Taking the Bite Out of Predatory Pricing
Grave concern about the deep-discounting strategies online retailers use to capture market share is driving a growing number of independent retailers to demand fair pricing policies from pet food manufacturers.
It was an unseasonably warm December morning in New England when a key supplier gathered a select group of independent pet specialty retailers in a conference call to discuss what many of them view as the single biggest threat to their businesses. The topic at hand: the predatory pricing practices that some online retailers are utilizing to capture a growing share of the retail pet products market.
The call, which was hosted by Michael Baker, president of pet product distribution company Pet Food Experts (PFX), from his headquarters in Pawtucket, R.I., was extraordinary for the pet industry, but a move that at least one retailer involved—Michael DiTullio, president of Especially for Pets, a Newton, Mass.-based chain that operates seven locations in Massachusetts—says was absolutely necessary, given the rising stakes for brick-and-mortar stores.
“I’ve seen firsthand the destructive nature of deep discounting,” says DiTullio. “And while it is something that I’ve been concerned about for some time now, the situation is really heating up as online retailers have come out with very aggressive print and digital ad campaigns targeting brick-and-mortar retailers’ customers.”
As an example, he points to a recent direct-mail piece that was sent out to his stores’ customer base. The advertisement encourages pet owners to “skip the store” and promises that this particular online retailer is “cheaper than the store,” offering $15 off a customer’s first purchase to further drive the point home.
There is only one conclusion that can be drawn from this approach, he says. “They’re going directly after the brick-and-mortar [stores].”
Clearly, DiTullio is not alone in his concern. In fact, he was one of about 60 retailers who participated in December’s predatory pricing discussion. But it was not just PFX’s key retail accounts that participated in the call; two of the independent pet specialty channel’s premier food suppliers—Champion Petfoods and Fromm Family Foods—were also in on the discussion and used the opportunity to listen to the retailers’ perspective on predatory pricing and express their commitment to maintaining fair competition between brick-and-mortar and Internet-based outlets.
“As brand builders, [retailers] want to know that we understand and keep their needs in mind when setting or upholding pricing,” says Peter Muhlenfeld, chief brand officer for Champion Petfoods, which manufactures the ACANA and ORIJEN food brands. “Treating people fairly gives them peace of mind knowing that you are making responsible decisions.”
Bryan Nieman, brand director for Fromm Family Foods, which markets pet diets under the Fromm Four-Star Nutritionals, Fromm Gold Coast and Fromm Family Classic labels, says his family’s company also understands the importance of standing by traditional pet stores as online retailing becomes more prevalent in the marketplace.
“As a brand dedicated to the neighborhood pet retailer, we recognize brick-and-mortar stores will always be vitally important,” he says. “Neighborhood pet stores offer a unique and intimate buying experience for the shopper. Customers will often form long-term relationships with stores, as they serve as a source of expertise and counsel for their shoppers. As the online segment grows, we are constantly working to ensure we are not alienating or negatively impacting our brick and mortar partners."
A Scorched-Earth Approach
Most independent pet retailers understand that competition from the Internet is here to stay, and they do not expect their suppliers to ignore this emerging pipeline to consumers. What they do expect is to be treated fairly.
“We don’t care if they sell online, we just want a level playing field,” says DiTullio.
While this starts with offering wholesale pricing parity for brick-and-mortar stores and online outlets, that simply is not enough in an environment in which Internet-based retailers are often clearly willing to forgo profits in order to grow their piece of the lucrative pet care market.
“Many of these websites are selling products below wholesale,” notes Scott Click, owner/president of Tomlinson’s Feed, an 11-store chain in central Texas. “They don’t care about making money.”
It is a practice that Michael Levy, president of the 56-store Pet Food Express chain in California, has also observed. “They must be losing a lot of money,” he says, referring to online retailers’ propensity for carrying zero (or even negative) margins on pet products. “They’re taking a scorched-earth approach to gain as much market share as they can. As one online retailer said in a recent interview with the Sun Sentinel, a south Florida-based newspaper, they ‘want to have all the pet customers.’”
