The Motley Fool's Rich Smith had the chance recently to speak candidly with Philip Francis, CEO of Motley Fool Stock Advisor recommendation PetSmart (NASDAQ:PETM). Rival retailer Petco was taken private earlier this year, but competitors (as listed by Yahoo! Finance) Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) are still lurking. How does PetSmart plan to stay on top of its game? It all starts with the pet parents.
Rich Smith: When pet owners in major metropolitan areas think of pet stores, they think of PetSmart and Petco, perhaps interchangeably. What's the primary difference between the two?
Philip Francis: Anyone who visits the two stores will notice the differences quite readily. Perhaps the main difference is our services. We have a far superior services offering with our groomings, trainings, and PetSmart PetsHotels and Doggie Day Camps, which are under the same roof and management as our retail. Because our stores are larger, it affords us the ability to have much larger grooming facilities as well as dedicated pet training arenas.
RS: I'm sure PetSmart welcomes all ages and tax brackets of customers into its store, but have you identified any particular demographic that is disproportionately lucrative to the company?
PF: It's really more of a psychographic target. Our targeted customers are people who treat their pets like children, hence our practice of calling them "pet parents." They are typically women between their mid-20s and 50s. With the demographic shifts in the United States -- such as people waiting to get married, people having children later in life, more people remaining single, and Baby Boomers becoming empty nesters -- we have the wind at our back and a lot of opportunity for growth in our target customer base.
RS: What trends are you seeing within the retiree demographic of your customer base? For example, Sun City, just down the road from your home office (in Phoenix), has a large retiree population. How do the shopping patterns differ from overall patterns among PetSmart stores?
PF: We really can't point to a difference in shopping or spending patterns in a store located in a retirement area versus one in the mainstream. If anything, store associates in a retirement area may be more personally familiar with their customers since our senior customers tend to visit regularly, both in terms of trips and conversation.
RS: How about PetSmart stores located in places where the demographics lean toward lower income brackets -- the places where high gas prices, higher interest rates, and an economic downturn would be expected to hit first? Do you see anything there that might suggest that PetSmart is perhaps resistant to an economic downturn, or is consumer demand pretty elastic?
PF: We've found that our business in general tends to be rather resistant and resilient to macro economic forces, and we can thank our strong services offering for much of that. If a pet parent is feeding her pet an advanced nutrition food, which she can't get at the grocer or most mass retailers, she's going to keep coming back to PetSmart to get that food. Premium foods and services are "sticky" and lead to repeat visits.
RS: PetSmart doesn't seem to advertise as heavily as Petco. Can you comment on what, if any, problems you've been facing in the marketing sphere?
PF: We take a very strategic approach to how we advertise, using a combination of TV and radio, circulars, and direct mail. We choose the mix based on the audience we are targeting, so while perhaps there may be a disproportionate amount of TV advertising between us and our competitor in a given market, it doesn't mean we're not reaching our audience in some other way or that we're being less effective. We focus on quality and effectiveness, not quantity. Our Pet Perks customers especially benefit from this approach since we target them with offers and information specific to their needs, making the most of our advertising dollars.
Our tracking studies, as well as studies from third parties, show that we have much greater awareness than our closest competitor and that our brand equity is also stronger. In fact, we have leadership awareness in our category. Our marketing programs are consumer tested and our media investments are made based on each medium's ROI as measured using test and control econometrics. Based on the results, we have a high degree of confidence that our marketing/media program is a competitive advantage.
RS: You have more than 850 PetSmart stores in operation. According to your 10-K, you believe "there is a potential for at least 1,400 PetSmart stores in North America." Is there an implied "all other things remaining equal" in such statements?
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Fool contributor Rich Smith does not own shares of any company mentioned. Wal-Mart is an Inside Value recommendation. Fool rules are here.
