While pet specialty stores undoubtedly face growing competition from online outlets, the right approach can go a long way in protecting a brick-and-mortar retailer's bottom line from this looming threat.
The writing is on the wall. Online pet product sales are here to stay, and they will almost certainly continue stealing market share from brick-and-mortar stores. But will the competitive threat from online outlets overwhelm and ultimately sink the traditional pet stores that have long been the backbone of the pet care industry? It all depends on how well they can leverage their own competitive strengths to respond to those of their counterparts in cyberspace.
While online sales still represent a relatively modest portion of the overall pet care market—most industry experts estimate that they account for about five percent of pet product sales—they are expected to grow to comprise 20 percent or more of the market within the next several years. That could potentially spell big trouble for pet specialty stores, which are already battling competition from other retail channels such as food, drug and mass.
“Frankly, I think that [competition from online retailers] is the biggest threat facing [independent pet stores] right now,” says Pete Cooper, vice president of sales and marketing for Austell, Ga.-based Southeast Pet, a pet product distributor that services pet specialty stores in six southeastern states. “Otherwise, they have a pretty safe spot in the industry—they fill a great niche.”
Bo Nelson, president of Wholesalepet.com, a Richmond, Va.-based online pet product wholesaler, agrees that online sales pose a significant challenge for brick-and-mortar pet stores and says that is indicative of a broader trend in retail. “Internet commerce is and will continue to be a disruptive force in the U.S. retail landscape,” he says. “The growth and make-up of online pet product sales is fairly consistent with other sectors and ecommerce as a whole, where the top companies get the lion’s share of the market.”
Among those top companies, says Nelson, are Amazon, PetSmart.com and Petco.com, as well as web-only pet specialty retailers like Chewy.com and PetFlow.com.
Interestingly, despite their success in the brick-and-mortar world, PetSmart and Petco have been somewhat behind the curve when it comes to capturing a share of online pet product sales. According to IBISWorld, a New York-based global market research firm, PetSmart earned an estimated $45.1 million through online sales in 2014, compared to Petco’s estimated $76 million during the same period.
Both companies’ online divisions performed significantly below some of the other major Internet players. For example, IBISWorld estimates that Rhinelander, Wis.-based Foster & Smith, Inc.—which operates several pet product retail websites, including DrsFosterSmith.com—earned approximately $222.8 million on the web in 2014. Meanwhile, Pompano Beach, Fla.-based PetMed Express Inc.—which also operates several retail websites, including 1800PetMeds.com—reported $184.4 million in online sales. While it should be noted that prescription medications account for a significant portion of both companies’ online sales (PetMed Express reports that these products represented about 44 percent of sales in FY2014), they still outpaced Petco and PetSmart even without accounting for that segment.
Tired of playing second fiddle to other Internet players, last year, the big-box pet specialty retailers set out to change that dynamic with strategic acquisitions. Petco bought Foster & Smith, and PetSmart gobbled up Plymouth Meeting, Pa.-based online retailer Pet360 (which operates several retail websites, including PetFoodDirect.com) for a reported $130 million. These moves are obviously indicative of the importance that both pet specialty superstores place on the future of online pet product sales.
“Everybody is trying to become omni channel,” says Jennifer Korngiebel, senior category manager, pet category, for Daymon Worldwide, a Stamford, Conn.-based retail-consulting firm with clients around the globe. “You’ve got these big pet retailers saying, ‘We can’t just be brick-and-mortar, even though we grew up that way. We siphon a lot of customers away from other channels, but now we have to watch our back and have a clear online avenue as well.’”
Having an Internet presence is particularly important, as the Millennial generation has become a force in consumer spending. “Millennials are now the largest pet-owning population, and they are a generation that has grown up on the Internet, so the trend [toward online shopping] is just going to grow,” says Maria Lange, senior product manager for GfK, a New York-based market-research firm that specializes in the pet specialty channel.
Of course, it is not just the big-box pet specialty retailers that need to be mindful of the growing impact of online sales. Small, independent pet specialty stores are also subject to encroachment from cyberspace; and what makes this form of competition particularly dangerous is that, unlike more traditional competitors, online retailers often have access to brands that were—and often still profess to be—exclusive to the independent channel.
“[Manufacturers are] looking at how they can maintain strong growth rates, but for some of them, that growth has slowed down a bit, so they’re looking for alternative channels,” says Korngiebel. “It is opening up a lot of gray areas in what it means to be exclusive to the pet specialty channel, and, in some cases, what makes independent pet stores different [in terms of product selection] is starting to go away.
“It’s a little bit of a free-for-all right now. It is interesting to see some of the specialty brands become available on Amazon. If I were a small, mom-and-pop pet retailer who had a long-term relationship with a brand that can now be bought online, I would be upset.”
Exacerbating the situation is the fact that the low-overhead business model used by online retailers often allows them to offer pricing that is far below what is feasible for brick-and-mortar pet stores and, in some cases, even wholesalers. “I’ve seen products for sale online at prices that are cheaper than what I pay for it as a distributor,” says Cooper. “And I see it more and more.”
