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.