Despite Disney, Petsmart Forecasts Slower Growth

Petsmart Inc. today reported it expects to grow 2 to 4 percent in 2013, both on a comparable store basis and overall. That figure trails the APPA’s recent forecast of 4.1 percent for the industry overall and fell short of analyst expectations of 5 percent.

Predictably, Petsmart’s stock is being driven down (about 7 percent as of 4:30 EST) in after-hours trading.

This, despite a strong fourth quarter in which Petsmart saw overall sales grow 15 percent to $1.88 billion and net income rose 31 percent to $134 million. Granted, Petsmart’s fourth quarter and 2012 fiscal year included an extra week, so the revenue climb isn’t as robust as it seems –the extra week would account for about half the quarter’s sales growth and less than 2 percent of overall sales for the year. Petsmart reported the extra week added $126 million to sales, so without the extra week its fourth quarter sales would have grown 7 percent.

 For 2013, Petsmart will be back to its 52-week fiscal year—one less week to try to grow sales.

During the year, it plans to open 45 to 50 net new stores in its 12,000- and 18,000-square-foot formats and also test 12 micro stores ranging from 6,000 to 7,500 square feet, according to CFO Chip Molloy. The “micro stores” are slated to open during the first half of the year and are expected to offer a broad assortment of products and grooming, training and pet adoption services.

The company reported strong sales growth in merchandise categories: consumables, hard goods and live goods. It plans to strengthen its growth in the natural/superpremium category by adjusting space allocations to increase available space for Blue Buffalo and Petsmart's proprietary Simply Nourish line, according to David Lenhardt, president and COO (and future CEO in June, when current CEO and chair Bob Moran will relinquish the CEO duties).

Also bolstering sales: the chain’s recent licensing deal with Disney for character-based pet apparel and toys, including Muppet characters such as Kermit the Frog. Also planned, a second quarter reset of its reptile department. Lenhardt says reptiles are the fastest-growing specialty segment for Petsmart.

For its fourth quarter, Petsmart posted comp store sales growth of 4.6 percent. Service sales grew 15 percent to $194 million.

For the year, Petsmart reported overall sales were up 11 percent to $6.8 billion, comp store sales grew 6.3 percent and services grew 10 percent to $740 million. The year’s overall sales more than doubled the APPA’s estimate for overall industry growth of 4.7 percent and services sales slightly outpaced the industry’s 9.7 percent clip.

Phillips Makes Splash With Royal Deal

In the latest move toward pet industry distributor consolidation, Phillips Pet Food and Supplies acquired Royal Pet Supplies, with distribution centers in Brentwood, N.Y., and Pompano Beach, Fla. The move allows Phillips to explore relatively uncharted territories: specifically, the underwater world of aquatics.

“The primary objective of this new venture is to continue to build a best-in-class distribution network that will give our customer’s unprecedented service,” Blaine Phillips wrote in a letter today to Royal’s customers. “Combined, we will offer our customers a full portfolio including full-line aquatics which allows us to address our retailers complete supply needs.”

The move more fully into aquatics comes at a time when the aquatics sector has rebounded: the latest APPA pet population figures estimated 11.7 percent of U.S. households kept freshwater fish and 1.5 percent kept marine fish. The sector had dipped in 2010, but has otherwise hovered about 12 percent since 2000.

 The deal may also give Phillips added heft in advance of a march west toward a national footprint, much as Animal Supply Co.’s acquisition path has led it down the Pacific Coast and across the southern portion of the country to the East Coast. Neither Royal nor Phillips seemed to fit Animal Supply’s needs due to overall size and territorial overlap.

“Both organizations are operating in the same manner as they have,” Phillips wrote. “Gary Nocera, the Royal sales team and drivers will continue to support you. As we work to integrate and consolidate our organizations, we will keep you advised of pending changes. Phillips will be able to offer increased sales support, inventory management, and a variety of other services.”

Phillips did not say whether the company will ultimately consolidate any distribution centers, but the Royal facilities are relatively distant from the Phillips facilities. Phillips operates distribution centers in Pennsylvania, Massachusetts (acquired in its 2010 acquisition of Super-Dog Pet Food), South Carolina, Florida, Ohio and Indianapolis.

The deal will see Phillips add Royal distribution centers in Brentwood, N.Y., (near New York City, about midway between Easton, Pa., and Taunton, Mass.) and Pompano Beach, Fla. (on the Atlantic Coast, 200 miles south of Plant City). 

“The integration of the companies will allow us to learn from each other, focus on the strengths of each and combine the best practices of both organizations to form strategic alliances with the vendor, ourselves, you and your customers,” he wrote.

The Parsley or the Flakes?

Last Wednesday, United Pet Group voluntarily withdrew “limited quantities” of four of its pet bird diets, including Ultra-Blend Gourmet for Parakeets and three Ecotrition Grains and Greens nutritional supplement blends. The withdrawn products could possibly contain salmonella-tainted parsley flakes from its supplier, Specialty Commodities Inc., which had recalled the flakes Feb. 11, or 16 days earlier.

At least two other pet food makers that had received the potentially bad parsley reacted much quicker: rival Kaytee, a unit of Central Garden & Pet Co., which managed to get the word out eight days earlier and before Global Pet Expo, and The Honest Kitchen, which set a new benchmark for recalls two days later during the show. 

