A Narrowing Pipeline
By Mark Kalaygian
Published: August 1, 2013
Will consolidation among pet industry distributors make it more difficult for independent retailers to access the products they need to set themselves apart from their competition?

 

 

There are seismic changes taking place within the pet specialty distribution channel and the impact is already reverberating throughout the industry.

Consolidation among pet product distributors is rapidly altering the supplier landscape for retailers—particularly small, independent pet stores. What was once a competitive field of mid-sized regional distributors now has two of its major players racing from opposite coasts to become national powerhouses. Fueled by outside investment, Animal Supply Company, based in Federal Way, Wash., and Easton, Pa.-based Phillips Pet Food & Supplies have both made a number of high-profile acquisitions of other distribution companies over the past few years, including Lone Star Pet Supply (Animal Supply Co.) and Super-Dog (Phillips).

“Clearly, the big story in distribution today is the consolidation that has been driven by the venture capital money that has become available to some distributors,” says Steve King, president of the Pet Industry Distributors Association (PIDA). “Over the last year-plus, we’ve seen a lot of acquisitions that are changing what the distribution environment looks like.”

King adds that while no one can predict what the end result of all this consolidation will be, it is certain to thin the field of distributors servicing the pet specialty trade—a trend that started even before Animal Supply and Phillips began their acquisition duel. “I’ve been around long enough to see the transformation from the mid-90s when we had 150 or so distributors servicing the industry to 50 today,” he says. “And there is sure to be considerably fewer than that a couple of years from now.”

To the owner of one regional pet food distribution company on the East Coast, this consolidation and its inevitable impact on the industry closely resembles what has already happened in the food-service industry, which may have even served as a sort of inspiration for the current trend in the pet industry.

“The model that is being utilized [by Animal Supply and Phillips] is a similar model that Sysco used over that latter part of the 20th century,” he says. “They realized that if all of the independent food distributors throughout the country were put under one roof, the company that was able to accomplish that would be in the driver’s seat. And that’s exactly what they accomplished in the 1990s.”

Not surprisingly, distributor consolidation has been a cause of concern among independent specialty stores. After all, the success that these retailers have enjoyed has largely been based on building a unique product mix that can only be achieved by utilizing a variety of suppliers. Now, as the field of suppliers has clearly narrowed, so too has retailers’ access to many of their most important SKUs.

“My biggest concern about all of this consolidation is whether or not we will maintain the variety of products that independents use to differentiate themselves from big-box stores,” says Jim Seidewand, a 40-plus-year pet-retail veteran and owner of Pet World and the Aqua Shoppe, which operates two stores in Rochester, N.Y. “When distributors have merged, we’ve frequently seen very large reductions in the number of SKUs [they offer]. In many instances, they are unique aquatic items and that’s what small independents need to distinguish themselves.”

Deb Wilson, merchandising manager for Pet Food Express, a 47-store pet specialty chain based in Oakland, Calif., has a unique perspective on the consolidation trend among the pet industry’s distributors, having previously served as the director of retailer development for Animal Supply Company. She says that retailers’ concern about access to the right product mix is something that she dealt with first-hand during her tenure with the distributor—which, at the time, had just started down the path of what has become a fast-paced series of acquisitions.

“When I was at Animal Supply and we bought Evergreen Pet Supply—a small, local distributor that was good at [selling specialty products]—the independents were really afraid that they weren’t going to be able to source some of those products that they really counted on,” she says. “Retailers were afraid that the available product mix would all get homogenized into a few big brands through consolidation.”

Unfortunately, it seems that retailer concerns may be proving well founded in this current round of consolidation.

“I’ve talked to many vendors, and [one of the two big distributors making acquisitions] is discontinuing thousands of SKUs during this consolidation, and I’m sure that the other has to be thinking about doing the same thing,” says Jack Drasner, president of PRISM Sales, a firm that helps pet product manufacturers broaden their distribution on retail shelves. “They have to look at all of their divisions and get everyone on the same system in order to recoup some of the money they’re spending.”

Blaine Phillips, CEO of Phillips Pet Food & Supplies, is quick to dispel concerns that his company is or will be making massive SKU reductions as a result of consolidation. In fact, he says that what is happening is quite the opposite. “When we make acquisitions, typically what happens is our brand mix expands,” says Phillips, pointing out that his company currently offers more than 40,000 unique SKUs from 500 different vendors. “When you make an acquisition, what you don’t want to do is say, ‘I’m going to buy this distributor, and through that start cutting SKUs or lines.’ I can tell you that from Phillips’ standpoint, that just doesn’t happen. The worst thing you can do to a retailer is say, ‘We’re going to make an acquisition, and the outcome is going to be that the products you are making money on are no longer going to be made available to you.’

“Quite the contrary, this consolidation is enabling us to start new relationships with vendors that we maybe didn’t have a relationship with before, and we’re gaining the rights to add those products to all of our 15 distribution centers around the U.S.”

Still, some retailers and manufacturers remain concerned about how they will fit in an expanding distributor’s business model. Drasner says that SKU rationalization among larger distributors can hurt not only small pet stores, but also small manufacturers. “If you can’t do multi-million-dollar business with these guys, they don’t want to allocate the space or sales resources to your products. In some cases, million-dollar lines are being delisted,” he says, conceding that the problem in those cases is often slower-moving SKUs within the line. “Who would have ever thought that if you are doing a million dollars worth of business with [a distributor], they just wouldn’t have the room for you?”

