We have curated our product availability toward premium brands and offerings that customers can’t find elsewhere. We’ve leveraged our owned and exclusive merchandise portfolio and partnerships with premium third-party brands to deliver high-quality nutrition without artificial ingredients2, complemented by a wide variety of premium pet care supplies. While 92% of pet parents say they want the most nutritious option for their pets, only 46% of pet parents feel confident that they know what that is. That’s where our unique assortment and well-trained and highly passionate partners make a huge difference.
Further, we believe that our owned and exclusive merchandise deepens our competitive moat and will power continued growth. Owned brands drove double-digit growth in 2020 with almost 30% penetration, further fortifying our differentiation. Together, our owned brands and brands exclusive to Petco in specific markets represent roughly half of our portfolio, not only enhancing our gross margin but also driving competitive insulation.
Our ability to leverage our national footprint of 1,454 Pet Care Centers across the U.S. as micro-distribution centers staffed by passionate and knowledgeable partners gives us a powerful competitive advantage. In the last year we have tripled our ship-from-store locations covering most major markets across the U.S., and almost every Petco today has buy online, pick up in store, curbside pickup and same-day delivery capabilities. All of these methodologies are faster to the customer and lower cost than the distribution shipping method used predominantly by online-only competitors. This structural advantage has powered the digital share gains we’ve captured this year.
Over the past two years, we’ve invested in the talent and infrastructure to create a world-class digital experience for our customers.
Our website, petco.com, and personalized mobile app serve as hubs for pet parents to manage their pets’ health, wellness and merchandise needs while enabling them to shop wherever, whenever and however they want. Also, by the end of fourth quarter 2020, our mobile app had been downloaded over 3 million times and is driving both merchandise sales and incremental services bookings at our Pet Care Centers.
The re-engineering we executed on our digital platforms generated 30%+ growth prior to the pandemic. At the onset of the pandemic, we launched curbside pickup and expanded ship-from-store in just a matter of weeks. And over the holiday period, we launched same-day delivery, an offering that our digital pure-play competitors just cannot provide. By leveraging our extensive physical network of approximately 1,454 Pet Care Centers located within 3 miles of 53% of our customers, we have a meaningful last-mile advantage over the competition.
We believe these developments further enhance customer retention with almost 40% of early adopters saying they prefer same-day delivery. In 2020, about 83% of our petco.com orders were fulfilled from our Pet Care Centers, enabling us to get orders to customers faster and at a lower average cost than pure-play online competitors.
Our services business is built on the foundation of treating the whole pet, including their physical, mental and social well-being. At Petco, we are building a holistic offering, including veterinary care, grooming, training, insurance and more.
We are committed to delivering quality, affordable, compassionate and comprehensive veterinary care that addresses all of a pet’s health & wellness needs.
Our vet hospital business is shifting into high gear as we opened 20 additional hospitals in fourth quarter 2020, bringing our year-end total to 125 locations. The key driver of our vet build-out is our ability to attract and hire vets. Our time-to-fill and retention rates are above industry benchmarks and further improving. Long term, we are targeting up to 900 vet care hospitals in our Pet Care Centers and believe our continued aggressive growth plans will have a tangible, annual and long-term impact on our financials.
In addition, our mobile vaccination clinic business, Vetco, services over 800 Pet Care Centers weekly and experienced strong demand in 2020. The roughly 1,500 vets who participate provide a unique feeder system for our hospital recruiting.
Despite pandemic-related headwinds on grooming and training, I am proud of our team’s relentless commitment to improving the lives of pets and pet parents, which enabled us to achieve services revenue growth in 2020 and return to double-digit growth in the fourth quarter. These businesses have a very favorable overlap dynamic in 2021.
This past year was a defining one for Petco and the pets and pet parents we serve. The pandemic, civil unrest and economic recession presented unprecedented challenges and uncertainty across the globe. It redefined how we live, how we work, how we educate our children, how we shop and how we interact with each other, including our pets.
