It always amazes me when companies decide the way to increase profits is to cut costs. Like that’s a long-term strategy.
Instead, it’s really a way for company executives to make the next quarter’s reports look better and to appease shareholders. “Look,” the investors say. “The CEO is thinking about us and our dividends.”
That’s what PetSmart has been doing, cutting $200 million out of its budget in an attempt to fight off stale sales.
But there is a bit of sunshine rising over the horizon. PetSmart is about to be bought by private equity firm BC Partners, which will make the company private – therefore, not so beholden to shareholders.
This way, the company and BC Partners can think long term, although we’ll have to see if they follow the right path. You see, the reason why it amazes me that companies think cutting costs is the only way to be relevant again is that it eventually leads to its demise. (Think Circuit City.) You just keep cutting and cutting until there’s nothing left.
What PetSmart should be doing is investing in regaining its preference. In announcing the purchase, BC Partners said, “PetSmart is an iconic brand and the category leader in the growing pet retail industry.”
It’s not so iconic anymore. Sales are flat, there is greater competition (especially from the local shops) and online has eaten into its market share. PetSmart might be the market leader, but its preference among pet owners is shrinking.
BC Partners stated it does foresee a strategic overhaul and it does note that the US pet industry is booming – so it sees the opportunity.
But simply cutting costs will not seize the opportunity. There is a brand problem at PetSmart, which has been overlooked due to its market leadership. In fact, it’s when you are doing well when you should be vigilant in ensuring your brand does what it is supposed to do: Create preference.