At the time, I shuddered to think how many more companies would issue related recalls after the show. So far, just UPG, which announced its action not on the Friday after the show (which would have been my guess, as it is a time-honored way to sneak bad news past the media) but on the following Wednesday. Even with a middle-of-the-week release, it appears that only one (Pet Age) of the three main pet trade media outlets has so far reported on the withdrawal.  

As unsettling as the slow response of both UPG and much of the trade media is, the more troubling recall is Hy-Vee’s recall  (on a Friday, no less) of several Hy-Vee Complete Dog pet foods made by Pro-Pet LLC.

This recall is troubling because it was for excess aflatoxin. 

Aflatoxin, a by-product of the mold Aspergillus, can be deadly to pets if eaten in excess, especially over a long time. Worse, Aspergillus is commonly found in corn, especially during drought conditions. As much of the United States suffered record drought conditions last year, 2013 could shape up to be a bumper year for aflatoxin-related recalls and/or illnesses.

And I am sure many pet owners will be appalled to learn that several states received FDA approval to increase the amount of aflatoxin-containing corn in animal feed due to the drought’s impact on the corn harvest, as Reuters reported. 

U.S. Pet Spending to Hit $100 Billion by 2030?

Pet spending in the U.S. increased 4.7 percent from $50.96 billion in 2011 to $53.33 billion in 2012, according to the American Pet Products Association. The APPA forecast growth of 4.1 percent to $55.5 billion in 2013.

At that rate, U.S. pet spending would surpass $100 billion a year in 2026.

“We are noticing several trends contributing to the growth of the industry,” says Bob Vetere, president and CEO of the APPA. “These trends include the positive impact of pet ownership on human health, which we expect to continue to fuel pet industry sales for years to come. And, as the pet industry proves to be recession resistant, we’re confident that this upward trend in spending will endure.”

What's driving the continued growth? For one thing, the pet population appears to be growing. With its just completed 2013-2014 National Pet Owners Survey, the APPA estimates a record 68 percent of U.S. households now own pets, up significantly from 62 percent in 2010.

While pet population figures reflect gains in the adoption of dogs and cats, it also reflects increased purchases of various hobby pets: fish, birds, reptiles and small animals. The APPA reported live animal sales grew 3.3 percent from $2.14 billion in 2011 to $2.21 billion in 2012 and forecast sales growth would accelerate to 5.9 percent in 2013 to $2.31 billion.

While live animal sales are a relative sliver in the overall pet spending pie, they do spur spending in the supplies and OTC medications category, which was the fastest growing of the three major categories (pet food and veterinary services are the others). Supplies and OTC medications grew 7.4 percent in 2012 to $12.65 billion and is forecast to grow 4.4 percent to $13.21 billion in 2013.

The supplies and OTC medications category also benefited significantly from a rise in the use of OTC medications as an alternative to professional veterinary care, the APPA reported. Indeed, veterinary spending grew a comparatively slow 1.9 percent in 2012 to $13.67 billion. That growth rate is forecast to increase to 3.9 percent in 2013. These figures correlate with comments made by Bob Antin, president and CEO of VCA Antech, the largest operator of veterinary hospitals in the U.S., in a quarterly conference call earlier this month.

“The bigger one [factor affecting growth] over the last few years has been the economy,” Antin said. “Some of it is counter intuitive. Our most intensive hospitals, the larger specialty hospitals, the ones that have the capability that you need when your pet is sick, those have had a higher growth rate and a higher revenue per invoice than general practices. So, you would think it would be the other way around that people would be hesitant to spend the money on sick pets. In turn, what they're really hesitant is they're hesitant to spend the money on well pets.”

Pet food remains the largest single category of pet spending, accounting for nearly 40 percent of the overall market. It grew 3.9 percent in 2012 to $20.64 billion and is forecast to grow 2.9 percent in 2013 to $21.26 billion. The pet food market obviously grows with the overall pet population, but also benefits from continued long-range trends such as the humanization of pets  (and subsequent pampering) and trends toward more natural and premium foods (which are perceived as healthier by consumers and may be seen as an alternative to veterinary care).

Indeed, pampering drove the fastest-growing category of U.S. pet spending in 2012: Pet Services (grooming, boarding, day care, training, and other non-veterinary services). That category grew 9.7 percent in 2012 to $4.16 billion and is forecast to grow another 9.1 percent to $4.54 billion in 2013.

APPA: Pet Population, Spending at All-Time Highs

The percentage of U.S. households owning pets grew a staggering 600 basis points to 68 percent in 2012 from 62 percent in 2010 and a previous peak of 63 percent in 2004 and 2006, according to new data released yesterday by the American Pet Products Association at its Global Pet Expo trade show in Orlando, Fla.

That pet population growth continues to fuel growth in pet spending, which the APPA reported grew 4.7 percent in 2012 to 53.33 billion (from $50.96 billion in 2011). The APPA forecast pet spending would increase 4.1 percent in 2013 to $55.5 billion.

The trade association's 2013-2014 National Pet Owners Survey indicated about 82.5 million U.S. households now owned at least one pet, up nearly 10 million households from the 72.9 million households indicated in the 2011-12 survey.

