PETsMART Tries for a New Leash on Life


On CEO Philip L. Francis' first day on the job in 1998, PETsMART faced a crisis: Rocky the hamster was missing. But the next morning, Francis found Rocky -- a member of PETsMART's product-selection team -- waiting outside his office door. He scooped up the rodent and returned him to his cage. "I came back to my office and found an e-mail to the staff that said: 'Phil saved Rocky!'" Francis recalls.

Saving the 14-year-old company would seem more problematic. For years, Phoenix-based PETsMART Inc. (PETM) stayed atop the pet-supply food chain by offering the biggest selection of kibble at low prices. Not anymore.

Last year, PETsMART's warehouse-style stores suffered a huge blow when Procter & Gamble purchased premium pet-food brand Iams and began selling the line in grocery stores and other mass outlets instead of only in pet stores. With Iams products no longer drawing shoppers, the company last year lost an estimated $50 million in sales. "Then there was the [doggie] bone that wasn't bought because the customer wasn't there buying food," says Francis.

SICK PUPPY. That wasn't the only problem dogging PETsMART. During a rocky changeover to new inventory-and-distribution software, some stores found themselves short of hot items. That's one reason why the company says same-store sales at its 500 outlets probably grew by only 2% in 2000, vs. 4.6% in 1999. Meanwhile, PETsMART.com spent millions to keep pace with Pets.com before its online rival flamed out in November. PETsMART lost $30 million on its Web site last year (see accompanying story, "A Smarter Pets.com?").

All told, PETsMART expects to report a loss of $2 million on $2.2 billion in sales for 2000, compared with a $9 million profit -- excluding the sale of its money-losing British division -- on $2.1 billion in sales in 1999. And the company's stock, which once traded for as much as $26 in 1996, has sunk to about $3.50 a share.

Now the heat is on Francis to make good on his turnaround strategy: focusing on the service side of the business. A program called Customer Service Unleashed will see employees greeting customers and answering their pet-care questions. And a remodeling program will make grooming and veterinary centers more visible, as well as showcasing animal-training classes now tucked away in corners of the stores. "We used to treat services as a Third World country," Robert F. Moran, president of PETsMART's North American stores. "Now it's more about service than product."

A new marketing campaign is pitching PETsMART as the place to go for complete litter-to-grave care of four-legged family members. This shift will be vital to boosting the bottom line because operating margins for pet-care services average 18%, says Moran, while PETsMART's current operating margin is about 3%. Only 10% of its revenue now comes from services. The new emphasis might also help PETsMART fend off small but rapidly growing rival, Petco, which has maintained much more of a folksy, service-based image in its stores.

NEW TRICKS. Persuading customers to take their dogs to PETsMART for flea dips and obedience classes presents challenges. Despite the warm and fuzzy nature of the pet business, PETsMART built its reputation on selection, not service.

"PETsMART has been out there so long as a low-price purveyor of commodity products that trying to change a whole set of consumer beliefs will be difficult," warns Don Stewart, a marketing and sales consultant with Cannondale Associates. Indeed, when the company first tested the Customer Service Unleashed program in Atlanta, one customer was so stunned that he walked back out and looked at the sign to make sure he was in the right place. "He told us he had never been greeted at PETsMART before," recalls Moran.

The company's impersonal image was magnified by an old-fashioned distribution system. Infrequent deliveries to stores required that excess product be stacked on towering and unsightly steel shelves. Workers spent so much time moving bags of food to the sales floor that they didn't have time for much else.

CUR-TAILED EXPANSION. By mid-2001, the company will have increased the number of distribution centers from two to seven while switching all of its stores to a new system of twice-weekly deliveries. That will allow goods to be replenished as needed and see them delivered directly to the sales floor. "It's less labor-intensive, and it offers the opportunity to do more with customers," says Gene Beaupre, manager of the PETsMART store in Pasadena, Tex.

Meanwhile, plans to double PETsMART to 1,000 stores over the next several years have slowed to a crawl -- just 35 new stores will open this year -- so the company can focus on boosting service in existing stores, which it expects will boost store traffic. It also hopes to erase dot-com losses by cutting costs and marketing the Web site along with the stores. David M. Mann, an analyst for New Orleans-based brokerage Johnson Rice & Co., says PETsMART could earn $38.5 million in 2001. "But only if we see improved execution at the store level," he adds.

Says Francis: "It's time to take care of our customers." If he succeeds, the man who rescued Rocky could become PETsMART's savior as well. By Arlene Weintraub in Phoenix


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