Document Sample
   PETCO Animal Supplies


       Angela Tiersma

          Bus 444
      Professor Meilich
           For my Theory-in-Practice Assignment I have chosen the publicly held company PETCO
Animal Supplies, Inc. (NASDAQ: PETC). I picked PETCO for several reasons: I worked there
in high school and loved it; it is based in San Diego; and it is the number two in its industry.
PETCO Company Information
           PETCO is one of the nation’s top pet superstores with 600 locations in 43 states and
Washington D.C. PETCO provides pet-lovers with small pets, supplies and services. The small
pets that PETCO sells include fish, reptiles, small animals and birds. They do not sell dogs and
cats due to over-population; however they do sponsor pet adoptions and can refer customers to
variety of breeders. Even though they do not sell dogs and cats they still offer a variety of
products and services that fulfill the needs of these types of animals. PETCO sells a variety of
different products amounting to more than 10,000. These products include a variety of foods,
toys, medicine, shelter and many other items that pet need on a daily basis. PETCO also
provides a plethora of different services including grooming, obedience classes and veterinary
           PETCO went public in February of 2002, and is the second largest pet supply specialty
store in the United States. PETsMART is the number one in the industry and other competitors
include Kroger and Wal-Mart. In 2003, PETCO’s sales were $1,476.5 Million. Their current
stock price is 37.73 + 0.07. ( and


Mission Statement
           PETCO’s mission statement is “to become the leading category-dominated national chain
of community pet food and supply superstores by offering its customers a complete assortment
of pet-related products at competitive prices with superior levels of customer service.” (Mikus 1)
PETCO strives to be the number one premium pet supplies retailer in the United States. They
plan on doing this by placing their stores in convenient locations within communities where
people already shop. PETCO offers a variety of different products at low prices and has
knowledgeable staff, all of these add to customer value.

       PETCO has utilized both a deliberate and an emergent strategy in its pursuit to becoming
a leader in the pet supply industry. Some strategies are planned such as selling only premium
dog and cat food rather than brands that can be bought at the grocery store. Placing these
products in the back of the store is also deliberate, this way the customers have to walk to the
very back of the store in order to get a necessity. They are forced to look at other items they
normally would not look for but desire to purchase. (Banerjee 2) PETCO also careful chooses the
locations where it will open new store locations. Their stores are conveniently located near
neighborhoods and other retail outlets that pet lovers frequent. PETCO has also made use of the
deliberate strategy of growth by acquisition (which will be discussed in a later chapter). PETCO
has also made the most of an emergent strategy. PETCO looks at consumer trends and then
expands into new areas that are becoming popular. This is how they began offering products for
pets rather than just cats and dogs (Scally 3). Another example of an emergent strategy that
PETCO uses has to do with the size of its stores and the millennium format. PETsMART was
beginning to increase the size of their stores so PETCO needed to do the same in order to remain
competitive. PETCO did this by implementing 15,000-square-foot stores in the new millennium
format. These stores were not only larger they also focused more on supplies and live animals
rather than just food, since these products had more growth opportunity.(Basas 3) By using both
a deliberate and emergent strategies PETCO has been able to remain one of the leading
superstores in the industry.


Macro Environment
       These forces will not affect the pet supply industry. Pets are seen as one of the family
and are “pampered even in hard times”. “PETCO Animal supplies helped reinforce the notion
that some industries are recession-proof with strong fourth quarter and 2002 sales”