Al Puntillo, chief merchandising officer for Mud Bay, a Tumwater, Wash.-based pet specialty independent retail chain that operates 33 stores in Washington and Oregon, is also mindful of the pricing disparities between online and brick-and-mortar retailers. He says that this is what makes it important for pet stores to work with manufacturing partners that not only have MRP (minimum retail price) or MAP (minimum advertised price) policies, but also enforce them. “We’ve always price-shopped our competitors, and now we have to include online retailers as well,” says Puntillo, noting that Mud Bay works hard to offer its customers everyday fair pricing. “Many of our suppliers do have a MRP or MAP policy, and if we see that it is not being enforced, we make sure we let them know about it.”
Puntillo goes on to note that if a supplier fails to enforce its MAP policy, it is not immediately grounds for removing that brand from Mud Bay’s stores. However, “If keeping our pricing comparable means bringing our margins down too low, it becomes harder and harder to justify shelf space for those items or the introduction of new items within that brand,” he says.
While pricing is often a big competitive advantage for online retailers, it is not their only weapon in stealing share from brick-and-mortar pet stores. In fact, Vito M. Mileo, brand- and vendor-relations manager for PetFlow.com, a New York-based online pet product retailer, says that pricing is not even his company’s biggest selling point for pet owners. “We are very competitively priced, but we’re not looking to be the low-cost provider online—it has never been a priority for us,” he says.
In fact, like many brick-and-mortar retailers, Mileo is a big proponent of MAP policies among vendors. “I love brands that have MAP pricing,” he says. “Ideally, you would hope that brands take a good look at the online world and police their MAP policy. There are some brands that do that really well, and some that are looking to do a better job of it. If they do it correctly, I think there is a lot of room for everyone to be successful.”
According to Mileo, convenience has been PetFlow.com’s biggest point of differentiation. “PetFlow.com was founded on the premise that buying pet food is a chore, and we felt that [pet] was a fantastic industry for auto-shipping. That’s because most people feed their pets the same food over and over again—they rarely change the formulas. We are looking to be a provider of convenience and exceptional service. We want to let pet owners pick and choose the products that they want, when they want them.”
This has evidently been a winning strategy for PetFlow.com, which reportedly grew its sales from $39 million in 2013 to an expected $50 million in 2014. However, according to Mileo, the allure of online shopping goes beyond the convenience of having their pet’s food show up on the doorstep every month. “Consumers are looking not just for convenience, but also choice,” says Mileo. “I live in New York City, so I can pretty much find whatever I want within an hour of walking out my front door. Unfortunately, a lot of America does not have that opportunity.”
Turning Back the Invasion
While the ability to offer a broader and deeper selection of products is a big advantage for online retailers, which often operate out of large warehouses or have suppliers drop-ship orders to customers, brick-and-mortar stores can approximate this breadth and depth by working closely with their vendor partners—particularly the pet specialty distributors that focus on servicing independent retailers.
Mud Bay is a great example of how retailers can extend their product selection beyond what can reasonably be stocked in a brick-and-mortar store. While the chain typically carries anywhere from 3,500 to 4,200 SKUs in its outlets, it also offers customers a robust selection of about 2,500 special-order items. “These are items—mostly consumables—that are extensions of product lines that we are already carrying in the store, but maybe it’s a particular size or variety that we don’t regularly stock,” says Puntillo, noting that the chain’s special-order items are limited to products that are sold through one of its distributor partners. And given the fact that these suppliers often make deliveries to Mud Bay stores up to three times a week, it is not usually difficult to fill special orders expeditiously.
Nelson says that a special-order strategy like Mud Bay’s can be invaluable in keeping brick-and-mortar stores competitive against online outlets, and his company does its part to make such a strategy attainable for even small retailers. “WholesalePet.com enables retailers to order direct from over 300 specialty suppliers,” he says. “In addition to being a great source for stock merchandise, retailers can expand their virtual inventories by using WholesalePet.com vendors to drop-ship special order merchandise.”
However, Nelson says that stealing a page out of online retailers’ playbook shouldn’t begin and end with special orders. “Leverage the power of location as a competitive advantage, but also do as the online retailers do, and track your customers’ behavior to make better decisions about products and inventory,” he says.
Korngiebel agrees that this type of data collection is essential for competing in the digital age, but notes that it is not a particular strength of independent pet retailers. “They should be collecting more data about their customers and their purchasing habits, and they should be more creative in how they use that data,” she says, pointing to category management and customer engagement as areas in which such information can be an invaluable resource.
At the end of the day, Korngiebel believes that the key to staying competitive in the face of growing competition from online outlets is to focus on the in-store experience that shoppers can only find in independent pet specialty stores, where service and knowledge should never be in short supply. “Brick-and-mortar retailers have to understand and embrace their strengths,” she says. “The way they will successfully compete is with service.”
Luckily, say many industry experts, independents will often find that they are preaching to the choir when it comes to extolling the benefits of shopping their stores to pet specialty customers. “The shoppers who shop in small, independent pet stores are highly engaged pet parents who indulge their animals with only the best,” says Korngiebel. “That shopper may not enjoy shopping online. They will probably continue to want to go to their local brick-and-mortar pet shop for the experience.”
“Most consumers want instant product gratification, and enjoy or are accustomed to going into a store to purchase goods,” agrees Nelson. “Physical retailers, particularly independents, know the advantages they have over online competitors: high-touch personalized service, strong product knowledge and a quality product assortment can create an unparalleled shopping experience.”