This approach is impossible for traditional pet stores to compete with, as their only options are to either try to keep up by cutting prices or continue to watch their customer base erode as shoppers increasingly look to the web for cheaper sources for pet products.
“It’s just a race to the bottom if you try to price match,” says DiTullio, noting that he has seen some web retailers selling products as much as $20 below wholesale cost.
Unfortunately, holding their ground on pricing as online pet retailers offer steep discounts is an equally untenable approach for brick-and-mortar stores. “We have customers come in every day who want to buy local, but they can’t turn down the prices they can find online,” says Click, explaining that, at the end of the day, “We don’t want to look like we’re ripping off our customers.”
Most independent pet retailers agree that they cannot win this pricing war without the help of their suppliers, which DiTullio says fall into one of three categories when it comes to their role in Internet retailers’ predatory pricing tactics—some are complicit, some simply turn a blind eye to what is going on, and others are actively trying to help their brick-and-mortar customers.
For those companies that fall into the last category, it seems that MAP (minimum advertised price) and MRP (minimum resale price) policies are the most effective way to keep the playing field level. However, though similar, there is an important distinction between the two approaches. While MAP policies place restrictions on the price at which a product can be advertised, they do not ultimately limit the sales price. MRP policies, on the other hand, do restrict the actual sales price.
The adoption of either type of policy is a big step in the right direction, say storeowners. Luckily, it appears that a growing number of pet food brands that are closely aligned with the independent pet retail segment are implementing these policies to get a handle on the pricing of their products.
For example, Austin, Texas-based Nulo Pet Food, which markets its Nulo FreeStyle brand through the independent pet specialty channel, recently introduced a new MAP policy for its products. “We have heard a growing concern among brick-and-mortar retailers seeing online retailers attracting consumers through price-driven tactics,” says Nulo president Heather Govea. As a result, “Nulo has recently deployed an updated MAP policy, and we work with our online partners to ensure our brand is represented through the lens of quality and superior nutrition.”
For Champion Petfoods, it was the choice to go the more stringent MRP route that has earned it kudos from its independent brick-and-mortar retail partners.
“Due to inconsistent retailer pricing, especially with online retailers that sell nationally, we recently made the decision to eliminate MAP and move to a minimum retail price,” says Muhlenfeld. “This ensures a consistent pricing experience and promotes peace of mind for both retail partners and pet lovers.”
WellPet is another pet food company that has revisited its approach to ensuring pricing parity among online and brick-and-mortar retailers. According to Roger Parsons, vice president of sales for WellPet, in late 2015, the company put a renewed emphasis on the MRP policy it implemented across its Wellness and Holistic Select brands.
“We always had an MSRP [manufacturer suggested retail price] and MRP on our price list, but we hadn’t really been maintaining the gap between the two through the years, and we weren’t really enforcing it,” says Camelle Kent, WellPet’s chief commercial officer. She explains that the high level of automation utilized by web-based retailers for price matching made policing the company’s policy difficult at best.
Even the strictest pricing policies are only as strong as a manufacturer’s commitment to monitoring retailers’ compliance and enforcing real consequences for those that fall out of line. As Kent notes, that is no simple task, but today’s software does make the process more manageable.
“We monitor our MAP policy through a software program that conducts regular online price audits, reporting discrepancies in comparison to our MAP policy,” says Govea.
WellPet also utilizes software to monitor for MRP violations, and when a violator is identified, the company acts swiftly. “We have a staggered approach,” says Kent. “Once we know someone has dropped below our MRP, we send them a written warning and give them 48 hours to correct it. If it happens again, we discontinue shipping product for 90 days.”
