Pet consolidation in offing: PETsMART buys Petzazz; enters Chicago, Portland, Ore - pet supply superstores

Discount Store News, March 21, 1994

PETsMART Buys Petzazz; Enters Chicago, Portland, Ore.

PHOENIX -- The inevitable consolidation of a new retail concept, in this case the pet superstore, has begun in a big way with the acquisition of Petzazz, Columubs, Ohio, by PETs-MART, Phoenix.

In a stock swap valued at $81.3 million in PETsMART stock, the pet superstore pioneer is acquiring the Petzazz superstore chain. The 30 acquired stores operate in five states: Ohio, Indiania, Chicago, Ill., Pittsburgh, and Erie, Penn., and Florence, Ky. The acquisition will give PETsMART instant access to a new market thta it is just entering, Chicago. Portland, Ore., will be another new PETsMART market in '94 with three stores.

PETsMART is set to open 10 stores in Chicago from May through October. The acquisition thus gives PETs-MART a head start in Chicago and eliminates one competitor. Pet Care Plus, Aurora, Ill., with 55 stores, also operates in Chicago. By mid-summer, PETsMART expects to convert the Petzazz units to its name and operating format.

Excluding the acquisition, PETsMART operates 110 stores. California has the most, 27; followed by Texas, 21; Arizona, 12; Florida, eight; and Colorado, also eight. It also opera[es in Georgia, Idaho, Maryland, Missouri, Nebraska, Nevada, New Mexico, North Carolina, Oklahoma, Oregon, South Carolina, Utah, Virginia and Washington.

PETsMART is a real estate-driven company, a spokeswoman said, so it will expand to wherever the best real estate deals happen to open up.

As part of the Petzazz acquisition, the chain also acquired another distribution center in Columbus, Ohio.

In a previous acquisition last summer, PETsMART bought out its Phoenix competitor, the five-store Pet Food & Supply superstore chain, and folded the chain, keeping just one store.

The Petzazz acquisition was a good deal for both chains, said Ray Guyer, president and chief operating officer of Pet Care Superstores, Aurora, Ill. Petzazz got a good price for its stores, he explained, and PETsMART eliminated what would have been a direct competitor in the Chicago market it is entering.

Most of the pet superstores have operated in mutually exclusive regions of the country, but that is changing as chains expand. In exceptions, PETsMart operates units in Atlanta and Baltimore, where Petstuff, an Atlanta-based, '92 startup superstore chain, operates. And PETCO, San Diego, has opened at least one store in the District of Columbia, as well as the states of Maryland, Virginia and Pennsylvania, where PETsMART will operate thanks to its Petzazz acquisition.

"Consolidation is just beginning," Guyer said. Most smaller chains will be acquired, he predicted, as the larger chains carve out new operating territories.

Pet Care Plus will either be acquired or acquire another chain, Guyer added.

Jack Maxwell, pet food analyst for Wheat First Securities, agreed that a consolidation in pet superstores is due over the next couple of years. Some small private chains already have been chomping at each other, a few stores at a time, he said. Especially where a large chain enters a smaller chain's market, the smaller chain either will go undre or be bought out, Maxwell said.

But it's difficult to say how much consolidation already has gone on since most chains are private, Maxwell added, so no stock analyst follows the industry. Maxwell knows of no failures of superstore chains.

Analyst coverage is certain to get a toehold, now that there of the largest superstore chians (PETs-MART, Petstuff, and soon, PETCO) either have gone public or will shortly. A small Minneapolis-area chain, Pet Food Warehouse, an eight-store chain soon to add three more units, also is public and has filed to raise $25 million more expansion capital through a secondary offering. Pet superstores fall into two size and format categories, retail and warehouse. But they all carry about the same number of skus, ranging from 6,500-sq.-ft. stores to 7,500 skus in PETsMART stores of 25,000 sq. ft. The units combine wharehouse presentation in the rear for pet foods with retail fixturing in the front for accessories, birds and fish.

PETsMART reported an 83% gain in pretax income for 1993 on a 76% sales gain. Pretax profits increased to $7.2 million for the year ended Jan. 30, 1991, from $3.9 million the previous year.

Revenues jumped to $330.8 million from $187.9 million. Comp store sales gained 19.8% for the year.

For the fourth quarter alone, sales rose to $106.4 million, from $62.9 million, while pretax profits increased to $2.2 million from $1.4 million. Comp store sales rose 25% during the final quarter.

Including $50 million in revenues from the Petzazz stores, PETsMART projects total revenues of $580 million in '94.