Fighting for a Share
As mass retailers get more involved with the pet category, the onus is on pet specialty chains to come up with ways to survive and thrive in this increasingly crowded marketplace.
They say that imitation is the sincerest form of flattery. That appears to be the case with the pet category as more and more mass retailers and other types of merchants expand their pet assortments to grab a larger share of the lucrative segment and add more dollars to their bottom line.
The battle for the hearts, minds and pocketbooks of pet owners is certainly heating up, fueled by a stagnant economy that has forced many merchants to look for other categories to shore up their bottom lines. Such major chains as Walmart, Target and even Bed, Bath & Beyond have added aisles and even entire departments to the pet category, hoping that it will bring in more traffic and lead to greater sales and profits.
“Pet is available basically everywhere,” says Paul Cooke, vice president of industry development for Nestlé Purina Petcare, based in St. Louis, Mo. “It doesn’t matter whether you’re talking about mass, drug, home improvement or convenience stores, everybody competes for the pet consumer.”
For non-pet-specialty retailers, says Cooke, the pet care category represents much more than simply an opportunity to turn a profit on the sale of products marketed for companion-animals; it also serves to drive traffic into other areas of the store. “We talk to all of our retailers about focusing on the consumer who shops the pet category, and how important they are to the rest of your business,” he says. “This is a category that is really worth investing in, because the benefit goes well beyond just the pet aisle.”
But this trend is not necessarily a good one for pet specialty outlets, which now have to compete with giant, well-financed mass retailers in addition to the usual suspects of other independents and big-box pet retailers. The bottom line is that everyone is essentially fighting for the same customer, and one shopper gained at a mass retailer usually means one shopper lost at a pet specialty merchant.
Unfortunately, even as outside competition for pet shopper dollars has intensified, some specialty retailers still dismiss the threat posed by these other retailers. Far too often, pet store owners and operators subscribe to the philosophy that they sell to an altogether different customer base than outlets such as grocery stores and mass merchants. While there is a modicum of truth to this line of thinking–grocery and mass are largely engaged in a head-to-head battle in not only pet, but a variety of other product categories–the simple truth is that pet store customers are also shopping at the local Walmart and Wegmans.
“Research I have seen shows that consumers shop multiple channels,” says Paul Kuny, senior vice president of sales and marketing for Bloomfield, N.J.-based Ethical Products, Inc. “I believe they do not think in ‘channels,’ but rather in opportunities to buy pet products. Given this, the pet store operator needs to consider all channels as competition and try to leverage their strengths versus the other channels.”
Other research backs up Kuny’s comments. For example, in a recent report compiled by the Rockville, Md.-based market-research firm Packaged Facts (based on data from the Experian Simmons National Consumer Study), a majority of dog and cat owners said that they shop for their pet care needs at multiple locations. However, this same report also revealed that pet owners’ cross-channel shopping may be trending downward. While only 35 percent of dog and cat owners said that they shopped for pet products at a single retailer in fall 2009, that number had risen to 43 percent by spring 2010.
In light of this trend toward one-stop-shopping, the stakes have clearly been raised for pet stores to secure their reputation as the ideal location to shop the pet care category. Doing so, however, will likely become more difficult as niche product trends that have largely served as a competitive cornerstone for pet specialty retailers move into the mainstream. As items that have traditionally been niche items increasingly gain acceptance in grocery and mass outlets, the distinction between product assortments can become fuzzy.
“It’s a real dilemma–not just for pet specialty retailers, but for the market as a whole,” says David Lummis, senior pet market analyst for Packaged Facts. “You always have this kind of evolution of mass gradually becoming more sophisticated as it accepts new product trends. It’s ongoing and there’s nothing anybody can do about it. It makes it more important than ever for pet specialty retailers to be able to differentiate in some way.”
When it comes to assessing the competitive threats to the pet specialty channel, industry observers put grocery stores right at the top of the list.
“It’s a bigger mistake to ignore what supermarkets are doing than what Walmart is doing,” says Lummis. “Although Walmart and supermarkets may be much closer together than either is to pet specialty stores, pet stores are still closer, in terms of competition for food sales, to supermarkets than they are to Walmart.”
