Chewy's automated fulfillment centers help keep costs on a leash

For Chewy, making things automatic has long been key to the business model.

The pet ecommerce platform's Autoship service allows customers to receive recurring orders on products, and there’s no membership fee attached. It has proven to be a particularly attractive offer due to the nature of pet products. Pet food needs constant replenishment, so the ability to turn on automatic ordering adds new convenience to a chore that can otherwise be a hassle.

As a result, Autoship is taking an increasingly bigger bite of Chewy’s revenue share. The program accounted for 73% of Chewy’s net sales in the fourth quarter of 2022, while customers signed on for the program grew by 18% from the fourth quarter of 2021.

The growth comes after pet products saw a big spike in demand during the pandemic, while companies dealt with supply chain issues. With the dust increasingly settling out, Chewy is seeking to operate more efficiently. Through a series of initiatives, the company is also applying automation in the supply chain.

Chewy decided to begin making an investment in automated fulfillment centers in 2019, but the pace of building has picked up. Now, it is on track to have four automated fulfillment centers.

“Our automated FC network is handling an increasingly larger portion of our outbound shipping volume at progressively lower variable cost per order,” CEO Sumit Singh told analysts oin the company’s Q3 2022 earnings call.

Here’s how the Wall Street Journal described the facilities in January 2023:

In the coming 15 months, Chewy will open at least two more of these hubs—which rely on automated storage, retrieval and sorting systems—cutting the time employees spend finding, picking and packing products, according to Mario Marte, the chief financial officer. In some cases, Chewy has fully eliminated manual box-packing, which was previously done by workers, he said.

The company is now shipping 30% of its volume through the automated facilities, up from 10% in late 2021. The company also said the facilities deliver a 25% increase in throughput capacity per square foot, and a 30% reduction in cost per unit.

Alongside automated facilities, Chewy is also optimizing the path that goods take from the ship to doorsteps. It opened a pair of import routing facilities that were on pace to handle 90% of import volume by the end of 2022. These allow for more efficient inventory distribution, and reduced inbound freight costs.

Singh described additional supply chain initiatives this way:

Inventory: It is better positioning inventory to ship shorter distances, and be more efficient with costs.

Density: Cartonization of orders is helping to improve package density, meaning there is more being put into a single package. This lowers freight costs.

Middle mile: Optimizing routes that inventory takes between upstream facilities help the company “consolidate orders and deeper inject into carrier networks.”

These initiatives help to cut costs and improve margins in the supply chain. They’re also improving the customer experience. Automating processes has allowed Chewy to reduce the time between a click and a delivery. It is also resulting in more accurate orders.

This work involves building, but also recalibration. Chewy made tradeoffs along the way. It closed two older fulfillment centers as it opened the new automated facilities in nearby locations.

It’s all designed to keep Chewy pushing ahead. While competitors such as Petco now have repeat delivery, Chewy’s supply chain improvements offer a new way to gain an advantage – and one that can’t be easily replicated without significant investment.