Should you buy Greencross Limited (ASX: GXL)? This vet clinic and pet retail operator has around 375 locations across Australia. Greencross aims to capture a growing part of the $9 billion ANZ pet market, of which it controls approximately 8% at present.
Over the long term, Greencross wants to capture 20%, which it will do through a variety of strategies including acquisitions, co-locations of vets and retail stores, plus other techniques such as own-brand products and loyalty programs.
Initial reports show that Greencross' strategy of co-locating retailers, vets, and pet groomers has been quite successful at cross-selling customers. The number of customers shopping across multiple formats grew by 35% last year and the co-locations are reaching their operational break-even level well ahead of schedule. Greencross is now targeting approximately 60% of vet and pet retail co-locations over the long term, and estimates that of its current properties, 120 are suitable for a possible co-location.
In-store clinics also cost less, deliver a higher Return on Invested Capital, and have the added benefit of being able to cross-sell and increase customer engagement.
What about Amazon?
With Greencross' high dependence on retail sales, prudent investors do need to ask what impact the arrival of Amazon in Australia might have. That depends on whether customers prefer to buy toys, beds, and food online, or in person. There's no easy answer to that question but with the co-location and loyalty initiatives both leading to higher customer spend, it suggests that at least so far consumers are voting with their wallet – in favour of Greencross.
The addition of more vets to retail stores gives the company the ability to recommend things like toys, food, beds, and so on to customers in response to specific pet ailments – upset stomach, boredom, and so on. A professional recommendation is likely a powerful catalyst for the customer to buy at a Greencross store while they're there.
One area that is likely under threat is Greencross' retail margins. Although the company has its own online strategy it could easily be undercut by cut-price competitors, especially if it elects to maintain its own online prices at the same level as in store. With that said, Greencross is increasing its own investment in private label products, which could provide some resilience to competition.
Greencross has been growing its same-store sales at 4% per annum recently, and although this has slowed from previous years, the company has a good handle on what it needs to do to continue growing, and it is acting on this strategy. At today's prices, Greencross looks like an attractive long-term purchase.
(For full disclosure, I was recently forced to sell my Greencross shares in order to raise funds for things outside my share portfolio).