While Walmart may be the non-pet-specialty retailer that has been the most outspoken about its commitment to capture market share in the pet care category, many of the regional grocery chains clearly have similar aspirations. “Grocery views anybody who is shopping pet care in any channel as an opportunity customer,” says Cooke. “There are a number of grocery retailers across the country that have said this is a category that is important.”
“What [grocery stores] look at is the consumer who shops pet care, more than just pet care products,” he says. “It’s in that retailer’s best interest to attract the pet consumer, recognizing that they tend to be family oriented, have more disposable income and come in on a regular basis.”
Historically, however, grocery stores have gotten squeezed by low-price leaders on the mass side, and the selection-heavy big box chains and service-oriented independents on the pet-specialty side.
“Supermarkets have sort of been stuck in the middle,” says Lummis. “They have a difficult time competing on price with Walmart, and they have a difficult time competing on selection, in-store experience and expertise with the pet specialty channel.”
Supermarkets have responded to this squeeze by becoming much more creative with their pet aisles; and this strategy may go a long way toward recapturing some of the market share that these retailers have lost to mass merchant’s super-centers in recent years.
“While the threat of mass taking share away from supermarkets is certainly going to remain, I think that supermarkets have bottomed out, to some degree, in terms of that lost share,” he says. “Because of the premium nature of the pet market now, both in terms of the products and the demographics–much of the market is now concentrated on higher-income demographics–I think that supermarkets might be in a better position now to begin to bring back that customer.”
Lummis and other industry observers point to Wegmans in the Mid-Atlantic and Northeast regions and Publix in Florida as grocery chains that are doing a particularly good job at building such an upscale reputation; but other players in the grocery channel are taking a similar approach to pet care.
“Supermarket retailers are definitely differentiating by scaling up,” says Lummis. “They’re looking at ways that they can enhance the overall shopping experience to win the shopper away from Walmart. That’s something that pet specialty retailers should be paying attention to.”
Part of this “scaling up” includes increasing the breadth of products that can be found in grocery store aisles. While supermarkets have long given ample shelf space to pet foods and litter, the presence of other pet care items has traditionally been quite limited. Now, however, more grocers are going outside the box to experiment with other pet categories, including more fashion-oriented items. They often favor freestanding displays to merchandise these items, as opposed to committing valuable shelf space.
“The grocery stores are definitely trying to expand their offerings,” says Gretchen George, president of Burlington, Mass.-based PetRageous Designs. “They have a customer that is coming into the store two to three times a week, and if they can attract customers into the hardlines part of the business, it has got to be more profitable for them than the food part of the business. Plus, it really anchors them as a headquarters for the pet business.”
Of course, say the experts, how far a grocer can push into the market differs greatly from chain to chain, and even from location to location. “A Wegmans is absolutely [going after the premium pet care shopper],” says George. “But there are still grocery stores out there that really aren’t a good fit for the real fashion-forward stuff. The customer is more middle-of-the-road, so they’re better off sticking with the basics.”
In addition to experimenting with expanded product selections, some grocery chains are playing right in a pet store’s backyard by marketing their stores as pet care information resources.
“Pet specialty has the distinct advantage of having more people readily available to help customers than some of their competition, but some of the grocery retailers that have done well have done a really good job, through their pet clubs or their web presence, of providing a lot of information,” says Cooke. “Where some of the successful grocery retailers have applied a lot of resources has been in the digital connection and the social networking. It represents a big opportunity moving forward.”
“The pet category is a very personal, very family-oriented, very emotional category, so wherever retailers can make a connection with their customers on a personal basis, there is a distinct advantage.”
Officials at Walmart have never been shy about letting competitors know that they are coming for their shoppers, so it was no surprise when the retail behemoth announced several years ago that it intended to increase its market share in the pet care category. While any share that Walmart has captured since setting its sights on the pet market has largely been stolen from the grocery channel, it is clear that the company and other mass merchants are committed to the category long-term and have some formidable competitive advantages.
