Emerging Markets and Global Humanization

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Increased humanization continues to spur growth on a global level, with traditionally “impartial pet owners” in developing countries becoming more committed to their four-legged friends. According to Euromonitor, strong income growth has helped to fuel the development of a much broader middle class in emerging markets, with Brazil now the world’s third-largest pet care market, behind the U.S.A and the U.K. Emerging markets continue to westernize and there is an ongoing shift in attitude toward pets; more owners are willing to indulge their companion animals.

These shifts toward westernization could be due largely to a shift in demographics as the Millennial generation comes of age to make purchasing decisions. Also, a greater number of people are living alone and more likely to want companion animals. Pet ownership rates are at an all-time high in some Latin American and Eastern European markets but continue to stay low in Muslim markets, primarily due to cultural beliefs.

Global humanization continues to expand as more countries westernize and begin to adopt a culture of caring for animals rather than just keeping them for consumption or agriculture.

Manufacturing and the Reshoring Trend

Manufacturing has seen dramatic changes in recent years, particularly with regard to pet food and treats. In early 2014, Petco announced that it would no longer sell treats manufactured in China, a decree quickly echoed by PetSmart. This moratorium on goods from China is something many independent stores have been engaging in for years, but now that the big box stores are on board, the times are changing.

North America’s energy revolution created an abundance of low-cost shale gas, and the resulting savings of upwards of 60 percent in gas prices is helping the U.S. regain its energy advantage. Meanwhile, labor and energy costs continue to rise in China. Higher costs in freight fees have also impacted the market, doubling in recent years. Add quality issues and delivery delays and there is every reason for manufacturers to reshore their products (bring manufacturing back to North America from overseas), especially with the perceived value of a Made in America label growing stronger. This is great news for pet product manufacturers who would like their label to say “Made in the U.S.A.” or “Made in North America,” as well as to consumers who demand stricter quality assurance.

Intellectual property theft is also a realistic and recurring consequence of manufacturing in China. According to a recent report from the IP Commission, China is thought to be responsible for 50 to 80 percent of all intellectual property theft. Meanwhile, mounting problems continue to plague the nation, bringing enough woes that many manufacturers began reshoring years ago. According to a 2014 study by Boston Consulting Group, only seven countries currently have lower manufacturing costs than the U.S.: China, India, Indonesia, Mexico, Thailand, Taiwan and Russia.

These scenarios have set up a reshoring mentality and encouraged by public pressure, businesses are bringing their manufacturing back to North America, making the U.S. and Mexico the rising stars of global manufacturing. BCG Perspectives believes the U.S. will continue to hold a competitive advantage in energy costs until at least 2025. Also, due to the rising costs of labor in China, it will be more inexpensive to manufacture in the U.S. than China by the end of this decade.

Retail vs Internet

The big will get bigger and the small will fall into obscurity when it comes to online markets. Consolidation continues to be the theme, as seen by major retailers gobbling up smaller online retailers. With the PetSmart acquisition of Pet360.com and Petco announcing the acquisition of drsfostersmith.com, we can expect to see a new level of service from online retailers. Creative partnerships between brands and online retailers will continue to expand with consumers expecting superior levels of service and highly educated retailers.

“As discussed previously, although online sales are still a relatively small part of the pet products industry, we expect them to become a more relevant source of revenue in the future,” said David Lenhardt, president and chief executive officer of PetSmart and broker of the acquisition of Pet360. “Combining PetSmart’s unparalleled strengths in traditional outlets with Pet360’s established digital footprint will perfectly position PetSmart to capitalize on this evolution and enhance our ability to serve pet parents across all distribution channels.”

Following the PetSmart acquisition of Pet360, Petco announced in late November 2014 that it had entered into an agreement to acquire Drs. Foster and Smith, the nation’s foremost authorities on pet care and education. This could strengthen Petco’s position in veterinary care and prescription medication services.

“This move underscores our commitment to nurturing the complete health and well-being of animals and further allows Petco to meet the diverse and expansive needs of pet parents,” said Jim Myers, CEO of Petco. “As pet lovers first and foremost, our values are perfectly aligned with Drs. Foster and Smith and we’re confident this new addition to our business will help us continue to offer the very best in products and services to pets and pet parents.”

To compete with the consumer-friendly Internet and substantially lower costs of online transactions, retailers must create value-added services to lure consumers into stores. Traditionally, this has come in the form of highly educated employees and in-store events such as photography services, special pricing and unique offerings, while the big box stores have relied solely on pricing structures and adoption events. Soon however, that strategy will not be enough.

Some stores are increasing value through “Yappy Hours” and “Doggy Style Fashion Shows.” Book signings from well-known animal-centric authors and inviting brands to sponsor events are becoming popular at many stores. The only limit is one’s imagination.

Most retailers might be unable to keep up with the marketing dollars, education assets or private label offerings of these two large companies. For this reason, it will be important for smaller boutiques to gain value proposition by differentiating themselves through specialty markets, i.e., the pet travel industry or pet sports. Handled well, this with create enough value proposition to attract devoted, repeat customers.