Remedy for sale: PetMed Express capitalizes on owners' love of pets with a new way to buy prescription medications for animals

South Florida CEO, August, 2005 by Yeleny Suarez

It's no secret that people lavish care on their pets, to the tune of $34.4 billion nationwide last year. Some of that lucre is making its way to Pompano Beach-based PetMed Express Inc.

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The mail-order retailer of pet supplies saw its profits increase by nearly 40 percent for 2004. Now the company, which gets the bulk of its revenues from selling prescription medications to its 1.4 million customers, hopes to capitalize on Americans' love affair with their pets by offering private-label health supplements.

PetMed, which does business as 1-800-PetMeds, is licensed to dispense animal pharmaceuticals, such as heartworm prevention pills, to pet owners that mail in prescriptions from their veterinarians. It is a niche that PetMed CEO Mendo Akdag has honed in on since he took the job in 2001.

"Pet medication is a $3 billion industry, pet supply is a about $8.1 billion," Akdag says. "We are estimating about $3 billion in revenues in the next five to 10 years."

Direct sales of prescription items are a line of business Akdag knows well: Before joining PetMed, he was CEO of Lens Express Inc., which fills contact lens prescriptions by mail.

The strategy, so far, for the company has been focused on gaining new customers through advertising, with national campaigns on broadcast and cable television, he says. The company launched a toll-free sales number, and its Web site, where customers can buy non-prescription medications, vitamins and other health supplements, grooming supplies and basic pet supplies such as leashes and beds, got three makeovers. Online sales account for 53 percent of PetMed's business, up from 10 percent in 2001.

Akdag says he also narrowed inventory from around 2,000 different items to 500 that were already getting the bulk of sales. Those moves have paid off, he says. Total sales for the year ended March 31 hit $108.4 million at the publicly traded company, up 15 percent from the year before. Industry wide, sales were up just 6 percent from 2003 to 2004, according to the American Pet Products Manufacturers Association (APPMA). PetMed's net income for that period was $8 million. The upward earnings trend continued in the quarter ended June 30, with sales for that quarter up 24 percent over the year before, to $43.6 million, and net income nearly doubling, to $3.5 million.

The picture wasn't always rosy for PetMed. In 2002 the Florida Department of Health's Board of Pharmacy said the company violated state statutes when it hired veterinarians to write prescriptions for animals the practitioners never examined. PetMed was put on a three-year probation, which was lifted in April 2001 after the company voluntarily ceased its "alternative veterinarian program," according to state records.

The company also defended itself against six consolidated class action lawsuits, including an October 2004 suit that claimed PetMed financial results were not sustainable and that its stock was trading at artificially high prices. Akdag says as of February "all class action lawsuits have been voluntarily dismissed. There is no class action suit pending."

Moving forward, PetMed now tows a low-price strategy meant to draw customers in and foster repeat business. Akdag claims consumers save "10 percent to 15 percent from the veterinarians' prices" because the company's large sale volume and low overhead allow it to sell veterinary medications for less than a typical veterinarian can sell them.

While it is difficult to gauge the impact online sales of pet pharmaceuticals are having on veterinarian offices, some local practitioners are feeling the pressure. Veterinarians have seen a 17 percent drop in medication sales, according to James D. Dee, a veterinarian at Hollywood Animal Hospital, in Hollywood. He blames PetMed specifically for the falloff. Dee says veterinarians are responding to the threat: "A lot of practices have reviewed pricing structures for designer drugs such as [flea repellents] Advantage and Front-line to provide a more competitive prices."

PetMed plans to continue to focus on its bread and butter medication refills while hoping to boost sales of other health-related products. The company is adding an average of one new product a week, Akdag says. He has also hired a veterinarian to beef up the pet health education section of its Web site. During the next six months, Akdag expects the company to launch new supplement products, which he hopes will appeal to consumers who see their pets as family members and will go to great expense to care for them.

The number of those pet owners is growing, according to the APPMA: As of 2005, 63 percent of US households own pets, up from 56 percent in 1998.

"We plan to capitalize on this growth trend by offering new private label high-end products with a focus on quality nutrition," Akdag says.

To differentiate PetMed from other pet supply retailers, Akdag hopes to ride the same wave as companies like grocer Whole Foods Market. "The more natural, the better--no preservatives; no sugars. Those are the things we are focusing on," he says.