“All of the mass merchandisers have made pet a priority and compete effectively on a weekly basis,” says Cooke. “There are a number of things that they do well. They’re very aggressive on pricing, they don’t suffer from a lot of the traditional out-of-stocks that some of their competition has, and their variety is very good. They’re hitting three of the top priorities–price, product availability and variety.”
Mark Johnson, executive vice president of TFH Publications in Neptune, N.J., agrees that mass merchants have made pet care a priority and says that they are becoming more effective at selling the category. “They’re better competitors today than they have been in the past,” he says.
Much of the success that mass merchants have enjoyed in the pet care category is directly tied to the super-center concept that has greatly expanded the selection of groceries that can be found in these stores. “Adding more grocery items will contribute to more consumer trips to mass for consumables,” says Kuny. “Additional trips to mass will open up the door for more chances to shop the pet section while they are in the store.”
However, industry observers say that for all of their competitive strengths, mass merchants, in general–and Walmart, in particular–are not necessarily stealing share from the pet specialty channel, or even some of the high-end grocery stores.
“Walmart’s demographic is not upscale–they tried to scale up, failed and had to go back to their everyday low-pricing strategy,” says Lummis. “This suggests that the premium side of the market is not a market that Walmart is going to be able to steal away, either from pet specialty or from grocers that are doing it right.”
Johnson agrees that Walmart’s competitive limitations are tied to the type of shoppers it attracts. “Walmart appeals to a certain income level of shopper, and that income level of shopper is probably not the same as the PETCO or PetSmart income level of shopper,” he says.
As Lummis notes, past attempts by Walmart to upscale its product offerings have often met with failure. Even with the economies of scale playing in its favor, oftentimes it is simply a matter of not being able to offer premium products at a price level that fits its customer base.
“It is tremendously demanding to do business with Walmart,” says Lummis. “To meet their pricing criteria, their delivery criteria, their returns criteria, companies have to re-tool.
“There’s always going to be a price ceiling at mass, particularly with Walmart. Walmart isn’t going to start selling some of these brands that are made with human-quality ingredients. Their customer base just wouldn’t pay that much.”
While many industry experts agree that Walmart does not do a particularly good job at stealing pet store customers, they do say that Target is better suited to attract premium pet care shoppers. When asked what differentiates Target from other outlets in mass, Lummis and George both point out that Target is typically viewed as a being more upscale, particularly with its private-label brands.
Other Alternative Channels
Grocery stores and mass merchants aren’t the only competition facing pet stores. An increasing number of retailers in channels not traditionally associated with pet care are actively marketing these products to varying degrees. All three national drug store chains (CVS, Rite-Aid and Walgreens) have expanded their mix of pet products in recent years. Bed, Bath & Beyond has added a full-line pet department of about 2,000 square feet to a limited number of stores to gauge whether it should roll out the section nationwide.
While most industry observers agree that much of the pet care business being conducted in these alternative channels revolves around impulse purchases, they are hesitant to dismiss this competition–particularly when those competitors are in the pet food and litter business, like club stores. In fact, according to a report presented at last November’s Petailing2010 Leadership Conference by Paul P. Lainis, senior vice president, Consumer & Shopper Marketing, Symphony/Information Resources, Inc., pet product sales are growing faster in club stores than in any other channel.
George says, “Club stores are a huge opportunity [for pet care]. If you look at a Costco or a BJ’s, their pet areas have great stuff. Whether it’s toys or treats or beds, they do a phenomenal job.”
Although they’re relatively new to the game, George sees home stores playing an increasingly important role in the competitive field as well. “Home stores are dangerous competition, because they’re going after the fashion,” she says. “Home stores really have an opportunity to take it to the next level, as opposed to just selling a bowl.”
George points to Bed, Bath & Beyond as the biggest standout in the home-store channel. “There’s no better company, as far as high fashion goes,” she says. “When you think about how well they do with kitchenware, bedding and home décor, as well as consumers’ desire to coordinate their pets’ stuff with the rest of the home, it makes great sense that Bed, Bath & Beyond would jump on the pet care bandwagon.”
Even convenience and drug stores are trying to profit from the growing popularity of the pet care segment, albeit in a much smaller footprint. “Some of the convenience stores, while they realize that they can’t have an extensive product selection, make sure they’ve got the top brands that consumers are looking for,” says Cooke. “It’s smaller sizes on a convenience basis, but they try to have product representation that the customers want.”
