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Chewy continues to show that ecommerce can take a growing bite out of the pet product market.
The platform posted a 13.6% increase in net sales for 2022, while expanding gross margin to 28%, according to a recent earnings report.
“Against the backdrop of a rapidly changing operating and economic environment, Chewy produced record-high revenue, profitability, and free cash flow,” said CEO Sumit Singh.
Like many in retail, the company is facing headwinds as a result of inflation and interest rates. That showed up in the metric of active customers, which declined to 20.4 million in 2022 from 20.66 million in 2021.
“We believe the modest sequential decline in active customers reflects the continued softness in discretionary spending experienced across the broader economy as well as the residual impact of attrition from our 2020 and 2021 cohorts,” Singh told analysts.
In 2023, Chewy is seeking expansion through international markets and advertising. Additionally, it is adding automation to fulfillment centers. Here’s a look at initiatives detailed on the earnings call:
Chewy is preparing to move into its first market beyond the U.S. Singh said the “time is right,” and the company is building both the capabilities and team necessary to launch internationally in the “next few quarters.”
“We expect this important development to unlock meaningful incremental [total addressable market], and we are excited to introduce Chewy to a broader customer base with whom we believe our brand and mission will resonate strongly,” Singh said.
While no exact geography was identified yet, Singh talked through some of the criteria the company is using for expansion, including size of the market, geographic proximity and consumer behavior that may be similar to the U.S.
Before moving into a new country, Chewy is also taking steps to understand the consumer culture.
“We plan and expect to bring all components of our value proposition to the international market. And at the same time, we are going to be very actively listening to the voice of the customer and designing our launch working backwards from that so that there is no dissidence in the way that we show up in the cultural nuances as Chewy's brand enters the international market,” Singh said.
Retail media is exploding, as ecommerce marketplaces realize opportunity to unlock new growth and margin opportunities by introducing advertising onto their platforms. Chewy is joining the ranks of retailers ramping up its ad capabilities. Currently, it is testing sponsored ads with a beta that rolled out in the fourth quarter of 2022. The full product is expected to be live in the first half of 2023.
“Our team is hard at work right now on the supply side of the platform, where we expect to deliver a great customer and partner experience with improvements in ad serving, tracking and relevance,” Singh said. “The reception from brands has been and continues to be positive, including the reception on our ROAS framework.”
Chewy made the decision to invest in fulfillment center automation in 2019. Now, it has three facilities that are automated, with a fourth in Nashville on the way this quarter. In turn, the company closed a pair of older fulfillment centers, including one in Pennsylvania, which did not have automated capabilities.
“Each of the facilities are located near one of our new automated FCs, which allows us to combine operations and offer team members the ability to transfer locations. We believe that this action will enable incremental order volume to flow through our automated facilities.”
The automated facilities are now processing about 30% of order volume, which is double from last year.
The move to streamline operations demonstrates that Chewy is not only employing innovation to drive growth, but also profitability at a time when retailers are watching margins carefully.
Trending in Retail Channels
New advertising opportunities are being beta tested for in-store audio and product demos.
Retail media’s fast growth isn’t only limited to increasing spend. The advertising itself is also poised to appear in more places beyond ecommerce marketplaces, and even beyond the web.
The latest example comes from Walmart Connect, which is the retail media arm of the world’s largest retailer.
Walmart shared details on testing that it is completing for in-store retail media. To this point, Walmart Connect has been considered the advertising platform for Walmart’s ecommerce site. But these tests indicate that’s poised to expand.
Stores present a potent opportunity for Walmart. It has 4,700 big box locations around the U.S., and customers returned to them in droves last year. In 2022, 88% of the retailer’s customers visited Walmart stores.
Walmart Connect already has already dipped a toe into in-store advertising, with a TV wall, self-checkout ads and integrated marketing. The new pilots aim to take a step further.
“The next frontier of retail media is in-store experiences, and it’s one we’re excited to chart,” Whitney Cooper, head of omnichannel transformation at Walmart Connect, wrote in a blog post on the new tests. “But it’s still an emerging opportunity for us, as we continue to test what serves customers best and which solutions are scalable to Walmart’s size.”
Here’s a look at the two new offerings currently under beta test:
Walmart suppliers will be able to integrate product demos into campaigns across in-store and digital environments.
Product demos aren’t new to store floors, but Walmart Connect is seeking to give them an update that blends digital and physical experiences.
“Part of our test is how to enhance the omnichannel experience by bridging the physical back to digital: For example, by pairing a demo cart with QR codes that link back to a curated Walmart.com landing page so customers can find inspiration and shop their list all in one spot,” Cooper wrote.
Walmart is currently offering 120 demos at stores each weekend, and plans to scale to 1,000 by the end of 2023.
Walmart Connect will now offer advertising placements on Walmart’s in-store radio network. Suppliers will have the option to purchase ads by region or store, enabling targeting of key markets.
“This is the first time brands will be able to speak directly to Walmart customers through this medium,” Cooper writes. “These ads also create a new upper-funnel touchpoint for brand marketers and out-of-home (OOH) buyers to create awareness, because in-store audio is about connecting with customers wherever they are in the store — they don’t have to pass the brand in the aisle.”
With the tests, we’ll be watching for how this advertising is measured, and whether Walmart Connect is tracking impact across different types of formats, and not just a single campaign.