On the Rebound
Whether or not the U.S. economy goes into a full-fledged recovery, next year is sure to present a variety of challenges and opportunities for pet specialty retailers.
At this time next year, will we be referring to 2011 as “The Year of Recovery?” If the professional prognosticators are correct in saying that the worst of the country’s economic woes are finally behind us, this may just be the case. However, there are a number of issues that make seeing the effects of any such recovery at a pet store’s checkout in the coming year far from a certainty.
“Overall, I think that there are signs of life [in the economy], but it’s premature to think that recovery is a done deal,” says Bob Vetere, president of the American Pet Products Association. He points to the country’s high rate of unemployment as one sign that the road to economic recovery will be a long one.
First and foremost among the issues clouding the picture of economic recovery for pet stores–and retailers of every ilk, for that matter–is the ongoing uncertainty shared by many consumers, regardless of what economists are saying.
“I think that consumers might still be in psychological recession,” says Pam Goodfellow, a senior analyst for BIGresearch, a Worthington, Ohio-based market research firm. “When economists come out and say that the recession is over, it’s hard for Joe Consumer to understand. When a consumer sees that his neighbor is still out of work or his home hasn’t sold over the past two years, it’s hard to buy into what economists are selling right now.”
Clearly, consumers are not as bullish on the recovery as the economists seem to be. In fact, Goodfellow says that her company’s research revealed that consumer confidence is not much better than it was in 2008 or 2009.
“[Consumer confidence] is still riding at around the same level as it has in the past two Septembers–about 30 percent of consumers say they’re confident or very confident about the economy,” she says. “In good times, like 2006 and 2007, we were seeing confidence ratings more in the 40-percent range. So, consumers are still very wary about the economic situation right now.”
Prelude to 2011
For most pet stores, the outlook for the coming year will largely depend on how their business performs during the last quarter of 2010. This isn’t surprising, considering the fact that for many retailers the holiday selling season can account for anywhere from 25 to 40 percent of their annual sales. Luckily, most experts are forecasting at least modest growth through the end of the year.
Goodfellow reports that the research her company recently performed for the National Retail Federation suggests a 2.3-percent increase in retail sales this holiday season. However, she is quick to caution that there are still many dynamics at play that can undermine these predictions.
“If there is any kind of upset in the economy right now–if we see a dip in the stock market or the unemployment rate goes up–consumers are really going to react to that,” she says.
Many figures within the pet industry predict good tidings for pet stores in particular this holiday season. “I think you’re going to see the pet industry doing better than the rest of the economy,” says Vetere. “It will be comparable to last year in that way.”
Deb Wilson, director of retailer development for Animal Supply Co., a Federal Way, Wash.-based pet product distributor, is also optimistic about what’s in store in for pet specialty retailers over the next two months. This is largely based on what she witnessed at this year’s SuperZoo trade show in September.
“During the last three years, there was definitely a down, scary vibe [at SuperZoo],” she says. “Everyone was a little tentative. They weren’t opening up and trying new things. They were still holding back. But I think things were back to normal this year. Everyone was back to business. People were excited. There was a lot of energy, a lot of innovation.”
Even if the coming holiday season is as successful as industry experts predict, retailers should not jump the gun in assuming that a full-fledged economic recovery is just around the corner.
“I think we’ve got a ways to go before we see a dramatic upturn,” says Doug Poindexter, president of the World Pet Association, the organizers of the SuperZoo trade show.
Actually, a strong showing during the final two months of this year may slow down growth early in 2011, says Goodfellow.
“I don’t think that any kind of increase in spending is really going to carry over that quickly into the new year,” she says. “If spending goes up over the holiday season, the tendency for consumers once January hits is kind of a spending hangover. Maybe they’ve charged a few things on their credit cards and they’re worried about saving and cutting back again.”
Another factor that will almost certainly slow the economic recovery next year is what many industry experts see as a fundamental (and possibly permanent) shift in the way consumers spend their money.
“I think what we’re going to see when we come out of it is that some buying habits will be permanently affected,” says Vetere. “I think some consumers who have cut back will want to go right back to their old pet-related spending habits once they can, but I think other consumers are going to realize that they were able to make some cutbacks and their pets didn’t suffer from it, so that will be a new buying pattern. In the long run, I think it will all balance out, but it means that growth won’t suddenly ratchet up. It will be slow and methodical.”
Goodfellow agrees with Vetere and sees this as a common concern for just about all retail segments. “We’re not going to see consumers automatically revert to their 2006/2007 spending habits,” she says. “Generally speaking, consumers have really learned their lessons from the recession over the past two years. They’re very much focused on making the most of every dollar and saving.”
However these conscientious spending habits won’t necessarily put pet specialty stores at a disadvantage in competing with bigger, price-driven retailers. “It’s not that [consumers] are being cheap and looking for the lowest price,” says Goodfellow. “It’s about finding value and doing their homework before they spend anything.”
It is no secret that a number of non-pet-specialty retailers have started focusing on the pet care category because of its apparent recession resistance character. Large big-box chains such as Walmart, Target and now even Bed Bath & Beyond, as well as regional grocery chains and a variety of other types of retail outlets, have sought the relative shelter provided by pet products, which have weathered the recession far better than some other categories.
