raising a
Speaker 1: penny of venture capital. Then in September, Larry Chang, co
Speaker 1: founder of Volition Capital and owner of a labordoodle named Coco,
Speaker 1: agreed to invest fifteen million dollars. Chewy was the great
Speaker 1: untold story, Chang says, back in that day, people were
Speaker 1: talking about Casper and Warby Parker, and we all knew
Speaker 1: Chewi was doing way better than all those companies. Chewy's
Speaker 1: path to success was all about scale, getting big as
Speaker 1: fast as possible. If we were going to be able
Speaker 1: to survive Amazon, we needed to build a larger pet
Speaker 1: business than they did. Cohen says, Chewy spent heavily on
Speaker 1: ad words and later on television and direct mail to
Speaker 1: attract customers. Some companies will pay suppliers up front in
Speaker 1: exchange for a price discount. Chewy, following Amazon's lead, chose
Speaker 1: instead to pay full price a few weeks later, gaining
Speaker 1: in effect a short term interest free loan. It could
Speaker 1: plow into customer acquisition as long as new customers kept
Speaker 1: shopping and even in many cases, subscribed to regular, periodic
Speaker 1: purchases of food and other staples. The model worked. Chewy's
Speaker 1: existing customers generated a profit, but that income was funneled
Speaker 1: directly into attracting new customers, which consistently led to financial losses.
Speaker 1: The approach was a facsimile of Amazon's vaunted flywheel model
Speaker 1: for growing. By twenty sixteen, Chewy was averaging two point
Speaker 1: five million dollars a day in sales for an annual
Speaker 1: take of nine hundred million dollars, never mind that it
Speaker 1: lost a hundred and seven million dollars that year. At
Speaker 1: any point, Cohen says he could have turned off the marketings.
Speaker 1: Pigot and Chewy would have become profitable, but it would
Speaker 1: be a smaller business today. Early in sev Cohen became
Speaker 1: a father for the first time, and his own father
Speaker 1: suffered a major heart attack. The latter event really shook
Speaker 1: me to my core, he says. Around the same time,
Speaker 1: he received an email from Raymond Spider, chairman of BC Partners,
Speaker 1: a private equity firm in London. Two years earlier, b
Speaker 1: C had bought pet Smart, which had four hundred stores
Speaker 1: in the US. Pet Smart executives had noticed Chewy eating
Speaker 1: into their market share, and Spider, who owns Siberian cats
Speaker 1: named Pearl and Kashmere, was now interested in buying the startup.
Speaker 1: Cohen told him he was plotting an I P O,
Speaker 1: but he'd consider an all cash bid if it came fast.
Speaker 1: That April, BC and pet Smart agreed to buy Chewy
Speaker 1: and what was then the biggest e commerce deal ever.
Speaker 1: Cohen and his co founders each pocketed hundreds of millions
Speaker 1: of dollars. As part of the deal. Chewy's executives and
Speaker 1: some senior employees got golden handcuffs prophets interest units, a
Speaker 1: type of equity that was set to vest over five years.
Speaker 1: If a recipient left Chewie before the end of May nineteen,
Speaker 1: b C could buy back his or her securities at
Speaker 1: a fraction of their value. Late one evening in March,
Speaker 1: Cohen sent an email announcing his immediate resignation. The news
Speaker 1: came as a surprise, though a few of his colleagues
Speaker 1: were aware that Cohen was frustrated with the new owner's
Speaker 1: questioning of some of his decisions, according to former executives.
Speaker 1: Cohen later wrote in Harvard Business Review, I felt I
Speaker 1: had done all I had set out to do, and
Speaker 1: I didn't want a boss. He did want to spend
Speaker 1: more time with his new son and with his father,
Speaker 1: who died last December. Singh, who had been hired by
Speaker 1: Cohen as chief operating officer less than a year before,
Speaker 1: was named the new CEO. When Singh, who owns a
Speaker 1: Shitsu named d, took over, the company counted ten thousand employees.
Speaker 1: Cohen had laid out a step by step plan for
Speaker 1: board members for achieving profitability in a few years. According
Speaker 1: to internal company documents reviewed by Bloomberg Business Week, sales
Speaker 1: of private label products, which carry higher margins than third
Speaker 1: party brands, were growing. A pet, health care and pharmacy
Speaker 1: business was almost ready for launch, and the company had
Speaker 1: laid groundwork for an I p O. But as Singh
Speaker 1: saw it, Chewy needed more structure, better data analytics, a
Speaker 1: greater product assortment, and stronger inventory and supply chain management.