That suggests a 13 percent increase in the number of pet-owning households over the past two years during a time where consumer spending in general has been tepid. It is considerably more bullish than the American Veterinary Medical Association’s latest statistics, which estimated the overall percentage of U.S. households owning pets at the end of 2011 was 56 percent, down 2.4 percent from 2006. 

Source: American Pet Products Association  2013-2014 National Pet Owners Survey

In addition, the new APPA data showed that the U.S. now has 56.7 million dog-owning households (46.2 percent of overall households) and 45.3 million cat-owning households (37.3 percent overall). The APPA estimates the U.S. pet dog population at 83.3 million dogs and the pet cat population at 95.6 million cats. (Cat owners typically own more cats than dog owners own dogs.)

By comparison, the latest AVMA estimates were 70 million dogs and 74.1 million cats.

While the AVMA and APPA have different survey methodologies and that signs pointed to an increase of pet acquisitions in 2012, the two studies generally track each other fairly closely, with the APPA figures traditionally trending somewhat higher, in large part in that in measures pet ownership over a 12-month period and the AVMA measures pet ownership at a given moment. Thus, the APPA figures would include homes that had recently lost or relinquished their pets and the AVMA figures would not.

Also, the APPA’s estimates of households owning pets have not seen such a dramatic shift from one survey to the next. The previous highest increase was 300 basis points, from 56 percent of households in 1994 to 59 percent in 1996. Much like this year’s strong rebound followed, the sharp increase in 1996 followed a dip from the prior survey. In 1992, the survey estimated 58 percent of U.S. households owned pets.

The APPA attributes the climb in pet-owning households not to anomalies in surveys or a stabilizing economy but word-of-mouth promotions of the joys and benefits of pet ownership.

“As an industry, we have been working very hard to promote the joys and benefits of responsible pet ownership and we are thrilled to see that more people are opening their homes and sharing their families with pets than ever before,” said APPA president and CEO Bob Vetere. “We believe that key initiatives have contributed to the growth and increasing word-of-mouth including the formation of the Human Animal Bond Research Initiative two years ago, a large national social media campaign called Pets Add Life, school program, Pets in the Classroom and public service ad campaign, The Shelter Pet Project.”

What may be particularly promising for the overall pet industry is that the APPA reported recovery in the number of households owning pets other than cats and dogs. All of these species had seen declines in 2010, likely due to lingering recession concerns. And about 40 percent of U.S. households own multiple types of pets, APPA reported.

Its survey will be available to purchase at www.americanpetproducts.org at some point.

  

Total Recall: Pet Foods Pulled for Salmonella, Plastics

What is the hottest trend at this week's Global Pet Expo? It just might be recalled pet food products.

Global, the largest pet trade show in the U.S., is the traditional launching pad of new pet products into all channels of the pet trade: mass, supermarkets, pet specialty, distributors, etc.  Pet product makers time their product development cycles to ensure they can make a promotional splash in Orlando.

The last thing these companies want to deal with is a product recall, yet at least four companies representing at least 10 brands have recalled products due to possible Salmonella contamination this week alone since set-up day for the big trade show.

And Nature’s Variety recalled one batch of its Instinct pet food last Friday due to pieces of clear plastic being found in some bags.

Add to these the recalls and product withdrawals that occurred last month due to illegal antibiotic residues detected in Chinese chicken jerky pet treats marketed by Nestlé Purina and Del Monte, Hartz, and Publix and Cadet and you have a sizable trend.

I shudder to think how many more products may be recalled tomorrow (Friday) due to Salmonella concerns after the show ends and most national media has gone home for the weekend. Many companies opt to release bad news late on Fridays in an effort to go unnoticed, and I certainly understand the desire not to be the talk of the industry’s biggest show for all the wrong reasons. 

So the companies that recalled their pet food products thus far this week due to Salmonella concerns deserve credit for acting responsibly and decisively in withdrawing the potentially problematic products. And it bears remembering that most companies that issue voluntary recalls of their products are acting responsibly and demonstrating that the pet food safety system, while not perfect, works well. And I hope the companies involved in any recall study the failures and take steps to prevent future breakdowns.

The Honest Kitchen of San Diego did just that in what is a textbook example of how to issue a recall. Unlike most salmonella-related pet food recalls, meat was not the contaminated ingredient in this case. Dried parsley was…potentially.

Lucy Postins
(image available at TheHonest Kitchen.com)

“While our quality control tests did not find evidence of Salmonella in any of our finished products, we are accountable for everything we make, and are taking precautionary action to ensure the safety and integrity of our products,” said Lucy Postins, company founder and CEO.

The company issued a press release that clearly illustrated how to identify an affected product, a sincere letter from Postins on its website, and a full FAQ page to address the issue. Each of those resources outlined steps the company planned to take to minimize chances of this happening again. Those steps include steaming all dehydrated leafy greens used in its products as an additional process to eliminate potential pathogens, conducting additional tests on leafy greens when they arrive at the Honest Kitchen’s manufacturing facility, and severing its relationship with the supplier that provided the potentially contaminated parsley.

