The Chewy Business Model – How Does Chewy Make Money?

Executive Summary:

Chewy is an internet retailer that sells pet products online. Customers can choose from over 60,000 items, such as food, toys, beds, and even pharmaceuticals.

The business model of Chewy is based on selling these products at the highest level of convenience and service.

Founded in 2011, the firm has become one of the leading e-commerce players in the United States. In 2017, Chewy was acquired by PetSmart for $3.35 billion. Two years later, the company spun off and went public.

What Is Chewy?

Chewy is an e-commerce firm that sells various pet-related items over the internet as well as through 17 retail locations in the United States.  

Pet owners can shop from over 2,000 brands and a variety of categories, including food, vitamins, and supplements, toys, beds, and many more.

Furthermore, products are offered for almost any widely held animal. Examples contain dogs, cats, fish, birds, rabbits, reptiles, horses, and so forth.

They offer over 7 million items in their inventory for purchase with prices ranging from $1 to over $200.

Users can then customize their order by choosing from a variety of options, such as the size of the pet, breed type, age group, weight range, and more.

On top of that, Chewy has introduced a telehealth service, called Connect With a Vet, to assess a pet’s health remotely. As the name suggests, the service connects you with a certified and accredited veterinarian.

Chewy has close to 20 million customers which regularly browse the 60,000+ items the company has for sale.

Chewy Company History

Chewy, headquartered in Dania Beach, Florida, was founded in 2011 by Ryan Cohen and Michael Day.

Cohen had been exposed to the world of business from a very early age. His father, who ran a glassware importing business in Montreal, became one of his most important mentors.

Cohen took that inspiration and turned it into something valuable from a very early age. At age 13, he began building websites for family members and other local businesses.

Then, in his teenage years, he would eventually discover the world of affiliate marketing. By recommending other products, he wound up making thousands of dollars every month.

As a result of his online endeavors, Cohen opted against going to college and instead continued to work on his business.

He began looking for a programmer to scale his affiliate operation. He eventually met Michael Day, who’d end up becoming his co-founder, in a Java chatroom.

Day, who studied computer science at the University of Georgia, dropped out of college soon after to go into business with Cohen.

Eventually, the pair decided to pivot into e-commerce and start selling jewelry online. At the time (around 2010), many categories were still in their infant stages. Nevertheless, companies like Wayfair and Warby Parker as well as e-commerce giant Amazon had pioneered a shift in consumer purchasing behavior.  

Cohen and Day invested $150,000 into the business, namely to buy up inventory. In 2011, after visiting a trade show in Miami, they decided to not pursue the business after all. For once, the jewelry business is rather complex. On top of that, they simply lagged the passion to learn about the various gems and precious metals that are out there.

So, what inspired Cohen to launch Chewy? Frankly, his own experience of being a dog owner. This is what he said about his decision to pivot in an interview with TechCrunch:

 “We even spent a few hundred thousand dollars on jewelry and we were a few weeks away from launching the company, but I have a poodle, Tylee, who’s now 12 years old, and I would go every couple of weeks to buy products from this store owner who knew me and who I really trusted and who was a pet lover like me. And I had this epiphany; I realized I’m so much more passionate about this category. So we sold the jewelry, luckily getting back most of our money, and started Chewy.”

Chewy’s website was launched in the summer of 2011, just weeks after the jewelry pivot. The business was solely funded through the team’s previous affiliate income as well as the sales that they already generated from Chewy.

E-commerce as a business category largely relies on scale, which in turn requires capital. Unit economics vastly improve if processes like warehousing and fulfillment are kept in-house. And in order to achieve that scale, founders need capital.

With that realization in mind, the then 26-year-old Cohen flew to Silicon Valley to knock on investor doors and pitch them his business. Cohen was met with nothing but rejection (after pitching around 100 investors).

Those Silicon Valley investors had a variety of concerns. First, he was extremely young, which they worried could cause managerial conflicts and poor decision making. Second, the business was located well outside of the established tech centers, such as San Francisco, Boston, or New York, which made it substantially harder to recruit talent. Third, competitors like the all-mighty Amazon were already offering pet food on their platform. And lastly, the spectacular rise and fall of Pets.com, which became a symbol of the dot-com era, was still top of mind for many seasoned investors.

Despite the negative sentiment, Cohen remained unfazed. In October 2013, Chewy finally managed to raise its first-ever round of funding, receiving $15 million from Volition Capital.

Larry Cheng, the firm’s co-founder and managing partner, was the one who signed the deal off. Cohen met him a year prior in 2012. One day, Cheng notified the team that he was en route to Disneyland with his family and agreed to make a quick stop at Chewy’s office.