Speaker 1: Despite the plan prior management set out, Singh says there
Speaker 1: wasn't a road map for sustained growth. How do you
Speaker 1: take the company from two billion dollars to twenty billion dollars. Singh,
Speaker 1: who grew up in India, has a master's degree in
Speaker 1: engineering from the University of Texas and an m b
Speaker 1: a from the University of Chicago. After ten years with
Speaker 1: Dell Technologies, he helped build Amazon's grocery delivery business in
Speaker 1: the US and three other countries. Those who interviewed him
Speaker 1: to be Chewy's operating chief saw a brainy data geek
Speaker 1: with a strong background in operations and experience working at
Speaker 1: large organizations. Singh improved Chewy's automated forecasting and supply chain
Speaker 1: management with machine learning, and expanded a tech centric office
Speaker 1: in Boston. The company's product catalog increased by more than
Speaker 1: half to sixty seven thousand items, Again mimicking Amazon, sing
Speaker 1: banned power points and told staff to argue their cases
Speaker 1: in narrative prose. He also identified key metrics and held
Speaker 1: executives to them during weekly, monthly, and quarterly reviews. It's
Speaker 1: a relentless focus on data and experience. That allows us
Speaker 1: to do hard things well, he says. Last year, Sing
Speaker 1: learned that Chewi was getting a disproportionate number of complaints
Speaker 1: about catletter boxes being damaged and delivery. Cat litter is
Speaker 1: heavy and a small problem can make a big mess,
Speaker 1: but customers need to reorder it periodically. Fitting with Chewy's
Speaker 1: focus on recurring purchases, A small team at Chewy gathered
Speaker 1: data and tracked down the warehouses, delivery roots, and zip
Speaker 1: codes with the most botched deliveries. The team worked with
Speaker 1: suppliers to create better packaging, set up fulfillment center prep
Speaker 1: stations for packages prone to sustaining damage, and took other
Speaker 1: steps to reduce the likelihood of problems in transit. If
Speaker 1: you're living in New York on the thirty six floor
Speaker 1: and your cat litter came open on your expensive hardwood floor,
Speaker 1: you're never going to order for me again, Singh says.
Speaker 1: Some longtime employees struggled to get along with the new boss.
Speaker 1: The abundantly confident Sing struck a different chord than Cohen,
Speaker 1: an unassuming Canadian who had never worked at a big
Speaker 1: company before founding Chewy, saying personally involved himself in matters.
Speaker 1: Cohen it delegated, and he encouraged executives to openly challenge
Speaker 1: each other during meetings, which some say created an atmosphere
Speaker 1: of competition that made some employees reluctant to speak up.
Speaker 1: His apparent obsession with data, big meetings and Amazonian six
Speaker 1: pager memos graded on some underlings, particularly those who joined
Speaker 1: Chewy because the founders scrappy, just get it done approach
Speaker 1: wasn't like that of a large corporation. We all knew
Speaker 1: we were just a pet store, but we really believed
Speaker 1: we were making a big difference in the lives of
Speaker 1: pets and people, says Andrea Wolf, Chewy's former vice president
Speaker 1: of marketing, who left in late It was more than
Speaker 1: just meeting numbers and building efficiency With sume it, you
Speaker 1: could tell he was just a numbers guy. In Singh's view,
Speaker 1: it's all unnecessary part of getting bigger. As Chewy continues
Speaker 1: to scale, it is critical to combine our spirit of
Speaker 1: innovation with data and insights, he says. We believe that
Speaker 1: practices like metrics and data have made us better, faster,
Speaker 1: and more scrappy. This approach, Singh says, allows the come
Speaker 1: penny to automate routine tasks and shortened meetings and promotes
Speaker 1: critical thinking. Early in his CEO tenure, Saying questioned a
Speaker 1: number of practices that had been fundamental to chewy success.
Speaker 1: For instance, in the summer of Amazon rolled out at
Speaker 1: discount for new customers placing subscription orders for pet products,
Speaker 1: besting Chewy's standard markdown. Singh resisted immediately matching the deal,
Speaker 1: even as his lieutenants argued that the company's growth stemmed
Speaker 1: in part from its commitment to having the lowest prices.
Speaker 1: Singh suspected customers value the subscription service enough that they
Speaker 1: didn't need a big price cut. After a week's long
Speaker 1: analysis and debate, Chewi eventually installed a discount of thirty
Speaker 1: A year after Singh became CEO, Chewy prepared to go public.
Speaker 1: The profits interest units that senior employees had received when
Speaker 1: pet Smart bought Chewy were scheduled to be forty invested
Speaker 1: at the end of May, but Singh told employees the
Speaker 1: unit were being canceled because of the impending June I
Speaker 1: p O. The value of the units was tied to
Speaker 1: how much Chewy and pet Smart would have been worth
Speaker 1: if they went public together. That no longer applied because
Speaker 1: pet Smart wasn't participating in the i p O. The
Speaker 1: employees instead received restricted shares in Chewy, only ten percent
Speaker 1: of which would be vested when the company went public. Yet,
Speaker 1: when Chewy's registration statement became public, it showed that Singh's
Speaker 1: award had its own vesting schedule he could pocket of
Speaker 1: his shares on the day of the I p O.