Parsley also played a role in another of this week’s recalls: Kaytee Products’ recall of 17 SKUs of bird treats and greens. http://www.kaytee.com/assets/021/41844.pdf  Kaytee had received potentially contaminated parsley flakes from Specialty Commodities Inc. None of the affected Kaytee products have yet tested positive for Salmonella, but the company pulled the product due to the potential issue. (The big concern with Salmonella in pet products is the potential of human illness from handling contaminated product.)

This week’s other recalls included Natur-Vet, which recalled NaturPet and Natur-Vet chicken jerky treats http://www.fda.gov/Safety/Recalls/ucm340468.htm because its U.S. supplier (not Chinese) informed the company of possible Salmonella contamination at the processing plant. Again, none of the recalled products had tested positive for Salmonella.

This week’s final recall, and its biggest, was Kasel Associated Industries recall of all dog treats http://www.fda.gov/Safety/Recalls/ucm340337.htm made at its Denver, Colo., facility over a five-month period from April 20, 2012, until September 19, 2012. This recall affected 48 SKUs across six brands: Petco, Boots & Barkley (Target brand),  Bixbi, Nature’s Deli, Colorado Naturals, and Best Bully Stick.

Items recalled include U.S.-sourced chicken jerky treats, pig ears and snouts, beef bully sticks and femur bones, pork jerky products, salmon jerky and lamb jerky. Kasel reports it has had no reports of pet or human illnesses associated with the recalled products.

Unfortunately, too many of these companies’ competitors are no doubt exploiting their misfortune, some even boasting that they’ve never had a product recall.  Certainly some of this week’s recalled brands had made similar claims. But I suspect that a pet food company that has never recalled any of their products for any reason may be very lucky or simply not adequately testing their products—probably both.

Insolvency: As Easy as ABC

Unpaid contributors, employees and other creditors of the former BowTie Inc. have been notified that the company has ceased to exist and that an assignee has been charged with  “closing down all BowTie business,” including unpaid contributor payments and other debts leading to BowTie’s insolvency.

For the new I-5 employees, this provides a nice and legal way to dodge the collection calls that had been dogging them for months: pass the buck, so to speak.

“The Assignee is the only person who can address BowTie accounts payable questions from this point forward,” wrote chief content officer June Kikuchi in a letter to contributors.

What the letter did not explain was that there was no guarantee that contributors would be paid fully.

BowTie opted to retain Insolvency Services Group Inc. of Los Angeles and to execute a general assignment for the benefit of creditors, also known as an ABC. An ABC is an alternative to a bankruptcy filing and its main benefits are speed and simplicity by avoiding bankruptcy court delays and bureaucracy. So the resolution of the case is quicker and less expensive, and creditors should be paid sooner (within the year).

But like a Chapter 7 bankruptcy, it is very much a liquidation of the company. The main assets were already sold to I-5, so the assignee’s role now is to send notices of general assignment to the company’s creditors, followed by formal proof of claim forms to all creditors, as listed by the assignor, within 30 days. Creditors typically have between 150-180 days to submit their claims.

The company’s remaining assets are then sold and proceeds distributed to creditors, with secured creditors paid first, followed by tax and wage claims, and lastly unsecured creditors. Any surplus is returned to the assignor. But it seems unlikely that there would be a surplus, or even sufficient assets to pay off all the debt.

So in the case of BowTie’s contributors, they are toward the back of the line, behind many current I-5 and former BowTie employees that lost accrued vacation pay (wages) when the assets were sold, the government, the banks and the assignee. Also at the back of the line are other service providers of BowTie, which likely include cleaning and landscape services, paper suppliers, other publishers and information providers, sales rep groups, and more.

While the ABC does not discharge the assignor from its debts, the reality is that the assignor has no real assets, so an unhappy creditor may not have many viable options for collection. Creditors that object to the general assignment could also file documents to force an involuntary bankruptcy on the assignor, but because the claims priority is the same, the involuntary bankruptcy usually would not be beneficial.

So, as I wrote in my prior post "New Beginnings: Zoetis, I-5 Emerge from Past Lives," I-5 will face a challenge in restoring much of the goodwill BowTie had lost over the past few years as the company struggled. While the new company could argue that they had saved the publications and therefore a market for the contributors, it would do well also to remember that these faithful contributors were instrumental parts of, in the words of interim CEO Mark Harris, “the talented, passionate teams that have built such a robust content engine.” It would also do well to restore the vacation pay of the former BowTie employees. Such an investment in human capital could pay off for many years to come.

To contact the BowTie assignee, call 949-494-7160 or email claims@managementprotem.com.

 

New Beginnings: Zoetis, I-5 Emerge from Past Lives

Today marked the beginning of two new entities, both created largely in whole from their former corporate beings and both significant within their niches in the pet and animal health world: Zoetis Inc. and I-5 Publishing LLC. Both have hopes of healthier growth on their own.

The similarities end abruptly there. 

Zoetis, formerly Pfizer Animal Health, was spun off by parent Pfizer Inc., raising $2.2 billion for a fraction of the business. Pfizer retained about 83 percent of Zoetis, which now has a market value of roughly $12.5 billion. Zoetis’s stock price climbed more than 20 percent today, its first of trading, closing at $31.01 from its $26 opening, which was higher than its expected range of $22-$25. Its IPO was the largest since Facebook’s last May.