The importance of pets in our lives and the number of pets in homes has never been more significant. Pets have been critical to the emotional well-being of our nation. They remain loyally and lovingly by our side, raise our spirits when they are low, and provide a source of comfort, companionship and entertainment.
Petco has become a truly unique company, one that is saving and improving millions of pet lives and tangibly improving the lives of the partners who work at Petco, while at the same time executing our differentiated strategy with excellence. This is what we call Purpose-Driven Performance. And our focus on Purpose-Driven Performance has now resulted in nine quarters of consecutive revenue growth.
Our focus on Purpose-Driven Performance has now resulted in nine quarters of consecutive revenue growth.
Over the last three years, our world-class leadership team and our dedicated and passionate partners have transformed the business from a successful yet traditional retailer to a disruptive, fully integrated, digital-focused provider of premium nutrition, products, services and veterinary care.
And over the last year, our team has acted with speed and agility amid unprecedented conditions in order to continue serving pet parents with a focus on health and safety. Through our transformation to become the health and wellness company over the last three years, we were positioned to execute and deliver strong results through the pandemic. For example, we leveraged our innovative capabilities and transformed infrastructure to launch new, socially distanced offerings like curbside pickup, same-day delivery and online training. These were game changers in the way that we engaged with and served pet parents and are strategic differentiators to drive growth going forward.
Our transformation is built on the premise that what is best for pets is best for Petco.
Our transformation was built on the premise that we needed to meet our customers when, where and how they want to shop. Our health & wellness ecosystem–physical Pet Care Centers providing shopping and micro-distribution center capabilities combined with sticky services like veterinary care, grooming and training, coupled with a robust, state-of-the-art digital offering–continues to set Petco apart from the competition and is driving meaningful results across all aspects of our business. And, catalyzed by our successful IPO earlier this year…we’re just getting started.
Our Petco partners are our most significant asset, critical to the delivery of our transformation and our continued progress against our strategic initiatives. A key tenet of our transformation was turning the organization on its head with our partners who interact with customers at the top and my management team and me at the bottom. Our job is supporting them to create better experiences and to take better care of customers.
We’ve built an open culture where great people have the opportunity to be great. We empower our partners to deliver on our mission of improving lives to guide our customer offering, serve our customers and grow as an organization. We encourage candid feedback, dissenting opinions, innovative thinking and, most importantly, people who have a real passion for pets.
We have improved benefits this year, raised our average wage rate by double digits, provided five COVID-related bonuses and launched incentives for partners to get fully vaccinated. Petco also established a Petco Partner Assistance Fund with $3 million in seed funding that has already provided support to over 1,300 partners and their families who have experienced pandemic-related and other hardships.
Importantly, partner and customer health and safety continue to be our top priority. The protocols we’ve deployed—including reducing capacity in our Pet Care Centers and salons, deploying sanitization resources and PPE and establishing strict guidelines for social distancing—resulted in Petco partner COVID infection rates that are around one-third of the national average.
As our country confronted long-simmering issues of racism and racial inequity, we unequivocally condemned racism and inequality in all forms. Petco committed to improve and ensure racial equity, diversity, inclusion and belonging in our workplace and communities. Through enhanced diversity tracking, training, empowering our Partner Resource Groups and expanding our vendor diversity footprint, diversity, inclusion and belonging will remain key priorites for Petco in 2021 and beyond.
Our unique model is supported by a phenomenal category that is large and growing. In 2020, the pet category proved once again how resilient it is to economic cycles and macro trends. As a result, industry projections forecast accelerated growth for years to come, due in large part to the seismic 3 million-plus incremental new pet households in 2020 and heightened adoption activity, both of which are continuing into 2021. While the pet category accelerated during COVID, what makes our industry so unique is that once a cute puppy or kitten joins your family, they will need to be fed, groomed and vaccinated for a decade or more, translating into a significant long-term annuity for years to come.
We’ve learned a great deal about the strength and importance of the human-animal bond as society has increasingly embraced pets as members of the family. Thanks to the pet humanization trend, spend per pet has increased 4% annually since 2015 with increasing pet ownership among millennials, who have 29% higher average spend.
