Get ready for Woolies Pet

By the time Woolworths announced its surprise acquisition of the Absolute Pets chain at the end of October, rival Shoprite Group had already opened nearly 60 standalone specialist Petshop Science stores across the country.

It would’ve been eyeing this adjacent sector for some time (Shoprite opened its first stores in 2021), and the outright acquisition of 150 stores offered instant scale in a market it needed to be in.

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Read: Shoprite taps specialist clothing, pet market

Retailers moving into adjacent markets is not a new phenomenon. Not only do these offer outright potential for growth, they also allow retailers to capture additional spend from their existing pool of customers. In Woolies’s case, they are very loyal!

Of course, it helps that these ‘adjacencies’ generally mean higher margins (high single digits, often double digits) than pure grocery retail (low single digits). Why else does Shoprite operate 700 LiquorShops in SA?

Listen/read: Consumers bought more liquor than ambient food in Q3

To date, Woolies has had some success with its WCellar liquor stores, and its push into this space is accelerating. Its clothing business has made a similar but more aggressive push with its beauty proposition. This gap presented itself in the market following Edcon’s collapse into business rescue. While Edgars and Edgars Beauty stores are seemingly trading well under new owner Retailability, it is a far smaller competitor than it was a decade ago.

Woolworths has also been pushing its homeware proposition into larger Food stores in a ‘concession’ type space (as is the case at Kyalami Corner) or as a standalone but adjoining store (in Lonehill, Johannesburg).

No-brainer

Pets is a no-brainer, and not just because the sector is worth over R7 billion annually.

Woolies Food customers are statistically more likely to own pets – and to spend lots of money on them – than shoppers at other supermarkets. Its Food unit is a R43 billion turnover business, while Fashion, beauty and home is another R15 billion.

Can an expanded ‘pets’ category boosted by Absolute Pets add R1 billion to turnover a year? More than likely.

In certain of its Food stores (like Lonehill), pet food, toys, clothing, and accessories have commanded an increasing amount of space. Now, this spans an entire aisle.

A typical pet offering in an existing Woolies store. Image: Supplied

It has even introduced a limited range of premium pet accessories at its 30-odd Country Road outlets in the country.

The next phase under CEO Roy Bagattini is firmly focused on growth (after two years of fixing the underlying businesses). In its food unit, this will include “new adjacencies”, including liquor, pet and food services.

Higher margins will boost Woolies Food’s already strong trading margin (earnings before interest and tax of 7%, adjusting for the impact of load shedding), trading densities, and its return on capital employed.

Obvious efficiencies

There are obvious efficiencies, too. The majority of Absolute Pets stores are in shopping centres/neighbourhood malls that already have a Woolworths Food.

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Expect Woolies to negotiate harder with landlords and drive down the cost of occupancy (Absolute Pets stores are currently likely paying higher rents per square metre than they ought to be). Expect the stores to be relocated near Woolies as these opportunities present themselves. There is some evidence that this has already started. And those centres without Absolute Pets stores will soon have them.

Read: No, Woolies isn’t going to stop accepting cash

Most of the tangible opportunity is on combining sourcing. Certain items from the Woolies pet food and treats range will surely appear in Absolute Pets stores sooner rather than later. Specialist foods (think Hills, Royal Canin, Acana and so on) will still need to be stocked only at Absolute Pets as regulations prevent these from being sold in supermarkets. Toys and accessories can be sourced together and merchandised in either Woolies Food stores or Absolute Pets ones.

Could it follow the concession-style approach with homeware in certain of its larger stores and introduce larger areas focused on pet-related products, especially in centres where there might already be a competing pet store and no Absolute Pets? Almost certainly.

Implementing its point of sale and stock system (Oracle) is also surely on the cards for Woolies. This will give it a single view of stock and ensure it can implement its operating model at these stores (opening times, merchandising, staffing).

It will also be able to extend its e-commerce platform into the pet space – Woolies Dash could replace the Absolute Pets ‘Go Fetch!’ delivery service and remove an entire layer of duplication.

Crucially, this will enable it to have a single view of its customers. It is no use if Woolies tracks some spend via the WRewards card and others via Absolute Pets’ rewards programme. With a single view, it will be able to better target promotions to its millions of profiled customers.

Standalone brand? Maybe not …

In the announcement of the deal, Woolworths was at pains to point out that the Absolute Pets CEO, Stephen Warner, “and the current management team, will continue to operate and lead the business under the Absolute Pets brand, with the benefit and support that partnering with the Woolworths Group provides”.

Realistically, though, Woolworths is a far stronger brand than Absolute Pets will ever be. And there’s an earn-out period for management, during which Woolworths will acquire the remaining 6.55% of the business.

It makes very little sense to operate Absolute Pets as a completely standalone business forever more.

It is by integrating the two units that Woolworths will be able to extract the most efficiencies and, therefore, value. Margins will get a boost. So why would Woolies combine almost everything but continue operating Absolute Pets as a separate brand?

Its WCellar business provides the template. Get ready for WPet, complete with remodelled, premium interiors and merchandising. It’ll be in your neighbourhood shopping centre sooner than you think …