         Technological advances allow for a great quality product for the consumer, therefore
increasing overall value of products and services. With technology also comes the internet and
that means more competition. On-line retailers have an advantage since you can shop in the
comfort of your own home and you don’t have to wait in line.
         The type of customer the pet industry is trying to market to is very important. With the
increase in young children and the retirement of the Baby Boomers pets have become
increasingly important. Young children consider their pets their best friends, one of the family.
Elderly people treat pets like their children after their own have grown up and moved away.
         Society today is having an increased interest in pets. Now there are dog parks, dog
beaches, pets can also be a fashion trend or accessory. Paris Hilton is a perfect example of this
with her miniature Chihuahua Tinkerbelle.
Political and Legal
         The pet supply industry is at risk to having many political and legal problems because of
animal rights activists. Many stores have been in legal proceeding involving the group “PETA”
over accusations of cruelty to animals. This could potentially be a large threat if fair treatment of
animals is not kept a priority.
Strategic Groups
         There are several strategic groups that exist in the pet supply industry which include
Grocery and Drug Stores, Superstores, Pet Super Stores, on-line retailers, and small pet shops.
Grocery and Drug Stores
         Grocery and Drug Stores include stores include stores such as Ralph, Vons and
Albertsons. They primarily focus on human food rather than pet food so they tend to have a
limited variety of items to choose from. They also do not carry premium therefore their quality
is not as high as the foods offered at the Pet Specialty Stores. Sales staff does not have very
much knowledge of the products therefore they would not be able to educate consumers on the
choices available to them.

         Superstores included retail outlets such as Wal-mart, Target, K-mart, Smart and Final,
and Costco. These stores are a one-stop-shop which makes them very appealing to customers.
They over a wider variety of pet products that the Grocery and Drug Stores and carry some if not
many of the premium brands. Since superstores do not specialize in pet supplies sales staff is not
likely to be very knowledgeable with the product lines. Customers are left to fend for
themselves and may never know the benefits of buying premium foods.
Pet Super Stores
         Pet specialty stores include outlets such as PETCO, PETsMART. These stores sole
reason for being in business is to sell pets, supplies and services. Because of this, sales
associates are well-trained and knowledgeable in a variety of different subjects that pertain to
pets. Sales staff also has a love for pets and share a common bond with their customers. Pet
Super Stores carry many more products than other retailers and have anything you could ever
need or want for your pet. They also are much larger having the capacity to carry all of these
On-line Retailers
         On-line retailers include sites such as,, and many others. These retailers are only available online. These on-line
retailers are very convenient for consumers because they can shop from the comfort of their own
home. They don’t even have to leave the house and if they buy above a certain dollar amount
shipping is free.
Small Pet Shops
         These stores usually consist on only one shop or a small chain. They offer many of the
same products as the Pet Super Stores, but on a smaller scale.


         PETCO utilizes a centralized purchasing and distribution center in order to remain
profitable and keep costs low. Most suppliers deliver directly to the three central and five

regional distribution centers. Only a few suppliers deliver directly to the stores, this saves
PETCO a significant about of money on delivery fees. The distribution center works hand in
hand with the POS system (which we will discuss in Chapter 7) in order that the stores will have
the supplies they need, but no extras. By using this system PETCO consistently has product on
hand without wasting space and money on excess stock. PETCO also uses the distribution to fill
on-line purchases. Since PETCO operates over 650 stores it is also able to use economies of sale
in purchasing product and also in its support operations.    (
       PETCO does its best to delivery a quality product with exceptional service, yet PETCO
does still experience failure in this area. PETCO does well in the cat and dog area providing
premium foods and the latest supplies. In other areas PETCO is not as specialized therefore it
cannot offer the level of quality a small shop focused on that area can. For example Fish Haven
will have a larger variety of fish and supplies that are more advanced and of higher quality than
PETCO. Fish Haven will also have a higher quality of service since the employees are fish
specialists. PETCO also can have a lack of quality in customer service with will be discussed in
the Responsiveness to customers section.
       Since PETCO does not manufacture its own products it is not able to be innovative in this
area. If a product is on the shelf at PETCO it will be on the shelves everyone including
PETsMART, Superstores, small pet shops and on-line retailers.
       Another area that PETCO tries to be innovative in is its services including grooming,
obedience classes, veterinarian services, and pet photography. These are all great services that
add value yet they are also offered at PETsMART. One innovative service that PETCO does
offer is selling Padres tickets (for PETCO PARK games) in the stores. PETCO delivers goods
and services to customers both at brick and mortar stores and online. Since these avenues are
standard PETCO does not display innovation in this area either.
Responsiveness to Customers
       PETCO strives to be active in meeting its customer’s wants and needs. One program that
PETCO conducts is the P.A.L.S. Club, which offers discounts on items throughout the store.
This program also tracks customer purchases and sends them special coupons and fliers catered
to the items they frequently buy. (This will be discussed in further depth in Chapter 7). Even