Zoetis is the largest player in animal health, and with its diversified product offerings will serve as a broad proxy for the health of the animal health industry. Its business is fairly evenly divided between food animal and companion animal, between pharmaceuticals and biologicals, between the Americas and the rest of the world.

I-5 Publishing, on the other hand, is a joint venture of publishing industry executives David Fry and Mark Harris created to buy certain assets of BowTie Inc., once the dominant publisher of pet and animal magazines and books (and my former employer). Without disclosing terms, the pair told Folio magazine that the deal was in the $10 million plus range. Certainly not disclosed was how much BowTie owed the pair’s respective companies, both of which were vendors.

Harris is co-founder and co-owner of National Publisher Services (NPS), which provides publishers with distribution, circulation and other services. Fry is chief technology officer of family-owned Fry Communications, a major printer for BowTie, and chairman of NPI Ventures LLC. NPI was formed by David and Henry Fry to invest in non-print initiatives, such as its 50-percent stake in NPS.

I-5, which is now operating out of BowTie’s former headquarters in Irvine, Calif., and its offices in Chicago and Lexington, Ky., acquired BowTie’s magazines, including Dog Fancy, Cat Fancy, Pet Product News International, Veterinary Practice News, Horse Illustrated; online properties including AnimalNetwork.com, DogChannel.com, CatChannel.com, BirdChannel.com, ReptileChannel.com, and FishChannel.com; and at least some BowTie Press book titles. BowTie Inc. is owned by Norman Ridker, who will not be part of I-5.

I-5 retained about 85 percent of current BowTie employees with the transition, including senior management: chief financial officer Nicole Fabian, chief content officer June Kikuchi, and vice president of consumer marketing Dolores Whitlo. Most, if not all, of the company’s book editors were laid off, so presumably the company is shifting away from the book business. Fry told the Orange County Register that I-5 ultimately expects to retain more than two-thirds of the employees and does not plan to shutter any more titles, although it will be reviewing their profitability. 

In July 2012, BowTie closed several publications, including Aquarium Fish, Bird Talk, Water Garden News and Dog World. I-5 has acquired all dormant titles as well, but it has not announced any plans to resurrect any of them at this time. Indeed, BowTie had just pulled the plug on the WaterGardenNews.com site earlier this year, redirecting traffic to the Pet Product News International site and removing access to thousands of pages of information pertaining to the water feature industry.

BowTie had undergone several rounds of layoffs in recent years, including about 10 percent of its then workforce (including me) in July 2012.

Harris will serve as interim CEO of the company and has hired Daniel Ambrose, managing partner of advertising sales consultancy Ambro.com, as chief strategy officer for digital and advertising. “In today’s increasingly complex media market, a company that can quickly package and distribute targeted content and innovate multifaceted marketing solutions is essential,” Ambrose said.

I-5 is expected to make significant investments in upgrading the company’s computers and software. Much of its efforts will be on the digital side of the business.

“We are thrilled to bring these storied brands under our umbrella,” Harris said. “Combining the talented, passionate teams that have built such a robust content engine with the technology and expertise of our existing joint ventures creates the perfect platform on which to create an infinite variety of special-interest content for delivery in all formats.”

Indeed, the mood of surviving employees has shifted from doomed to cautiously hopeful.

Still, I-5 will face a challenge in restoring much of the goodwill BowTie has lost over the past few years as the company struggled: animal enthusiasts upset about magazines closing, contributors upset about long overdue payments, and strategic partners that saw ventures fall short of expectations.

I-5 apparently did not assume any of BowTie’s debt with the acquisition, with the possible exception of money owed to Fry and NPS. Many with knowledge of BowTie’s financial status had speculated it was headed toward bankruptcy. It had fallen behind in payments to contributors and other vendors. Representatives of I-5 have not yet responded to queries regarding how parties owed money by BowTie will be able to collect.

Ironically, on the day I-5 began operations, assets of BowTie’s sister company Thoroughbred Times, which declared Chapter 7 bankruptcy in September, were auctioned off in Kentucky, according to The BloodHorse, a rival of Thoroughbred Times. According to The BloodHorse report, Thoroughbred Times bankruptcy filing listed $1 million in assets and $5.3 million in debts to former employees, contributors, The Jockey Club and others.

Debt also plays a role in the Zoetis story, as the company completed a $3.65 billion debt offering shortly before the IPO. But with 2012 sales of $4.3 billion, that debt should be manageable.

Zoetis expects the overall food animal health market to grow at about 6 percent annually and the companion animal health market to grow at about 5 percent annually over the next several years. That suggests moderate growth for Zoetis, barring the unlikely prospect of spectacularly poor management.

Moreover, Zoetis will be able to focus on its own R&D and marketing initiatives, no longer playing second fiddle to human health. This in and of itself should contribute to its overall performance.

Pfizer retains the option to sell off part or all of its Zoetis holdings if Zoetis stock performs well, or spin it off tax-free to existing Pfizer shareholders if it lags. It is expected that Pfizer will be clear of Zoetis within 18 months.

The move to spin-off Zoetis was prompted by an effort to please investors that were looking for more sizzle from Pfizer’s stock. Indeed, off-loading Zoetis (and other non-human pharmaceutical businesses earlier) does give Pfizer an immediate return.