Champion Petfoods also takes a hardline approach with retailers that fail to heed its warnings of MRP policy violations. “For those retailers operating outside of our brand standards, we start with a conversation to explain the value of our brand strategies, which usually resolves the problem,” says Muhlenfeld. “Any retailer that continually operates outside our brand standards is no longer considered a Champion pet specialty retailer and is therefore ineligible to sell our foods.“
The Cost of Commoditization
While this type of response to escalating concerns about predatory online pricing is heartening, many retailers say that more manufacturers need to get on board with MAP or MRP policies. Of course, online sales only represent a fraction of the total pet products market, but the old argument that this volume does not warrant major concern simply is not going to cut it anymore.
“Those who say that it’s not as big a deal as retailers are making it out to be often refer to the percentage of total pet food sales that ecommerce represents—or even worse, they compare it to the total $60-billion pet industry,” says Baker, noting that most estimates fall somewhere between five and 10 percent. “But the food brands that really make or break independent pet stores tend to be the most expensive and have the smallest bags, so I expect that ecommerce represents a much larger percentage of these independent-only brands.”
Ironically, the very brands that tend to be ripest for poaching by Internet retailers are also the ones that most depend on the unique expertise that only independent brick-and-mortar retailers can deliver. “We built these brands; we created the demand,” points out DiTullio.
“Online retail doesn’t build brands,” echoes Levy. “Instead, it takes what independent stores have built, with lower prices, no sales tax in many states, and free delivery.
“This is obviously bad for pet specialty brick-and-mortar retailers, as many of them are losing sales and will continue to lose sales. Some of them may even go under. But it’s also really bad for the brands because recommendation from independent retailers isn’t going to continue.”
For pet food brands that often occupy a premium position in the marketplace, there is another danger in ignoring or being complicit with predatory online pricing practices—a drawing down of these products’ price points could ultimately lower their value in the eyes of the consumer. This is a trend that the industry’s high-end pet food manufacturers should be keen to avoid.
“For both Wellness and Holistic Select, price is part of our positioning,” says Kent. “Given that we were one of the first companies into natural and grain free, and we continue to drive the category forward with products like TruFood, if we can’t have price as part of our positioning, we’re going to be in a commoditized category very quickly. The whole point is to provide that constant innovation that is necessary to differentiate pet specialty from the mass channel.”
It seems that more and more of the industry’s premier pet food brands are coming around to this line of thinking, and they are either looking to adopt fair pricing policies or looking for a forum to explain the policies they already have in place. In fact, Baker says that he has heard from quite a few pet food vendors since word spread about the conference call he hosted in December.
“It has been an interesting set of calls,” he says. “One group has been vendors that are disappointed they weren’t in on the first call. If they have a policy that they can stand behind, they’re surprised or disappointed that they’re not getting credit for it, so they want to be involved in a second call, which I’m in the process of planning right now.
“There have also been an equal number of vendors calling to ask, ‘What are the best practices being used by the companies that are perceived as being proactive enough in dealing with this issue? What are they doing that I could be doing differently?’ So, I am optimistic that, with the retail community demanding change, nobody is going to get away with doing nothing about this situation. Excuses won’t be accepted anymore—the consequences are just too high.”
As Baker notes, retailers must continue to voice their demands to pet food manufacturers in order to successfully address the danger posed by predatory pricing. Regional pet store chain retailers can play a critical role here, as their size often gives them a taller soapbox with the vendor community.
“One of the strongest areas of growth within pet specialty over the past few years, behind only ecommerce, has been the regional chains,” says Baker. “Those chains, similar to the few independently owned pet product distributors that are left in the United States, have an opportunity to help this category within pet specialty. Frankly, it is our responsibility to use our voices, whether individually or collectively, and the single-stores should benefit from that.”
When it comes to chain retailers that can use their voice to help their peers, no one is more willing than DiTullio. “The role of the multi-unit retailer must be to use our strength in numbers,” he says. “And I’m seeing many other chains joining this fight. We’re doing it not just for ourselves, but for the future of the industry. Maintaining fair gross margins helps everyone.”
Levy is another retailer who has been quite vocal about what may be a defining issue for the future of the independent pet specialty channel. “Independent retailers must demand support,” he says. “We have no choice but to support the brands that support us as retailers. It’s about survival.”