Dive Brief:

• Online sales are the fastest growing channel for pet sales and will be for the next five years, putting pressure on legacy brick-and-mortar retailers Petco and PetSmart, according to a report from Moody's analysts led by Manoj Chadha emailed to Retail Dive.

• PetSmart's acquisition of online pet retailer Chewy last year was a good strategy because it immediately boosted PetSmart's online penetration, Moody's said. That, plus its bigger scale and greater number of services gives PetSmart a longer-term advantage over Petco despite its weaker credit metrics (and larger debt load), according to the report.

• Meanwhile, Amazon, Walmart and independent online pure-plays like Bark are also surging in the space. In May Amazon launched Wag, one of its latest private labels. Pet products on Amazon grew over 40% last year and now make up over $2 billion in sales annually, and the company is likely to move to other categories like treats, crates/habitats and pet health products, according to One Click Retail.

Dive Insight:

U.S. pet sales are growing primarily because Americans are increasingly treating their furry friends as members of the family, not because the number of household pets is increasing. That has them buying more and better items. "We expect spending on non-discretionary pet supplies — particularly food and healthcare — will continue over the next several years," Chadha and his team said.

Pet owners were also early e-commerce adopters, attracted mostly by the opportunity to have heavy bags of pet food delivered to their door, according to another report from One Click Retail. "30lb bags of dry dog food remain the biggest hit among Amazon's pet products, but dry cat food is finally beginning to catch up," One Click Retail Director of North America Sales Mike Corry wrote in a blog post last month.

Petco and PetSmart both enjoy advantages thanks to their brick-and-mortar fleets — despite the fact that physical store sales have declined at both over the past two years — because they're able to offer services like grooming, training and healthcare, according to Moody's. In particular, analysts pointed to more robust in-store service offerings at PetSmart than Petco, an estimated 12% of revenue versus 8% respectively. PetSmart, Moody's noted is the largest pet service provider, which gives them the advantage of additional store traffic and a relatively safe position given the high barrier to entry for competitors.

But both are also highly leveraged by their private equity owners, Moody's also warned. "Petco's financial policies have been subdued compared to PetSmart. Although Petco distributed $100 million to shareholders in fiscal 2017 it has also gradually lowered its debt load," Chadha​ said.

Despite its quick growth and ambitions in the category, Amazon's entry into pet products hasn't been entirely smooth. For example, one of its dog food offerings had to be pulled after bad reviews, One Click Retail said. Still, Amazon's pet food accounts for almost half its total pet sales, and food drives some two-thirds of pet retail, according to One Click Retail.

"The discrepancy between these shares might suggest that Amazon's pet food sales are likely to experience a lot more growth before leveling off," Corry said.