However, in the long run, both Pfizer and Zoetis may lose out on some of the R&D synergies, especially as the concept of One Health takes hold. That concept suggests the health of people, animals and the environment are all interconnected and Pfizer may yet regret losing its animal connection.

Robins Named Top Pet Journalist for 2013

Congratulations to Sandy Robins for being selected as 2013 recipient of Global Pet Expo’s annual “Excellence in Journalism and Outstanding Contributions to the Pet Industry Award.”

Global’s organizing partners the American Pet Products Association and Pet Industry Distributors Association unveiled her selection on Monday. She will receive her award during a media reception during Global Pet Expo.

“With such dedication to spreading life-enhancing information on behalf of pets, we couldn’t be more confident and pleased with our decision to award Ms. Robins,” said Bob Vetere, president and CEO of APPA. “Her enthusiasm and passion for both pets and the journalism profession is what this award is all about and we’re thrilled to honor her.”

She certainly deserves recognition for her prolific writing about pet topics and other activities, including serving as a spokesperson for Petco, a pet safety advisor for Toyota, and a featured blogger of Sergeant Pet Care Products’ Pet Health Central blog. Incidentally, Sergeant’s has generously sponsored the Global Pet Expo press room and the official APPA press conference for many years running, helping many journalists to provide coverage of the trade show.

Robins is vastly more deserving than some past selections, notably Rachael Ray and Ellen DeGeneres. With no disrespect intended toward either of those women, to honor them as “journalists” borders on the absurd. It is akin to awarding me the Miss Congeniality Award. I understand bestowing those two with the “Dick Van Patten Award for Best Celebrity Owner of a Pet Food Company” or “Pet-Friendly Media Personality of the Year,” but for journalistic contributions to the pet industry, I don’t think so. But maybe I’m just a bit of a scold about what it means to be a journalist. Or perhaps I'm bitter that I've never been selected for either the Global award or Miss Congeniality.

I greatly admire (and know) most of the recipients of the award for what they have done for the benefit of animals and their people through their work. Past recipients such as Dr. Marty Becker and Steve Dale are both larger-than-life icons that have inspired me deeply on a personal level. I have a tremendous amount of professional respect for Gina Spadafori, Janice Brown and Victoria Stilwell.

With all that said, I wish Global Pet would retire or rename the award.  It is a generous and well-meaning gesture that inadvertently places the most deserving recipients in the awkward position of accepting an award for contributions to an industry rather than contributions to their readers. Most journalists seek to serve their readers and, in this field, their readers’ animals.

And those journalists are indeed who this award is intended to recognize: “…individuals in the media who have the power to influence millions of people and use this to positively promote the joys and benefits of pet ownership. Whether via print, broadcast or internet mediums, these distinguished members of the press produce stories that highlight responsible pet ownership and all the exciting services, products and activities that make spending time with our pets even more enjoyable,” according to the sponsors.

So here’s to Sandy Robins winning the final Global Pet Expo “Excellence in Journalism and Outstanding Contributions to the Pet Industry” award.

Hot Segments? Natural, Naturally.

The natural/super premium pet food and treats market posted the strongest growth over the past two years, but both hard goods and the small animal and aquatics sectors are beginning to see life again, according to Scott Bender in his “Sales Trends in the Pet Industry” from the PIDA Management Conference.

This probably doesn’t and shouldn’t surprise anyone. On a broader scale, many Americans (certainly not all) are paying more attention to what they eat and paying more for what they eat. This trend applies to their children and, to a greater extent, their pets (animals don’t seem to resist eating healthful foods like people can). Although pricier, America’s pet owners also see premium nutrition as a hedge against higher veterinary costs.

This, of course, isn’t new information, but the numbers continue to support the validity of this trend. Natural is the fastest growing sector within foods and treats, the largest slice of the pet care pie, accounting for 38 percent of overall pet expenditures, followed by 28 percent for veterinary care and 22 percent for supplies, according to the American Pet Products Association.

The food and treats category has grown between five and seven percent annually for the past three years, worse than its 10 percent pre-recession rate but better than a 2 percent slip in 2009, Bender said, citing APPA statistics.

But natural grew 15 percent in 2012, vs. 5 percent of the overall pet food and treats market. The segment is now approaching 15 percent of the total pet food/treats market, Bender said. Natural’s home is pet specialty, where it accounted for at least 60 percent of the food/treats market in 2011. Natural could grab another 5 points of market share in pet specialty in 2012, Bender estimated.

That growth is likely to slow, possibly as soon as 2013, simply because such a rate of growth is not sustainable, even if the ingredients are. And, of course, other channels are paying attention and trying to gain share back (i.e., Walmart’s Pure Balance launch). But the natural/super premium category should continue to grow, especially as it makes greater inroads within cat foods and treats from dog food.

Far more exciting news for the broader pet industry, however, is the recovery of hard goods and the small animals and aquatics sector.

Hard goods (such as bowls, crates and beds) are now growing more in line with consumables, at least for Petsmart, Bender reported. Growth in both categories fell sharply during the recession, with hard goods sales at Petsmart actually shrinking 2 percent in 2009. Petsmart continued to grow due to continued, but slower, growth in consumables (nearly 9 percent in 2009).