though this is an excellent program PETsMART has a club that is almost identical. Other
retailers have similar programs: grocery stores have club cards; small pet shops have frequent
buyer programs; and online retailers can save personal preferences and can email coupons and
information about products that customer buy. PETCO also tries to offer a high level of
customer service. Employees are trained yet there are so many products and services that it is
difficult for an employee to master all of this information. In comparison to grocery stores and
superstores, PETCO offers good service yet is lacking when compared to a specialized pet shop.
Small retailers that specialize in one or two areas have more product knowledge and are able to
be more responsive to customer’s questions.

                            BUSINESS-LEVEL STRATEGY

Low Cost
       PETCO uses the business strategy of low cost. It is able to pursue this strategy for three
reasons that include: large target market, standard production, and process-oriented R & D.
First, PETCO has a large target market which includes all types on animal lovers. Sixty-two
percent of Americans now own a pet, up from 56 percent in 2000 (Norman 2).” Not only is this
target market huge, it is also growing. Second, PETCO offers a standard product of pet food and
supplies. These products are available at many different retailers including PETsMART,
superstores, grocery stores, online retailers and small pet shops. PETCO is able to take
advantage of economies of scale in its operation because of its large size and the nature of the
products it offers. Third, PETCO uses process-oriented R & D in order to create new and more
efficient ways of conduction business. This can be seen in its distribution, POS, and inventory
       Though PETCO is a leading firm in the pet supply industry it does not have competitive
advantage. Despite this PETCO is still doing well and can still be profitable being second to
PETsMART. At one time PETCO was number one, but at the current time PETsMART has the
edge. These two firms are very much like Coke and Pepsi constantly battling to be top dog. At
the present time the market is large enough for the both of them and still growing, the two firms

together only have 20% of the market share.(Palmer 2) In the future we will continue to see
these two firms battling it out and most likely take turns being on top.

       The pet supply industry is highly fragmented. In 1994, “the U.S. (had) about 12,000 pet
shops, and 85% of them (were) independently owned (Triplett 2).” Although not all of these
independently owned shops are differentiators many of them are. These are not the only retailers
in the industry, by looking at the strategic groups we discussed in Chapter two you can see there
are many more. Retailers whose strategy is low cost include PETsMART, superstores, grocery
stores and online retailers. Barriers to entry are low for the pet supply industry; Economies of
Scale are not need if your strategy is differentiation (anyone can start a pet store). Evidence of
low barriers to entry is the boom of on-line pet supply retailers, since there are many new firms
constantly entering the industry.
       By chaining PETCO is able to tie all of the 654 locations together and treat them as one
store. When doing this PETCO is able to overcome the barrier of high transportation costs since
most supplies are sent to the eight distribution center rather than the 654 stores. If suppliers
shipped directly to the stores it would be time consuming for both the suppliers and PETCO.
PETCO carries over 10,000 different products; image if these supplies came from 100 different
suppliers. This would be 100 different deliveries for just one store; this would be extremely time
consuming to receive the supplies, check them in, and put them out on the floor. Employees
would be so tied up in this process that they wouldn’t have time to help customers. Thankfully
PETCO uses chaining and therefore shipments come three times a week and are more cost
effective. Another benefit of chaining is realizing Economies of Scale which PETCO uses when
purchasing product and providing other resources for its stores. PETCO buys in high volume
therefore it is able to receive discounts that smaller stores cannot take advantage of. PETCO also
has the advantage spreading costs of advertising (PETCO PARK Sponsorship), training, human
resources, technology and other costs across its 654 locations.