This combination of more pets and greater spend per pet resulted in industry experts raising their forecasts in 2020 from historical levels to as high as 7% through at least 2024, with higher growth projections in key growth areas where Petco has strength, like premium food, services, vet and digital.
The differentiated ecosystem we’ve built over the past three years is generating results and attracting new customers, most of whom over-index on taking the best care of their pets and are the industry’s highest-spending pet parents. With over 20 million active customers—which grew by nearly 1 million customers in each of the third and fourth quarters of 2020—we believe our end-to-end ecosystem presents a unique value proposition with sticky customer relationships.
A key to unlocking Petco’s ecosystem was the radical transformation of our digital platform, which drove over 100% digital revenue growth in 2020.
We have developed structural advantages for customer fulfillment, whereby our Pet Care Centers now double as micro-distribution centers, turning our national footprint of physical locations into a significant competitive asset.Our Health & Wellness Ecosystem
We are also building full-service veterinary hospitals across the country to address the growing need for high-quality, affordable pet health care. By integrating these veterinary hospitals into existing Pet Care Centers, we benefit from significant structural advantages compared to stand-alone veterinary care providers, including lower cost of acquisition and increased basket opportunities. This model enhances customer lifetime value and drives retention across our business.
Petco’s multichannel platform integrates our strong digital assets with our nationwide physical network to provide a comprehensive offering of differentiated products and services to meet the needs of the 50% of pet parents who are looking for a single source for all their pet’s needs.
Our analytics show that when customers shop more of our categories and channels, their spend and our share of wallet increase exponentially.
Multichannel/category customers spend three to seven times more with us compared to single-channel customers, and this group grew by double digits in 2020.
We are leveraging data analytics to drive new customer acquisition and multichannel purchase conversion with headroom for growth for years to come. In support of these efforts, we are deploying enhanced analytics, segmentation, CRM and digital marketing capabilities, with resulting marketing ROIs that are double industry benchmarks.
A key outgrowth of these efforts is our game-changing, industry-first Vital Care membership program, which provides benefits for a range of services including checkups, vaccinations, grooming services and merchandise discounts. After launching in late October 2020, we had about 50,000 customers by the end of the year, even without investing marketing horsepower behind the offering. We are pleased with the results and see a lot of upside.
Our digital business continues to benefit from Repeat Delivery, which by the end of 2020 represented almost 45% of total digital revenue.
BOPUS, curbside, ship-from-store and same-day delivery represented about 83% of fulfilled digital orders.
Our transformation has delivered nine quarters of consecutive revenue growth. Going into 2020, we had momentum with strong performance and market share gains across our core business. That performance accelerated through the pandemic, and we are on an exciting growth trajectory even as COVID restrictions relax.
2020 revenue grew 11% with digital sales up over 100%, services and vet up modestly despite COVID headwinds, and brick and mortar merchandise up mid-single digits. For the fourth quarter 2020, revenue grew 16% with comparable sales up 17%, demonstrating acceleration in the second half of the year. Our revenue growth translated to 14% growth in Adjusted EBITDA1 of $484 million. Our performance enabled us to generate Free Cash Flow1 for the year of $109 million, supported by a strong liquidity at the end of the year of $499 million.
Owned brands drove double-digit growth in 2020 with almost 30% penetration. Together with exclusive merchandise they represent roughly half of our portfolio.
Digital revenue more than doubled in 2020, growing market share. Repeat delivery represented almost 45% of digital revenue.
Services and vet grew modestly in 2020, from scaling of vet and Q4’20 momentum in grooming despite COVID headwinds. Achieved 13% growth in Q4’20.
Strong Free Cash Flow1 generation of $109M was net of $160M of capital expenditures.
Reduced Net Debt1/Adjusted EBITDA1 ratio to 3.2x with $1.5B of Net Debt1 driven by our IPO, related recapitalization and Free Cash Flow1 generation.
In 2020, we relaunched our brand as THE health & wellness company. This positioning drove momentum, with our marketing exhibiting 2x category ROI norms, highly competitive customer acquisition costs and growing total customer value. We invested behind that growth flywheel and saw fantastic results.