There is still room to grow for hard goods, which are still about 5 percentage points below precision mix levels at Petsmart. In 2012, Cleveland Research estimates hard goods would account for about 33 percent of Petsmart sales, compared to the nearly 40 percent in the years preceding 2008. That suggests there is continued room for growth in hard goods sales, which average twice the margin as consumables at Petsmart, Bender said.

Bender tied the hard goods growth to the housing market and new pet acquisitions. Most hard goods are purchased in the first couple years after a pet acquisition, naturally, and if housing trends continue to improve, so will pet acquisitions, Bender said.

Indeed, Petsmart is seeing live pet purchases (primarily small animals and fish) improve, with growth possibly exceeding 10 percent for 2012, Bender said. These sales had been essentially flat from 2008 to 2010. Petsmart plans a fish category reset later this year, Bender said.

Again, pet specialty is poised to benefit from a continued recovery of small animal and fish keeping as it dominates live animal sales, which spur sales for associated consumables and hard goods.

Antibotics Prompt Hartz Chicken Chews Withdrawal

Hartz Mountain Corp. of Secaucus, N.J., is the latest company to pull its chicken treats for dogs off the market after testing the Chinese-made items for antibiotics. Hartz is at least the fifth company to jerk the treats off the U.S. market after residue of unapproved antibiotics were detected in samples.

 

In Hartz’s case, the antibiotic residue was detected in about one-third of tested samples after the company began testing for it following the initial withdrawals by Nestlé Purina and Del Monte and subsequent ones by Publix and IMS Trading Corp.

 

"Upon learning about the nationwide voluntary withdrawal of several other brands of chicken jerky products through media reports, Hartz acted immediately to begin additional testing to determine if the same unapproved antibiotic residues were present in our products," said Sean McNear, senior director of quality and regulatory at Hartz.

Hartz is voluntarily withdrawing all of its Hartz Chicken Chews and Hartz Oinkies Pig Skin Twists wrapped with Chicken for dogs because of trace amounts of the residue. 

Antibiotics detected include sulfaclozine, tilmicosin, trimethoprim, enrofloxacin and sulfaquinoxaline. The FDA withdrew enrofloxacin’s approval for use in poultry in the United States in 2005 due to concerns that it was contributing to fluoroquinolone-resistant strains of Campylobacter, a bacterium that can cause foodborne disease in people. Although the antibiotics are not approved in the U.S. for use in poultry, they are approved elsewhere in the world, notably China and Europe. 

While there has been widespread safety concerns regarding Chinese-made chicken jerky treats (and other jerky-type treats) for pets, the U.S. FDA has been unable to definitively link the products with adverse event reports. All of the recalls thus far have been because of this antibiotic residue, which all concerned have described as a technicality rather than a safety issue. Thus, pet owners will be able to find the Hartz products on Canadian shelves even though they’re being recalled in the U.S.

 

 Consumers with these products can contact the Hartz Consumer Affairs team at 800-275-1414 for a product refund or go to www.hartz.com for additional information.

Growth Factors Favor Pet Specialty

Several of the trends driving per pet spending favor the pet specialty sector, which is gaining overall market share from supermarkets and discounters, Scott Bender of Cleveland Research Co. said during his “Sales Trends in the Pet Industry” presentation at the Pet Industry Distributors Association’s management conference earlier this week.

While mass market still commands the greatest pet products market share at 47 percent, pet specialty (currently 24 percent) is poised to surpass grocery (25 percent) if current trends continue.  More than half of pet owners (55.7 percent) purchased at least some pet products at pet specialty stores in 2011, up from 49.5 percent in 2007. During this time, the purchasing rate for pet products at supermarkets slipped to 42.8 percent from 47.4 percent and at discount stores to 27.5 percent from 30.6 percent, according to Packaged Facts data shared by Bender. By comparison, 6.4 percent of pet owners purchased at least some pet products online in 2011, compared to 5.7 percent in 2007.

The key trend driving pet specialty’s resurgence remain the oft-cited “humanization of pets,” which includes pet owners wanting to feed their pets better (presumably with natural and super premium foods exclusive to pet specialty) and pamper their pets  with goods (pet specialty has greater selection of hard goods, such as toys and beds, and treats) and services (obviously, pet specialty is more likely to offer services such as grooming and daycare than mass or grocery), Bender noted.

It also helps that the price difference between pet specialty and grocery/mass on products carried by each is less than 10 percent, Bender reported.

Is Petsmart's performance driving pet specialty's growth
or is pet specialty's growth driving Petsmart?

The biggest component of pet specialty’s resurgence is Petsmart, which now accounts for 44 percent of overall pet specialty sales and 14 percent of overall U.S. pet product sales.  Petsmart’s nearest competitor in pet specialty is Petco Animal Supplies, at 21 percent, or less than half the size of Petsmart.  Pet Supplies Plus is the third largest pet specialty player, with pet specialty market share of 4 percent, 11 times less than Petsmart.

And Petsmart is generally running on all cylinders, with 10 consecutive quarters of comparable store sales growth of at least 5 percent. Cleveland expects that streak to end in 2013, although it does expect comp store sales between 4 and 5 percent (from about 7 percent in 2012) that are higher than Petsmart’s guidance (2-4 percent).  