       PETCO has a top of the line POS system that is vital to it everyday operations. This POS
system links the stores to both the distribution centers and the corporate headquarters. The POS
system keeps track of the store’s inventory and when an item needs to be replenished it sends an
order to one of the distribution centers. The product is then shipped to the store. The POS
system also sends reports to the corporate office in order that they are well informed on the
activities of the stores at any given time. (
       PETCO has three central distribution centers and five regional distribution centers. Only
some of PETCO’s suppliers deliver directly to the store; most deliver to one these distribution
centers. PETCO can keep better track of what is in their stores by using the integrated POS
systems and distribution centers. From the distribution centers the stores receive shipments two
to three times a week depending on demand. With this system food is less likely to spoil and
stores are always stocked but rarely stuck with items it cannot sell.
       The POS also supports the PETCO PALS club and allows PETCO to get a great deal of
customer information. The PETCO customer signs up for the club card by filling in a variety of
questions including what type of pet they own and when the pet’s birthday is. Every time the
customer checks out they are asked to show their Pals card. They can save with the in-store
deals, just like in grocery stores. Every time the PETCO PALS card is used the POS system
records that item under the consumer’s name. Later the customer will receive coupons that
reflect what they normally buy. This way customers get coupons that they will actually use,
which creates a higher value to them. These types of programs are very popular within the
industry. PETsMART has a very similar program that does virtually the same thing. Grocery
stores offer club cards that offer discounts but do not send tailored coupons by mail. On-line
retailers also use a variation on this idea by sending special offers and coupons by mail. Most
consumers are happy to sign up and the programs benefit both the customer and the firm.

       Over the years PETCO has taken advantage of a growth-by-acquisition strategy buying
out many pet supply chains. In 1980 PETCO acquired WellPET and the Pet Dept (its first
acquisition) which brought its store count to over 100. By 1998 PETCO had acquired 21 chains
making PETCO a national chain and adding more than 200 stores. ( By taking
on this strategy PETCO has not only eliminated competition, but also has increased the number
of its stores and geographical locations. This success has not come easily though, but with
challenges and pitfalls. One problem that PETCO has faced is the high cost associated with
acquiring another company. These expenses not only include the cost of buying the business but
also making it combatable with other PETCO stores. This task of integrating PETCO’s store
layouts and information technology systems into the newly acquired stores was extremely
challenging. Acquired stores came in many different shapes and sizes therefore PETCO had to
be creative in implementing its store concepts. Sections of the stores would have to be
downsized or expanded in order to fit the particular store; some stores even had to be totally
remodeled in order to become integrated into PETCO’s system. Information technology also had
to be changed in order to be compatible with PETCO POS and distribution centers. Employees
would also have to be retrained according to PETCO’s standards for service. Although
acquisitions have been challenging for PETCO they have been successful and have allowed the
chain to grow into a national retailer.
Joint Venture
       In 2000, PETCO went into a joint-venture with buying in 20 % which
helped PETCO expand it scope from being a brick-and-mortar retailer.
( In this joint venture PETCO agreed not to start its own online
store, but to direct online customers to In exchange agreed not to
partnership with any other brick-and-mortar store. Even though this partnership was mutually
beneficial to both parties it was short lived. found itself in highly competitive
business, and decided to call it quits in December 2001. PETCO took advantage of’s exit and acquired it assets. Now PETCO sells product online as well as in stores.

Customers who frequented are now redirected to What was once a joint
venture for PETCO turned into another competency that was added to PETCO’s portfolio.

