The online pharmacy space for pets is growing at a strong rate and that's good news for Chewy(NYSE: CHWY). The company operates the go-to e-commerce platform for pets. Most investors are likely aware that it generates billions of dollars of sales annually from retail products. But fewer realize that pethealth is a big business for Chewy as well.
In 2023, Chewy Health was a business worth more than $3 billion, according to management. But that's just the tip of the iceberg. The company believes the pet health market is worth $47 billion in just the U.S., and it's still growing.
When thinking of this from an e-commerce perspective, the outlook is even more optimistic. According to a 2022 article sponsored by Chewy, 30% of pet medications are expected to be purchased online by 2025. That's a substantial shift.
For perspective, 70% of pet medication sales are through a vet, according to a 2022 report from market research company Packaged Facts. The remaining 30% is split between retail stores and online channels. Therefore, if a full 30% of sales were just on online channels, that would be a big deal.
The point is that spending for pet health is a large market opportunity and it's increasingly moving online.
Many of Chewy's latest initiatives are designed to capture the shifts underway in pet health. But investors may be shocked to hear that Tractor Supply Company(NASDAQ: TSCO) just positioned itself to enjoy the same boost to its own business.
The surprisingly slick move by Tractor Supply
Tractor Supply is a retail chain with nearly 2,300 locations of its namesake brand. The company also owns a chain called Petsense with more than 200 locations. But don't let the small size of the Petsense brand deceive you. Petsense is just a small component of Tractor Supply being a major player when it comes to pets.
Tractor Supply had total sales of over $14.5 billion in 2023. And according to the company, 25% of sales were for products related to companion animals -- pets. This places it among the top players in the pet space. And if management has its way, it's going to become an even bigger player.
On Oct. 24, Tractor Supply announced its all-cash acquisition of online platform Allivet. Allivet is an online platform selling both prescription and over-the-counter medicines for animals. Tractor Supply's management says that it expands its addressable market by $15 billion.
I find this deal particularly interesting because of the dynamics of Tractor Supply's business. The company had 37 million customers in its loyalty program at the end of its third quarter of 2024. And these are truly loyal and important customers. In 2023, 77% of Tractor Supply's total sales were to loyalty club members.
Tractor Supply's management says that 75% of its loyalty club members own a pet. These loyalty club members spend a lot of money on pets outside of what they spend at Tractor Supply. By acquiring Allivet, management believes it can become more important to its best customers, consequently gaining a greater percentage of their overall pet spend.
There's good reason to dislike most mergers and acquisitions. Companies frequently overpay and cost-saving synergies often don't materialize. With Tractor Supply's acquisition of Allivet, I'm far more optimistic. In the first place, terms of the deal weren't disclosed, suggesting it was a small purchase price. Moreover, management says that Allivet will add to overall profits in its first year.
Tractor Supply has been a magnificent long-term investment. But with nearly $15 billion in annual revenue already, some might wonder if it can grow in the future. I believe its acquisition of Allivet shows that there is still some low-hanging fruit for growth, in this case by offering more pet products to its loyal customer base. Things such as this can keep this business on an upward trajectory long term.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool recommends Tractor Supply. The Motley Fool has a disclosure policy.