Entering 2021, we supplemented that focused customer acquisition approach with a brand-building campaign to pull away from competition as a health & wellness company.
“It’s what we’d want if we were pets” is a campaign intended to educate pet parents about what whole health means for their pets and motivate them to take action and start thinking about their pets’ health & wellness like they would think about their own.
Petco Whole Health is a new care philosophy and model across five critical dimensions of pet health: physical, mental, social, home and accessible health.
At petco.com/wholehealth, pet parents can find everything they need to know to help their pets thrive and get started on their whole health journey, including wellness tips and product and service recommendations developed in consultation with the Petco Pet Wellness Council, a coalition of independent, leading experts in veterinary science and animal care.
Our unwavering commitment to improving the lives of pets, pet parents and Petco partners is making a tangible impact, a key ingredient in our Purpose-Driven Performance.
In 2018, we took a bold, unapologetic and industry-leading stance on pet nutrition as the only national retailer to eliminate certain products with artificial ingredients2. That choice resonated with pet parents and rallied our partners. Fast forward to October 2020, when we led the industry once again by removing human-operated and bark-activated electric shock collars from our shelves. The response to this announcement was incredible, generating more than 2.3 billion impressions and further establishing Petco as THE health & wellness company. We are still the only national retailer to make these moves.
At Petco, we’re dedicated to investing in and meeting the pet welfare needs of every community where our Pet Care Centers are located. Over its 20-plus-year history, Petco Love, formerly Petco Foundation, has invested more than $300 million in animal welfare organizations across the country. We are focused on creating a future in which no pet is unnecessarily euthanized and investing in cancer research to improve the quality of lives of pets and their parents. Cancer is the no. 1 disease-related cause of death for dogs. This is something near and dear to my heart as my dog, Yummy, is a cancer survivor. I fundamentally believe early cancer treatment in pets will lead to longer and healthier lives.
In 2020, in partnership with Petco Love, we helped save roughly 400,000 animals from euthanasia. Since its inception, together we have found homes for more than 6.5 million animals.
We believe that environmental sustainability is fundamental to ensuring the future health & wellness of pets, pet parents and Petco partners.
In 2020, we made significant progress in sustainability. For instance, our BOPUS, curbside and same-day delivery programs not only provide strong customer value, but e-commerce orders fulfilled by these programs use 92% less plastic packaging and 23% less cardboard compared to online pure-play competitors. As a result, we eliminated 3.6 million pounds of cardboard packaging and 30,000 pounds of plastic packaging in 2020.
Our Started As a Bottle program has upcycled 1.5 million plastic bottles to pet toys and accessories. And our packaging optimization in our owned brands portfolio has eliminated 3.2 million pieces of polybags. With a dedicated shopping destination at petco.com/sustainability and in-aisle signage in our Pet Care Centers, we’re making it easier to choose sustainable products.
As part of our pledge to offer pets and pet parents more sustainable products to choose from, we’ve recently announced a commitment to increase our assortment of sustainable products to 50% by the end of 2025. Again, we're the only pet retailer to make a commitment of this kind.
We’re excited about Petco’s future and appreciate you being part of our journey. Our transformation has uniquely positioned us within an attractive industry that is large and accelerating, and we believe we are the only end-to-end partner for pet parents’ complete pet health & wellness needs.
As we’ve already shown the world, Petco is going to be a different kind of company. Every day we will strive to make a contribution to the world around us by improving pet lives, we will work to improve the lives of the partners who work at Petco and drive to execute to the highest degree of excellence. This is our definition of Purpose-Driven Performance.
We are confident that the continued execution of our strategy will sustain momentum across our business throughout 2021 and enable us to continue to create value for all of our stakeholders for a long time to come.
1 Please refer to the last IV-VII pages of the company’s fiscal 2020 Annual Report for definitions and reconciliations of “Non-GAAP to GAAP” metrics.
2 See how Petco defines artificial ingredients at: petco.com/nutritionstandards
Information about the forward-looking statements in this letter can be found here.