Vertical Integration
       PETCO has used vertical integration by adopting in-house printing. Previously PETCO
outsourced all of its store signage and pricing labels spending a considerable amount of money
on this important aspect of their stores. By using an outside printer PETCO was not able to
express the extent of creativity that it would have liked to. Other problems include long
turnaround time was long and inconsistencies with advertising campaigns. By evaluating the
current system PETCO saw all of these disadvantages and decided to bring the printing in-house.
Once PETCO vertically integrated the in-store signage it found many advantages. PETCO was
able to be more creative, this allowed for more attracting signage inducing purchase. Store
signage and pricing labels were able to be more consistent with advertising campaign. Turn
around time was also reduce from about ten days to one to three days. Because of this quick
turnaround time stores no longer need to keep excess stocks of labels and store signage. Overall
adopting in-house printing allowed PETCO to get the job more efficiently and effectively than
before it used vertical integration. (Chain Store Age 1)
       For the most part PETCO sells just about anything you could ever want or need for your
pet, PETCO also sells many pets, but not cats and dogs. This is one thing that PETCO does not
specialize in for very good reasons. One reason is that it is very difficult to care for these types
of animals properly in a pet superstore setting. Cats and dogs are more time intensive animals
than fish, reptiles or small animals because they require a lot of love and affection. There is also
a large overpopulation problem associated with these animals because people don’t bother to
spay or neuter their pets. “The pet overpopulation problem in America today is at epidemic
proportions. Some 11 million dogs and cats are euthanized in America each year due to lack of a
home (Triplett 3).” Many people do not believe that it is socially responsible to sell cats and
dog. PETCO in a sense outsources this area to local human societies. Local human societies

hold pet adoptions to match up cats and dogs that do not have home with suitable owners.
PETCO only provides the site and adoption application and the human society does the rest. The
human society screens applicants and finds a suitable fit for both the pet and owner. The human
society also takes care of the pet until it is adopted. The adoption program is great because
PETCO is able to still offer cats and dogs yet in a socially responsible way and PETCO isn’t
responsible for taking care of the animals.

       At this present time PETCO only conducts business in the United States therefore it does
not have a global strategy. PETCO’s current strategy is focused on market penetration in the
United States rather than in other countries. Currently the pet superstores have a tremendous
amount of growth potential in the US therefore PETCO doesn’t need to search elsewhere in
order to grow. PETCO only operates in 43 states and the district of Colombia and in many states
only have a few locations. Most of its stores are located on the West and East coast therefore it
has plenty of room to grow in the Midwest. Once growth has slowed in the United States and
PETCO no longer has room to grow then it should think about going global, before then there is
really no need.
       If PETCO were to enter the global environment it should use a global strategy. This way
it could use benefit from the effects of the learning curve and use the same business level
strategy of low cost that it uses in the United States but on a global scale. PETCO could use the
same strategy of growth by acquisition in other countries. It could acquire stores that are offer
limited product and services and add value to them buy infusing them with PETCO’s selection
and services. PETCO could also acquire stores that are run down and remodel them and make
them more appealing so that customer would want to shop there. This would require a large
initial investment but it could pay off if it was implemented correctly.

                         COMPETE IN A SINGLE INDUSTRY
Strategic leadership
       PETCO’s COE Brian Devine is a very strong leader which can be seen through how
successful PETCO has been through the years. Brian Devine became the COE of PETCO in
1990 and has been consistent in his actions in carrying out PETCO’s business plan. Under his
leadership PETCO has grown to 654 stores and continues to grow at a steady rate each year.
PETCO’s sales have also reached the $1 Billion mark under his leadership. Brian Devine is so
successful in this business because he himself is a true pet lover therefore he really believes in
PETCO. Devine and his wife have many pet include cats, dogs, small animals and reptiles.
Devine is a customer therefore he know what customers want and what they value. Devine has
focused on important aspect of the business such as information technology and training of
employees. He recognizes that in our day and age information technology is very important and
it is constantly get better. Because of this Devine makes sure that PETCO is kept up to date with
the latest technology in order that operations can run smoothly. Devine also takes advantage of
cost savings that are associated with the efficiencies that information technology provides.
Devine has also put an emphasis on training of new employees. He feels that this is very
important in order to anticipate and fulfill customer needs. Training is also important because
well-trained employees will help the store run more efficiently therefore reducing costs. Overall
Brian Devine has demonstrated excellent leadership over the years making PETCO a leader in
the pet supply industry. (Bernstein 2)

                                  IT REMINDS ME OF…
       PETCO (pet superstores) and Timex (affordable quality watches) were both first movers
in their industry. They both focused on efficiency and were successful utilized Economies of
Scale. Because of this both PETCO and Timex were able to provide a great deal of value to their
customers at a low price.