Like c-stores, drug stores’ participation in the pet care category is heavily driven by convenience–the same competitive strength that the larger drugstore chains are looking to leverage by expanding their grocery offerings overall. “If you look at Walgreens as an example, in cities like Chicago and New York, they’re going to carry fresh [and prepared] foods,” says Cooke. “They recognize that there is a convenience aspect and are focusing on items and services that their customers are looking for.”
This, says Cooke, includes pet food and other pet care items. “Drug has really refocused on pet,” he says. “A couple of the major national chains have significantly increased the space that they give to pet. [They have] said, ‘We can win in the pet category, but we have to be selective and focused on the products that our customers want.’”
While the pet care market is certainly getting a lot of attention in alternative retail channels, many industry experts say that the level of expertise and service that can be found in pet stores will keep them firmly at the head of the pack.
“Due to the direction that the pet market is going, in terms of the increasing product sophistication, pet owners increasingly want to go to a channel where they are going to find some kind of background in pet; and these [alternative] channels are obviously not pet-specific,” says Lummis. “Even a grocery store is in a better position [than some of the other non-pet-specialty channels] to win the consumer on that level, because [they are often trusted by their shoppers].”
Pet Specialty Success
Of course, no analysis of the competitive field in the pet care market would be complete without discussing the state of pet-specialty retailing. Not surprisingly, the past few years have been a mixed bag for pet stores large and small. While these retailers still greatly benefit from the superior expertise, service and product selection that they offer to pet owners, they have not been unaffected by ongoing economic turmoil. Even the big boxes are not immune.
“Both [Petco and PetSmart] felt the recession, for sure,” says Lummis. “If you look at PetSmart’s annual reports, they’ve admitted that they’ve run into some of the hardest times that they’ve seen.”
One of the biggest recent developments from the big-boxes has been the roll-out of the new Unleashed by Petco concept. Basically Petco’s version of a small, independent pet shop, the new Unleashed stores certainly seem to have the potential to impact the true independents, but the aggressive growth strategy that Petco had for the concept has not exactly gone according to plan.
“We [Packaged Facts], as a market research company, have been advising that there needs to be some kind of national chain between [the big-box pet stores] and the independents–there is a vacuum there that needs to be filled,” says Lummis. “I think that’s what Petco was shooting for with its Unleashed concept. Unfortunately, it was probably launched at about the worst time that any new retail concept could be launched, because of the economic downturn.”
For big-box and small independent pet stores alike, success still largely hinges on the ability to maintain product selection that is differentiated from other retail channels. Natural/organic foods have been invaluable in this regard, but industry observers say that it would be a mistake to think that this product segment will effectively serve as a point of differentiation forever.
A number of mass and grocery brands have already begun introducing line extensions aimed at natural-minded pet owners; and with many of the biggest pet food manufacturers acquiring small, pet-specialty niche brands, it may just be a matter of time before one of these niche brands crosses over into the mass and grocery channels. That, says Lummis, could be a real game-changer.
“If we end up seeing some sort of crossover of what I call a ‘true natural brand’–one that has been born in the pet specialty channel, as opposed to just being a natural line extension of an established grocery brand–that could be another plus for supermarkets,” he says. “We’re still going to see premium pricing on those products, but it will be somewhat more affordable, and there will be a much broader distribution of the products. That may give supermarkets another leg up in building out their departments.”
Regardless of what happens on the natural/organic food front, the experts agree that independent pet specialty retailers will continue to have a key advantage over competitors: the flexibility to respond to the next big emerging product trend.
“Large retailers usually do not change their item assortment except for once a year,” says Kuny. “The independent can be much quicker bringing new products to the consumer. They may not have the scale of large retailers, but they can be much more nimble, and that can be a competitive advantage.”
Johnson has a similar take. “The pet shop has the ability to be responsive, to do resets quickly, to bring new items in quickly, to try new things and be a more interesting place to shop as a result,” he says. “And I think that’s why they’re more successful now than they’ve ever been in the past.”