(It will be interesting to watch how smoothly Petsmart transitions its leadership and what effect that has on future earnings; on the day Bender presented, Petsmart announced a succession plan in its leadership. The moves, effective June 14, 2013, will see current president and COO David Lenhardt become CEO; current CEO and chairman Bob Moran become executive chairman; and executive vice president of merchandising, marketing, supply chain and strategic planning Joseph O’Leary become president and COO.)

Bender also said that Petsmart, with roughly 1,250 stores and a long-term target of 1,600 stores) may be testing a sub-10,000-square-foot format somewhere in Arkansas. A smaller format store (most Petsmarts are larger than 20,000 square feet) would allow Petsmart to increase its number of locations by fitting into smaller market areas, much like Petco’s “Unleashed” format allows it to enter more urbanized areas (where retail space is more expensive).  

Speaking of Petco, it has been performing “much better” in the past couple years, Bender said, noting that its comp store sales are similar to Petsmart’s, that it is improving its pricing to be in-line with Petsmart, and has been remodeling to improve store conditions. Petco operates more than 1,150 stores.

Pet Supplies Plus, which has also been remodeling stores of late, expects to accelerate its rate of store openings in 2013, having spent much of 2012 preparing for growth by building a new distribution center, Bender said. Pet Supplies Plus has more than 250 locations.

As to the independent pet stores, the trend seemed to be a matter of the strong getting strong and the weak getting weaker or disappearing altogether, Bender said. Net store count among independents was expected to decline slightly and most new openings will be by existing retailers, especially small chains, adding additional locations.

The number of pet owners that purchased pet products at independent pet stores has stabilized at slightly more than 12 percent, up from a low of below 11 percent in 2009, according to Bender and Packaged Facts.

Outside of pet specialty, Walmart seems to be performing best, gaining market share from other mass merchandisers and supermarkets. Walmart has launched larger, convenience packs as a result of consumers making fewer shopping trips; has begun adding more assortment of pet products following a round of SKU reductions; and is really focusing on reestablishing its everyday low pricing reputation. It has also launched Pure Balance, a private label natural pet food, but sales results have been mixed, Bender said.  Presumably, the mass customer is not as interested in “natural” as the specialty shopper.

Target is also gaining market share from supermarkets and other discounters, but likely loses some to pet specialty, Bender said. Its “Boots & Barkley” brand lacks the strength of Walmart’s “Ol’ Roy,” Bender said, and Target’s merchandising strategy has led to perceptions of higher price than Walmart and lower quality than pet specialty—a perilous gray area that is not translating to optimal value for pet owners.

The bottom line is that supermarkets are not only losing share to pet specialty and mass, but also the emerging channels of dollar, farm & fleet (especially Tractor Supply Co.), and online dealers. Those smaller channels are all growing, but are all still relatively minor. 

So you can expect grocery stores to pay more attention to their pet aisles in the future. For example, Kroger has experimented with a “re-invented” pet aisle in about 15 stores that is driving strong growth, Bender said, although it is not clear what Kroger’s roll-out plans are. Similarly, Safeway will be increasingly using its Just for U program to convert pet shoppers; however, that program has not yet performed as well as expected, Bender said.

Research Firm: Pet Industry Sales Still Trending Up

Overall pet product sales continue to grow on multiple fronts, with many driving trends, notably the humanization of pets and the rise of natural products, especially beneficial to the pet specialty segment, according to Scott Bender, senior research analyst and partner at market research firm Cleveland Research Co., during his “Sales Trends in the Pet Industry” presentation Tuesday at the PIDA Management Conference.  

As these trends are expected to continue and the rate of pet acquisition appears to be accelerating, Cleveland expects the pet industry’s growth outlook to continue to be stable and positive. Moreover, the industry would benefit from further improvement in the economy and especially the housing market.

That household penetration of pets has held steady in the United States for more than 10 years has provided a foundation for this continued growth, despite the recession. Although that penetration peaked at 63 percent in 2004 and 2006, it has held steady at 62 percent since then and has been above 60 percent since 1998, Bender presented.

Bender cited American Pet Products Association data showing that the annual pet industry growth rate has remained fairly steady for the past 10 years in the mid-single digits, although a “touch softer post-recession” at about 5 percent compared to 7 percent before the recession. APPA’s 2012 estimate was actually 4 percent, the lowest rate since at least 2003, when the industry grew 10 percent.

Overall, industry expenditures contine to grow toward $53 billion in 2012, with a new APPA estimate for 2013 expected to be announced during Global Pet Expo next month.

But what really drives the growth has been annual expenditures per pet, which has nearly doubled (up 80 percent), over the past 10 years from about $80 in 2002 to $140 in 2012, according to Cleveland Research estimates.

That type of spending would offset modest declines in overall pet ownership, as reported recently by the American Veterinary Medical Association.

Although Bender didn’t address the AVMA data directly (or I completely missed it), he did report that new pet adoptions and acquisitions appeared to be picking up, based on improvements in the housing market and Pethealth Inc.’s PetPoint report that tracks adoption trends at shelters using Pethealth’s shelter management software. That data showed pet adoptions were up 6 percent in 2012 vs. up 2 percent in 2011.

Similarly, Bender reported that, although still softer than before the recession, the housing market had improved slightly over the past 12 to 18 months, both for existing home sales and new housing starts. This is significant for the pet industry in that new pet acquisitions tend to rise with the housing market.