        PETCO reminds me of Honda because its business strategy was also low cost. They both
focused on efficiency in order to pass down cost savings to the customer.
Cigarette Industry
        PETCO reminds me of the Cigarette Industry because the both acquired many different
companies. The difference between these two is that PETCO acquired other firms inside its
industry and the Cigarette Industry diversified and bought firms outside its industry.
Coke and Pepsi
        PETCO and PETsMART remind me of the Cola wars. They both are leading firms in the
pet supply business while Coke and Pepsi are leading firms in the cola industry. The two pairs
of firms are constantly trying to out-do each other in order to be on top. PETCO and
PETsMART also remind me of Coke and Pepsi because these two large firms benefit with the
competition while other firms lose (grocery stores and other pet chains that have been acquired).
        PETCO does not remind me of Coors, because PETCO is constantly looking at trends.
PETCO moves with the times and focuses on what customers want both in the present and the
future. This is unlike Coors since the industry changed, trends changed yet Coors stayed the
Airborne Express
        PETCO offers products with low differentiation; the same products can be purchased at
any pet supply store. Airborne’s service also has low differentiation; no matter who you send the
package with it is still going to arrive at its destination.
        PETCO and Southwest are both have customer loyalty programs. PETCO has the PALS
club and Southwest has the Rapid Rewards programs. Both of these programs help the firms
obtain important information about the customers and also let the firms show their appreciation
to their customers.
Harley Davidson
        Both PETCO and Harley capitalize on hobbies. Yes, having a pet is a more affordable
hobby than having a bike but they both are the same concept. Pets and Bikes provide hours of

enjoyment, yet are a big responsibilities. They are both very different in their business strategies
since PETCO is low cost and Harley is focused differentiation.
       PETCO and Wal-Mart are very similar. They both carry a wide variety of products and
services all under one roof. They are able to keep prices low because the take advantage of their
increased bargaining power over suppliers. PETCO also reminds me of Wal-Mart because
       PETCO reminds me of Dell because they both used advanced IT systems to keep close
track of inventory. When PETCO was running low on supplies its POS system would send a
new order to one of the distribution centers. Dell’s process was similar to this but when supplies
were low the order would be automatically sent to the suppliers.
       PETCO reminds me of BIC because they both used the low cost business strategy.
PETCO does not remind me of BIC because it has remained will its core business pet supplies
rather than diversifying into unrelated areas like BIC (perfume, pantyhose).
Marks and Spencer
       PETCO reminds me of Marks and Spencer because it was also the first mover in its
business strategy. They both also offered their customers a high quality product.

                 Conclusion: Most Interesting Things that I learned
       Overall I learned many different things about both the pet supply industry and PETCO. I
had no idea that pets and supplies were such a lucrative business. I also was surprise to see how
many locations that PETCO has expanded to since I first worked there. I believe it has doubled
in size since I worked their in 1998.
       Other aspect of this paper I found interesting were the strategic groups, the industry is
highly fragmented and there are many competitors. I also thought it was interesting that some
shops were differentiators and other were low cost.
       The information technology and distribution centers were also very interesting. It is
amazing how they have so many functions and how this helps reduce cost. The PETCO PALS

program is also great how it is tied into the POS system and how it is able to collect a lot of
important customer information.
       The strategy of growth-by-acquisition worked well for PETCO and I found it amazing
how they were able to make this strategy profitable for them.
       Finally I thought that the it reminds me of were very interest and can apply to many firms
in many very different industries. At first I had a hard time relating the material but it just got
easier as I went.

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