The idea that there is a magic number that vendors must reach, in terms of volume, in order to interest larger distributors is another point with which Phillips takes issue. “You would be surprised how many vendors we support that do less than $20,000 a year,” he says. “What drives the decision on what we stock is consumer demand and retailer support for the brand, and the programs that the vendors are doing to drive their business. It’s not a numbers game that sets a bar vendors can’t be under. That’s not how we operate.”

Officials at Animal Supply declined to participate in this story.

Even as consolidation has reduced the number of sourcing options for pet stores and distribution outlets for small manufacturers, some experts contend that the recent trend is simply part of a cycle that is indicative of a mature industry, and it will undoubtedly create new opportunities for smaller regional and niche distributors.

“Consolidation seems to be a natural thing that has happened in other industries,” says Wilson, who goes on to compare the recent distributor consolidation to what happened at the retail level of the pet industry in the 1980s, when Petco and PetSmart started buying up small independent chains. Once again, she draws on her past experience at the distributor level to illustrate how the current trend can benefit small distribution companies, just as the consolidation brought about by the rise of the big-box pet stores opened the door for a new breed of regional retail chains.

When Animal Supply Company acquired a small specialty distributor, Wilson says,  “the other smaller distributors got stronger. If Animal Supply did drop five or six lines that they couldn’t handle, another distributor picked them up.”

This, she says, turned out to be a positive development for small pet stores. “In the end, it just moved things around,” she adds. “It didn’t really change the product mix for the independent retailer.”

Russell Armstrong, owner of Edgewood, Md.-based Natural Animal Nutrition, Inc., a distribution company that services the Mid-Atlantic region, also sees an opportunity for smaller distributors to step up and cater to independent retailers and niche manufacturers that feel left out in the cold.

“As these [mid-size] distributors get bought up by the investment-owned companies, it just opens up new opportunities for smaller distributors that are already in the market to expand,” says Armstrong. “In order for a distributor to grow, you have to have a strong business policy. It’s not adequate anymore to just present products to your dealers. You have to find products that have specific features and benefits for both the pets and for the business. That’s the key for smaller distributors to grow in the voids created by [consolidation].”


Small Distributors, Big Opportunity
Drasner is confident that these smaller distributors will rise to the occasion. “What I think we’re going to see is a turnaround among some of the smaller regional distributors,” he says. “If they’re smart, they will become more sales focused and work the secondary [product] lines.

“Some of the vendors I work with, they may do six figures with a distributor. Now, for some distributors, that may be a great line, but the big guys are going to say, ‘Nah, I don’t have room for six figures; I need seven figures to make this work.’ A smaller distributor can take a look at these lines and be more aggressive. It’s up to them to pick up the ball and take advantage of this situation. And I don’t see any of them running away from the competition. A lot of them are looking at the situation as a big opportunity.”

From his vantage point, King is already seeing smaller distributors respond to the opportunities that consolidation has presented them. “Niche players are very nimble,” he says. “They are able to attract and handle specialty lines that do well in the independent pet store environment but aren’t necessarily attractive to some of the larger distributors.”

Seidewand is one storeowner who is open to working with new, smaller suppliers that are able to provide access to the products he needs to keep his business competitive. “On one hand, the largest distributors have the most efficient systems and probably the sharpest pencils,” he says. “On the other hand, if smaller niche players can bring unique products to the store, they become important players. Whether those small players can become efficient in their distribution systems will be the real challenge.”

“I’m not primarily a designer dog food retailer. I’m mainline aquatics and small-animal products—the conventional pet-store-type products. Now, it’s hard to base a small distributorship based on niches in those areas. But I look forward to any small niche players that develop.”

For small distributors, the key to effectively competing against the formidable size and reach of Phillips Pet Food & Supplies and Animal Supply Company is the ability to deliver not only the right products, but also a high level of service.

“Just like an independent chain can compete with Petco or PetSmart by out-servicing them, the same holds true for the small distributors when going up against the big guys,” says Drasner. “I’ve already heard from some key retailers across the country saying that they’re not getting the attention and service that they were getting before this consolidation.”

This seeming drop-off in service levels is something that Armstrong has also observed among the bigger class of distributors. “These mega-distributors, although they have salespeople making calls and claim to offer high levels of service, they clearly focus the bulk of their service on large accounts,” he says. “The B, C and D accounts, if you want to call them that simply based on their volume, they’re left relatively unattended and they’re not serviced very well.”

But according to Phillips, the idea that service is suffering as his company expands simply is not grounded in reality. He notes that Phillips Pet Food & Supplies continues to offer services such as providing both vendors and customers with sales training at retail, as well as marketing programs to drive shoppers into pet stores.

In fact, a case can be made that consolidation actually makes larger distributors better partners for pet specialty retailers. “With the acquisitions, the level of service that we provide to our customers increases,” says Phillips. “Making more products available to retailers from a single source of distribution has many benefits. After consolidation, we’ve increased the number of deliveries that stores receive per week. That increased frequency of deliveries enables retailers to increase their inventory turns, which means less cash needed to stock inventory. It provides customers with fresher code dates. It reduces the amount of safety stock that a retailer needs to carry on any item they purchase from us.

“There are some large distributors in the industry today, but there are still a lot of small distributors, and each one of us plays a vital role in the success of a pet store. But reducing the number of distributors a store purchases from will help take cost out of the system. They end up with a much more efficient supply chain.”

Such efficiencies, he says, are essential for small pet stores to compete against bigger retailers in the market.