In a column for Harvard Business Review, Cohen recalled Cheng asked him “who’s going to take this company to $100 million in sales?” to which he confidently replied, “I am”. Cheng ultimately declined to invest.

Nevertheless, around six months after that visit, Cheng followed up with the team again. They had beaten all the sales projections that they presented that day, leaving Cheng impressed – and ultimately deciding that he would write their first check.

The cash influx allowed Chewy to invest in and scale its operations to become a national player in the pet commerce space. It allowed the team to bring all the logistics and fulfillment processes in-house. In the summer of 2014, Chewy opened up a 400,000-square-foot logistics facility in Mechanicsburg, Pennsylvania.

Volition’s funding also provided the necessary signaling that made other investors more comfortable to pour money into Chewy. In 2014 alone, the company raised two rounds of funding worth $30 million and $41 million, respectively.

As a result of these ongoing expansion efforts, Chewy’s sales more than doubled from $205 million in 2014 to $423 million in 2015. The company was furthermore able to hire top-notch executives from other e-commerce competitors like Amazon.

To do that, Cohen sent out hundreds of invites via LinkedIn, asking those employees whether they would be interested in joining his company. While the majority did not reply, the ones that did turned out to be as passionate about animals as Cohen (on top of the years of e-commerce experience they possessed).

To take the company to the next level, Chewy began prepping for an IPO in early 2016. This would grant both the founders and those employees the payday that all of them had been working towards for the previous years.

Luckily for the company, its competition had other plans. In April 2017, retail giant PetSmart announced that it would acquire Chewy for $3.35 billion in cash – the largest e-commerce transaction at the time.

Cohen eventually stepped down in March 2018 after leading the company for over seven years. He was replaced by Sumit Singh, who joined the company as its Chief Operating Officer back in August 2017. Cohen, on the other hand, wanted to dedicate more of his time to his family.

Over the next two years, Chewy continued to grow its business and invest heavily in all kinds of efforts. Despite the growth, Chewy also remained to be an unprofitable business. As such, raising capital became a necessity again.

On top of that, PetSmart faced a legal battle with its creditors over the transfer of minority stakes in Chewy to businesses that were out of reach for those lenders. Chewy went public in July 2019, adding another $1.02 billion to its balance sheet.

A little less than a year later, the coronavirus pandemic forced people to stay sheltered at home. According to the Washington Post, many decided to adopt a pet or simply add more furry friends to their family.

And since retail locations were partially closed as a result of lockdown measures, pet owners turned to the internet to order their supplies. Chewy became one of the major beneficiaries. The company added millions of customers and even became profitable for the first time in its existence, recording a profit in the fourth quarter of 2020.

Today, over 7,000 people are employed by Chewy. The company operates offices in more than 20 locations across the United States.

How Does Chewy Make Money?

Chewy makes money by selling pet products to consumers over the internet. Its business model is predicated on a variety of key initiatives.

Most importantly, the company has always prided and separated itself on the merits of its world-class service. To show how much it values its customers, Chewy sends customers sketches of their pets and handwritten notes or even flowers when their animal passes away.

Second, it also undercut many of its competitors on price. The thesis is to acquire as many customers as humanly possible while, in the meantime, build out all the necessary operations. Furthermore, adjacent services can be added to make a customer’s life even easier.

In the case of Chewy, two of those main services are Autoship as well as its telehealth offering. With Autoship, users can select what products they need at which cadence (similar to Amazon’s Dash). These products are then delivered without the need for customers to even place an order.

Second, the company’s telehealth service, which was launched in October 2020, connects pet owners with certified veterinarians. So far, both services are free to use.

The goal is to further increase the stickiness of its product. Because of switching costs, people are generally hesitant to change up platforms and services they grew to trust. Pets, which are particularly sensitive topics to many, further amplify this.

In fact, customers had already reported that Chewy began raising prices for some of its product categories. Consequently, the company could eventually announce that some of its adjacent services will cost money as well.  

Chewy Funding, Revenue & Valuation

According to Crunchbase, Chewy has raised a total of $451 million across seven rounds of venture capital funding.

Prominent investors include BlackRock, Greenspring Associates, New Horizons Venture Capital, Lone Pine Capital, and many more.

When Chewy went public in July 2019, during which it raised another $1.02 billion, its business was valued at $8.8 billion. Today, the company is valued above $34 billion.

For the fiscal year 2020, Chewy posted annual revenues of $4.85 billion, up over 37 percent from the previous year. The company continues to lose money due to various expansion efforts. In 2020, net loss was equal to $92.5 million, including share-based compensation of $129.2 million.

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..