THEORY IN PRACTICE FINAL:
PETCO Animal Supplies

By:

Angela Tiersma

Bus 444
Professor Meilich

INTRODUCTION 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 clinics. 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. (www.hoovers.com and www.petco.com)

CHAPTER 1: THE STRATEGIC MANAGEMENT PROCESS

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.

Strategy 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.

CHAPTER 2: EXTERNAL ANALYSIS: THE IDENTIFICATION OF INDUSTRY OPPORTUNITIES AND THREATS

Macro Environment
Economic
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” (Desjardins1).

Technological 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.
Demographic
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.
Social
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 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 items.
On-line Retailers On-line retailers include sites such as PetMarket.com, HighTechPet.com, PetCareCentral.com 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.

CHAPTER 3: INTERNAL ANALYSIS: DISTINCIVE COMPETENCIES
COMPETITIVE ADVANTAGE AND PROFITABILITY

Efficiency 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. (www.yahoo.investor.reuters.com)
Quality
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.
Innovation
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.

CHAPTER 5: BUILDING COMPETITIVE ADVANTAGE THROUGH
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 systems. 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.

CHAPTER 6: COMPETITIVE STATEGY AND THE INDUSTRY ENVIRONMENT
Fragmented
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.
Chaining
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.

CHAPTER 7: STRATEGY IN HIGH-TECHNOLOGY INDUSTRIES
Technology
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. (www.integratedsolutionsmag.com) 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. (www.integratedsolutionsmag.com) 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. (www.integratedsolutionsmag.com)

CHAPTER 10: CORPORATE STRATEGY: DIVERSIFICATION, ACQUISITIONS, AND INTERNAL NEW VENTURES
Acquisitions
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. (www.petco.com) 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 Petopia.com buying in 20 % which helped PETCO expand it scope from being a brick-and-mortar retailer.
(www.integratedsolutions.com) In this joint venture PETCO agreed not to start its own online store, but to direct online customers to Petopia.com. In exchange Petopia.com 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. Petopia.com found itself in highly competitive business, and decided to call it quits in December 2001. PETCO took advantage of Petopia.com’s exit and acquired it assets. Now PETCO sells product online as well as in stores. Customers who frequented Petopia.com are now redirected to Petco.com. What was once a joint venture for PETCO turned into another competency that was added to PETCO’s portfolio.

CHAPTER 9: CORPORATE STRATEGY: HORIZONTAL
INTEGRATION, VERTICAL INTEGRATION, AND STRATEGIC OUTSOURCING
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)
Outsourcing
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.

CHAPTER 8: STRATEGY IN THE GLOBAL ENVIRONMENT 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.

CHAPTER 12: IMPLEMENTING STRATEGY IN COMPANIES THAT 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…
Timex
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.

Honda 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).
Coors
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 same.
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.
Southwest
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.
Wal-Mart
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
Dell
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.
BIC
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.

Works Cited

Banerjee, Neela. “Marketscan: Pet superstores collar customers from supermarkets, small shops.” The Wall Street Journal 18 Nov. 1993: 3pgs. ProQuest CSUSM library 12 Apr. 2004

Basas, Susan M. “PETCO ANIMAL SUPPLIES INC. San Diego, California; Pet Supplies Retail Marks Its Territory In A Dog-Eat-Dog World.” 5 Dec. 2002: pgs 4. LexisNexis. CSUSM library 9 Mar. 2004

Bernstein, Ralph. “Petco MORPHS” 30 Apr. 2004

“Best-Of-Breed: PETCO Enterprise.” Integrated Solutions. 9 March 2004

Desjardins, Doug. “Petco Hits A Home Run With Strong Sales And Newly Acquired Rights To Ballpark Name.” 7 Apr. 2003: 1pg. 20 Feb. 2004

Hoovers online. 20 Feb. 2004