Petco reported accelerated growth for its paid membership plan Vital Care, signaling that it is locking in more high-value shoppers.
Vital Care now has more than 400,000 active members, growing 42% quarter-over-quarter and 200% year-over-year, according to its third quarter earnings report. Members of the Vital Care program have a 3.5 times higher lifetime value than regular shoppers. This quarter, the retailer saw its comp sales grow 4.1% year-over-year and net revenue rise 4% year-over-year to $1.5 billion.
At $19.99 per month, the Vital Care program offers discounts on nutrition, cat litter and dog grooming services, among other benefits. As Petco’s program grows, so does its recurring revenue, which executives said the company is leaning more towards. Its recurring revenue makes the company more stable and less vulnerable to changes in consumer shopping behaviors. Generating revenue through subscription and veterinary services has been a growing trend among pet retailers in order to maintain growth.
Although hyperinflationary periods hold consumers back from making purchases, Ron Coughlin, CEO of Petco, said that the company’s “programs are helping us maintain stability in our traffic trends.”
The Vital Care program was launched in 2020 and was centered around supporting the health and wellness of pets. In March, the company updated its membership plan to include more perks like 20% off all litter for cats and 10% off all nutrition. A few months later in August, Petco expanded its Vital Care program to include small pets like hamsters, birds and fish.
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Weekly signups for the program accelerated to over 50%, which is driven by the addition of companion animals and upgrades to in-store registration at point of sale.
Vital Care was also one of the major drivers of recurring revenue along with insurance. Petco’s recurring revenue climbed 56% year-over-year. Executives said its sales and customer growth were fueled by these high-value customers returning to the store to shop.
“If you can count on people coming in, it makes it easier to predict and makes it easier to plan your business. A lot of times these reoccurring businesses tend to be higher margin in a lot of cases too,” said R.J. Hottovy, head of analytical research at Placer.ai. “The goal is to get more stable revenue and potentially higher margin revenue.”
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Hottovy said that Vital Care members offer plenty of growth opportunities for Petco. Once these shoppers become members, it becomes easier to market to them and send promotions their way, he said. During the call, executives said that its marketing strategy had been a key contributor of the program’s rapid growth.
Loyalty is a crucial growth lever for many pet retailers, especially during this economic period. Bark, for example, previously told Modern Retail that it sent out an email to customers to let them know they won’t be raising prices as long as they maintain their subscriptions. Meanwhile, companies like Wild One go as far as writing handwritten notes to engage with shoppers.
Although pet retailers tend to fare better than other specialty retailers during periods of high inflation, Petco isn’t entirely insulated from economic headwinds. The retailer’s gross margin of 39.8% was down 139 basis points year-over-year. The gross margin decline was primarily due to supply chain pressures and freight costs.
Additionally, the high cost of goods and services has impacted consumers’ spending power, causing them to primarily buy consumable products over in discretionary items, said Seth Basham, managing director of equity research at Wedbush Securities. This quarter, for example, Petco’s consumable merchandise rose 12% year-over-year.
Still, Petco is reporting results that are “better than most discretionary-oriented retailers and it’s primarily because of that consumables business,” said Basham. “That’s been much more stayed demand-wise and also has benefited from inflation.”
Executives on the call said that the company plans to continue driving recurring revenue programs like Vital Care and insurance. In fact, Petco and a pet insurer called Nationwide introduced their plan in October to form a multi-year partnership to offer affordable pet health and wellness solutions.