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PetSmart & Chewy: A private equity turnaround story

What does it look like when private equity actually gets it right in retail?

Well, last week we looked at the decline and fall of Toys R Us, which is very much the story of PE getting things publicly wrong. And Toys R Us wasn't alone – there's a long list of retailers taken over by PE firms and then flailing.

This week, we have the opposite story: how a PE firm took over PetSmart and  made an incredibly bold decision to acquire the online upstart that was luring its customers away.

To understand what exactly happened, we talked to the Wall Street Journal's Miriam Gottfried, who covers private equity and know this story inside and out.

A huge part of understanding how things turned out well for BC Partners, the PE firm that bought PetSmart in 2014 and in 2017, is getting to the core of what made Chewy a valuable business, one that was able to hold off Amazon as an online retailer.

Miriam explained that Chewy's core pitch to investors in its early days was its repeat business. Customers just loved buying from the company – and it wasn't an accident. Founder Ryan Cohen (yes, the guy later famous for his central role in the meme stocks phenomenon) made customer service a central focus of the company, allowing customer service agents to spend as much time as necessary on the phone with customers, sometimes talking for hours at a time to a single caller.

A digital upstart fending off Amazon isn't the only reason why PetSmart-Chewy is a very unusual deal – the head of BC Partners also got directly involved in righting PetSmart's operations as the stores's sales were sagging. And he was able to actually do it, in large part because acquiring Chewy gave him the respite he needed to turn things around.

Physical retail stores, it turns out, can thrive under private equity ownership, if they have a successful online business to serve as a temporary life raft.  

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