Speaker 1: In an internal email reviewed by Bloomberg Business Week, Singh
Speaker 1: told his team he'd fought very hard for them in
Speaker 1: negotiations with Chewy's controlling shareholder, BC Partners. He also said
Speaker 1: his own vesting was justified. The payout depended on factors
Speaker 1: beyond his control, such as the stock hitting certain price thresholds,
Speaker 1: but other executives payouts were tied to the same benchmarks.
Speaker 1: The company says the new plan has generated exponent sol
Speaker 1: returns for shareholders and employees alike. On the day of
Speaker 1: the offering, Chewy's shares jumped fifty to thirty five dollars,
Speaker 1: temporarily ballooning the paper value of Sing's equity award to
Speaker 1: on thirty nine million dollars. Chewy says Bloomberg's calculation of
Speaker 1: Sing's twenty nineteen compensation is inflated because it includes shares
Speaker 1: that have yet to vest. The shares slid back and
Speaker 1: hovered at about thirty dollars until the coronavirus invaded the US.
Speaker 1: Singh was attending his daughter's school fair on February nine
Speaker 1: when he took an urgent call from his chief supply
Speaker 1: chain officer. Customer demand had spiked over the past two days,
Speaker 1: even though Chewy wasn't running special deals okay, Singh says
Speaker 1: he thought something is about to break loose. Over the
Speaker 1: next few weeks, Inventories that were normally stocked suddenly declined
Speaker 1: by as much as twenty It was like the holiday
Speaker 1: season had arrived unannounced. Our backlog levels were higher, Singh says,
Speaker 1: our customer service level started degrading. Grooming products, for example,
Speaker 1: were in especially heavy demand because groomers had closed their
Speaker 1: doors and owners were opting to wash and clip their
Speaker 1: pets themselves. Lucky for Chewy, it had stalked up in
Speaker 1: late to prepare for the Chinese New Year in January,
Speaker 1: when factories in China that supply those and other goods
Speaker 1: would shut down. Chewy also regularly reserves ample stocks for
Speaker 1: its subscription or auto ship clients. Which effectively shielded about
Speaker 1: two thirds of the company's business from acute shortages. Algorithms
Speaker 1: were tweaked so customers could more easily find different brands
Speaker 1: and sizes if their preferred choices weren't available. That had
Speaker 1: the added benefit of attracting fresh eyes to Chewi's private
Speaker 1: label offerings. The company also created a free online chat
Speaker 1: service that connected auto ship customers with veterinarians. Shipping was
Speaker 1: the monster. Singh says the company might have something a
Speaker 1: customer wanted but in a warehouse on the other side
Speaker 1: of the country. During April and May, deliveries were taking
Speaker 1: as long as nine days. Chewy started splitting orders into
Speaker 1: multiple boxes, using express shipping, and taking other measures. The
Speaker 1: added cost was about twenty million dollars. All of this
Speaker 1: was done to protect the company's relationships with customers. Singh
Speaker 1: says it worked when new ones complained on Facebook, longtime
Speaker 1: customers jumped to Chewy's defense. Six thousand workers joined Chewy
Speaker 1: this spring. The company says it temporarily increased wages and
Speaker 1: benefits to attract new people, most of whom were deployed
Speaker 1: in the warehouses. Some shifts doubled in size. Chewy projects
Speaker 1: its sales for the current fiscal year will approach seven
Speaker 1: billion dollars, up more than from twenty nineteen and about
Speaker 1: what Cohen forecast before he left. The obvious question is
Speaker 1: when Chewi will turn a bottom line profit. In an
Speaker 1: email to Bloomberg Business Week, addressing that, saying attached to
Speaker 1: photo of a diagram he'd drawn on a whiteboard with
Speaker 1: blue and red markers, a big circle labeled growth and profit.
Speaker 1: Flywheel illustrated the cycle of existing customers generating cash to
Speaker 1: learn new ones and expand offerings. An arrow pointed to
Speaker 1: a word and read profitable. It doesn't indicate when, but
Speaker 1: Singh says the company is on its way. The cost
Speaker 1: of marketing relative to revenue has been falling, the private
Speaker 1: label and pharmacy businesses are thriving, and Chewi has said
Speaker 1: it could post a profit for fiscal of as much
Speaker 1: as twenty point four million dollars, albeit without counting charges
Speaker 1: for interest, taxes, depreciation, and amortization. That would presumably be
Speaker 1: good for shareholders, including Singh. As of November sixte his
Speaker 1: equity award had swelled in value to two hundred and
Speaker 1: fifty six million dollars. And that is our cover story.
Speaker 1: This week. Check out more in the current issue of
Speaker 1: Bloomberg Business Week magazine. It's on newsstands, online at Bloomberg
Speaker 1: dot com and on the Bloomberg I'm Carol Masser. The
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