“People are still viewing the pet industry as a safe haven throughout all of the economic struggles,” says Vetere. “If you’ve got retailers like Burberry and Sharper Image emphasizing pet products, it’s pretty clear that they feel that these products are going to be a draw.”
Of course, just because these retail outlets are now placing a bigger emphasis on pet products doesn’t necessarily mean that they’re going to steal market share from traditional pet stores, which still excel when it comes to customer service and advice, says Poindexter.
“I think they’re going to steal business from each other, rather than the independents,” he says. “If an independent uses its ability to provide personal service to customer and answer their questions, they’re going to maintain that edge over the [mass-merchandisers].”
In addition to coming up short in terms of personal service and sound pet-care advice, retailers in other channels are severely limited in how broadly they can tackle the pet care category.
“They can really only put in so many SKUs that make sense from a velocity standpoint,” says Michael Levy, co-owner of Pet Food Express, a 35-store pet specialty chain in the San Francisco Bay Area. While his comment is really directed at the grocery channel, Levy could just as easily be talking about any non-pet-specialty retailer that stocks pet products.
“Even if they get access to more natural brands, I think it’s somewhat self limiting,” he says. “It’s still not the destination that you would go to in order to get everything you need for your dog or cat, and it’s certainly not the destination that you would go to for advice.”
Another bit of good news for pet stores regarding their fight against other retail channels is the simple fact that there aren’t many non-pet-specialty stores that have done an outstanding job with pet products.
“I think a lot of [non-pet-specialty retailers] think that all you have to do is show up and it’s going to be a success, so they have not put in the necessary effort,” says Vetere. He points to Walmart as an example of how many retailers outside the pet specialty channel are still feeling their way around the category, noting that the behemoth had two or three false starts before its latest declaration that it was placing a bigger emphasis on pet products.
However, says Vetere, this doesn’t mean that these outside retailers do not pose a threat to pet stores. “I don’t know that pet specialty should just sit back, put their feet up and figure that everybody is going to shoot themselves in the foot,” he says. “Some of these guys are big enough that they can make an initial mistake and then recoup and come back with a stronger second effort, similar to what Walmart is doing.”
Eye on the Competition
Unfortunately, the fact of the matter is that many non-pet-specialty retailers are getting better at developing their pet aisles.
“I think it’s a safe assumption that they will continue to get better and there will be greater competition,” says Levy. “This means that we, as independents, have to constantly reach for ways to improve our businesses and insulate ourselves by having pet-specialty items wherever possible and really supporting the manufacturers that have invested in us and are not really focused on these other channels.”
While she agrees that pet stores must utilize product selection to set themselves apart from retailers in other channels, Wilson says that doing so has gotten more difficult recently.
“The lines have gotten very blurry with brands,” she says. “Brands are moving across the street at an unprecedented rate.”
The good news, says Wilson, is that a host of new products are constantly entering the market to take the place of brands that move outside the pet-specialty channel. “We’re seeing a whole new group of products come to market for independents,” she says. “It’s all a matter of ebb and flow and moving to the side of innovation.”
While competition from retailers in other channels has certainly become a growing concern for pet specialty retailers, most industry observers agree that the big-box pet stores (PETCO and PetSmart) pose the biggest threat to small independents–particularly since these national chains are placing a bigger emphasis on customer service.
“Before, they weren’t really providing the service, but now they are, just to distinguish themselves from retailers like Walmart,” says Vetere. “Now they’ve got more and more people who can answer specific questions about any given pet. I think as some of the big boxes have tried to add that type of expertise to their stores, it is giving some reason for concern among the mom-and-pops.”
One particular point of concern among many independent pet specialty retailers in this regard is PETCO’s introduction of its new Unleashed stores. With around 20 locations (and more on the way), Unleashed is basically billed as PETCO’s version of a small-format neighborhood pet shop. These outlets focus heavily on providing excellent customer service, as well as offering many of the products (most conspicuously, organic and raw diets) that small independents depend on to set themselves apart from big-box competitors.
“We think that Unleashed is going to be a big threat to the independents,” says Wilson. “We’re carefully watching the brands that are going to cross channels–we’ve already started to see that.”
Working with distributors that are devoted to independent retailers the way Animal Supply Co. is can go a long way in ensuring that a pet store’s selection stands apart from the selection found at Unleashed outlets. Storeowners and operators, however, should also look out for vendors that are selling to PETCO’s new Unleashed stores and respond accordingly.
“There is still an opportunity for independents to differentiate themselves and, in this case, support manufacturers that are supporting the independent and not going into Unleashed,” says Levy.
While Levy understands that PETCO’s Unleashed concept also promises to place a premium on providing the same high level of customer service that can be found at a mom-and-pop pet store, he is skeptical about the company’s ability to follow through, especially over the long haul.
“They’ve said that their focus is on training and having an educated staff,” he says. “I think the jury is out on how well they can provide that and if it’s something that will be long term. That’s still an area where the independent can excel against any large chain.”
Unfortunately for mom-and-pop pet shops, says Levy, Unleashed doesn’t ultimately have to be successful to hurt independents–or even put them out of business–along the way, because they’re still certain to draw away at least some of an independent pet retailer’s customer base.
“It something that the independent pet retailer needs to take seriously,” he says. “But I also believe that [independents] can still easily outperform from the standpoint of customer service and knowledge, and keep that loyalty of their customers–and that’s what it’s all about.”