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Amazon.com Is Taking Over the World… of Pet Supplies

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a recent post, I briefly summarized the history of Amazon.com’s (NASDAQ: AMZN) rapid growth.  While most investors are already aware of the impact Amazon.com has had on brick and mortar bookstores like Barnes & Noble and electronics stores such as Best Buy, there is significantly more going on at Amazon.com.   This is the first in a series of posts analyzing some areas of focus for Amazon.com that do not get as much widespread attention.

Pets Are Members of the Family

Within the retail space, one specialty that has remained strong despite a challenging economic environment is the sale of pet supplies.  Interestingly, strong sales trends have not been limited to essentials like food and medicine, but have instead grown as a result of a continuing trend of more sophisticated toys and gourmet treats.  As a recent Time article notes, spending on pets in the U.S. crossed the $50 billion mark in 2011 and is expected to continue to climb.   Amusingly, the article points out that spending on pet costumes alone is expected to increase by $70 million in 2012. The continued growth in spending on pets has similarities to how high end grocers like Whole Foods have been able to out-pace the growth of more traditional chains such as Kroger; in the case of pet supplies, the focus on health and ingredients has led to higher-end dog foods containing bison, venison and salmon rather than corn and heavily processed ingredients.

This strength in what had traditionally been considered a largely discretionary spending category subject to swings in the larger economy is evident in the share price of industry leader PetSmart (NASDAQ: PETM):

<img src="http://media.ycharts.com/charts/2796ff1aa699c494f85a001fe941452b.png" />

PETM data by YCharts

When compared to a relatively flat S&P 500 over that time frame, a return of approximately 150% is pretty impressive!

Enter Amazon.com

After backing a failed attempt to sell pet supplies (pets.com) about a decade ago, Amazon.com is back in this business in a big way.  First, Amazon.com’s core retail site features thousands of pet supplies; the assortment is so vast that I challenge you to search for a pet treat that isn’t on the website!  Amazon.com’s efficient network of warehouses also allows it to stock inventory for a wider range of creatures beyond the popular assortment of dogs, cats and fish.  Second, the often overlooked 2010 acquisition of Quidsi was leveraged by Amazon.com to launch Wag.com in 2011.  In addition to over an assortment of over 10,000 pet supplies, Wag.com boasts free two day shipping on orders over $49, and what I consider to be one of the most polished pet supply websites around. 

With superior selection, the convenience of both one-stop shopping for pet supplies and other goods, and free shipping, Amazon.com presents a compelling option for pet owners. 

More to Come

In addition to food, toys and general supplies, Amazon.com has begun expansion into the world of pet medication (e.g., flea and tick medicine).   This will put pressure on already struggling pet medication specialty companies such as PetMed Express (NASDAQ: PETS), especially if/when Amazon.com or Wag.com begins offering a full range of prescription medications.  The effects on PetMed Express and others could be devastating if the combination of a full line of prescription medications and Amazon.com’s plans for same day delivery comes to fruition.

Brick and Mortar Cannot Be Conquered Completely

While Amazon.com effectively crushed Circuit City (remember them?), the same is not likely to be true in the world of pet supplies.  PetSmart and a wide range of companies such as VCA Antech (NASDAQ: WOOF) will always have a significant portion of pet spending as service providers.  In 2011, veterinary services accounted for $13.4 billion of pet spending and non-vet services (such as boarding and grooming) grew to $3.8 billion. People will always need pets to be trained, groomed, boarded and treated for medical issues, and I think it is a safe bet to assume that these services are sufficiently insulated from Amazon.com’s core competencies in retail. 

Additionally, Amazon.com is not the only diversified discount retailer positioning itself for growth in pet-related revenues; Wal-Mart Stores (NYSE: WMT) has a large pet business that it will continue to leverage.  Wal-Mart has a significant online presence, an existing prescription medication program (both in store and online) and will also be tinkering with same day delivery in response to Amazon.com.  This will be just one of many battles that Amazon.com and Wal-Mart will engage in as both companies fight for the title of largest retailer.  It is also important not to forget about other big retailers; Target Corp has many of the same strengths as Wal-Mart working in its favor, including in-store offerings and pet medication services in addition to online presence.

There’s Plenty of Spending to Go Around

With domestic spending on pets exceeding $50 billion a year and growing at 5% a year, Amazon.com does not have to be the dominant player in the industry in order to significantly add to its revenue.  Given that almost 40% of annual pet spending is comprised of categories such as veterinary care, services and animal purchases and the fact that these are markets that Amazon.com will not (likely) ever enter, the real addressable market for Amazon.com is closer to $30 billion per year (and growing) in the United States.  Capturing just 10% of that addressable market would be $3 billion per year in revenue, which equates to over 5% of Amazon.com’s TTM revenue.  That is a sizable amount of growth, especially when you factor in current growth rates in pet spending and the important fact that this analysis does not factor in international growth.  A recently updated article estimates worldwide 2010 pet spending at $81 billion, with faster growth occurring overseas.  In addition to international sales already representing 43% of Amazon.com’s revenue in the most recent quarter,  the rising middle class in emerging markets could translate into even more rapid pet-related growth internationally. 

While Amazon.com doesn’t disclose revenues in sufficient detail to track past and future revenues from pet-related businesses, it is clear that there is opportunity for significant revenue generation in the future.  Based on Amazon.com’s track record, how successful this line of business becomes will be less a reflection on the total market opportunity and competition and more a reflection on how much attention Amazon.com’s management devotes to developing this portion of the company.

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BrewCrewFool owns shares of Amazon.com and PetSmart and his dog eats food purchased from Wag.com. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com, PetSmart, Wal-Mart Stores, and VCA Antech. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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