Jason Kamery//January 6, 2014//
Jason Kamery //January 6, 2014//
For another year, the pet industry has continued to grow, meaning profits have grown as well.
The 2013-2014 Pet Age Retailer Report is sent out to independent pet retailers all over the country to find out what trends they are seeing in the industry, and specifically, their store.
Some of the top trends noted were an increase in grain-free dog food, as well as all-natural treats. In addition, stores’ overall net profits and gross profits went up. Retailers are also marketing more online and there is a surprise in the fish segment – it’s a growing category.
American Pet Products Association President Bob Vetere, he said it’s safe to say the pet industry, overall, had another strong year.
“While there were some shifts within any category the total dollars spent grew,” Vetere said. “For example, there continues to be stronger growth in the organic and natural area within the food sector but some of it has come at the expense of other subcategories. There seems to be a slowing down of the polarization the industry has seen over the past few years, people tending to migrate either toward more value priced food and products or toward higher-end products. I am seeing continued growth in the services area as people continue to want flexibility in their lives but still want to ensure good care for their pets.”
George Puro, president of Puro Research Group, said that one of the biggest trends they have seen in the last year, based on Packaged Facts survey data, is that consumers are becoming less price sensitive compared to years past.
“Consumers have migrated increasingly towards pet specialty channels, which focus more on high-end products,” Puro said. “Even sales at natural food and specialty gourmet stores have seen healthy increases.
“Companies have been emphasizing specialized formulations, with the overarching theme being pet wellness. These include products based on age, size of your pet, natural/organic, whether it’s grain-free, etc.”
Puro also said that despite pet owners’ desire for high-end products, their survey data shows that consumers are still looking for deals, and are willing to shop around to find them.
“Of course, what’s really driving the market is the belief by around three quarters of pet owners that their pets have a positive impact on their physical and their mental health, according to the latest Packaged Facts survey data,” Puro said. “This connection is what’s driving consumers to increase spending on pets and buy premium products and bodes well for the future of the industry.”
Bryan Jaffe is the managing director of Cascadia Capital, a boutique investment bank located in Seattle. The company provides capital markets and M&A advisory to emerging growth and middle market companies nationally. One of their areas of expertise is the pet space.
“While premiumzation remains a key industry driver, we are seeing consumers reorient their spending around affordable value – exhibiting less brand and channel loyalty,” Jaffe said. “Discretionary dollars are being allocated to solutions that deliver observable benefit, as consumers prioritize outcomes over marketing claims. This has resulted in revenue expansion among products and services that have a health and wellness orientation. Solutions that cannot link inputs to health outcomes are seeing growth in-line with the broader industry.”
Jaffe said he has seen strong growth among solutions that are natural and/or offer a limited ingredient panel.
“Ingredient transparency is a high priority for consumers given continued recalls involving some of the industry’s leading brands,” Jaffe said. “Foods in an alternative form factors, dehydrated, freeze-dried, raw, are also experiencing strong growth. These solutions provide higher nutrional value as a result of their production processes, which is resonating with retailers, who are expanding carriage and square footage allocated to the category, and experiencing increased consumer adoption as a result of perceived benefits and greater access.”
What Retailers Are Saying
Craig Maggio, owner of Friend-Lee Pets, is in his first year of business and it has been going well for him.
“The holistic is probably about 90 percent of the dog and cat food I sell,” Maggio said. “Everyone is price sensitive. So the value proposition is something important. Having a holistic food that you can put at a good price point is a really important part of the selling process. We sell a fair amount of small animal and bird stuff but I would say the driver for my business is pet food, dog and cat food and then aquatics.”
His observations seem to be in line with what the Pet Age 2013-14 Retailer Survey found.
The top areas of growth for retailers who took the survey were grain-free food, all-natural treats and aquatics.
In 2011, all-natural treats for dogs wasn’t in the top of retailer’s fastest-growing product category. Only 3.48 percent of retailers said it was their fastest. Now in 2012, 12.4 percent of retailers said all-natural treats for dogs is their fastest-growing product category, making it only second to grain-free food. Grain-free food itself also saw an increase from 9.13 percent to 13.5 percent.
Comparing overall gross dollar volume for dry goods and animals in 2012 to 2011, 74.6 percent of retailers saw an increase in sales. In 2011 only 61 percent saw an increase in sales. The same can be said for net profits in 2012 compared to those in 2011. In 2012, 70.7 percent of retailers saw an increase in net profits compared to the 56.4 the previous year.
The Hungry Puppy has been around for 27 years selling pet food and supplies, and has seen the category expand.
“Grain-free has continued to grow,” Frank Frattini, CEO of The Hungry Puppy, said. “It’s incremental now; it’s not expediential as it was several years ago. Still it is double digit growth though. There has been double digit growth in our raw diets, the frozen diets.
“What has really driven the business over the last 27 years is that different mindset of folks of how they treat their pets, as opposed to as it what it was to what it is today. So we are just fortunate to ride that wave.”
Retailers are also now focusing more on advertising on the internet and through social media. In 2011, 28 percent of retailers said it produced the best results for their business while now 39.6 percent say it does.
In previous surveys, a major concern for retailers was the economy, in 2011 54.3 percent said it was their biggest concern. In 2012 though only 46.3 percent said the economy was their biggest challenge. So what is the biggest challenge according to pre retailers? According to 61 percent of you, competing with independent, big box, mass market and online stores is the biggest challenge for the next two years.
The biggest surprise coming from the entire survey though was the increased popularity of fish.
Fish Is back
In the past, when looking at what pet stores carried freshwater and saltwater fish, they were slowly in decline. From 2008 to 2009, saltwater fish fell 4 percent while freshwater fish just stayed even. From 2010 to 2011, freshwater fish fell 3 percent and saltwater fish fell 9 percent.
But, now it seems fish is making a giant comeback. In 2012, retailers carrying freshwater fish shot up to 79.5 percent, a 13.5 percent increase from 2011. Those carrying saltwater fish made a larger, 14.8 percent increase, from 2012 to 2011, as 57.8 percent of stores now carry them.
“We do get a lot of aquatics business,” Maggio said. “People are really kind of getting back into the hobby and I think that’s due to a couple of things. Could be the economy is getting better or shows like “Tanked” on the Animal Planet may be inspiring people to try to create their own little underwater world.”
Maggio said it could be a combination factors such as the shows but it’s also something that’s scalable.
“Your common person who can’t afford a $10,000 huge salt water reef tank can still get a 10 gallon tank and learn about the hobby,” Maggio said. “It’s approachable on an everyday man’s level. As you have seen the evolution of the psyche of the average American the past 25 years and how pets have taken over a different role in the household. Dogs have gone from sleeping in barns to sleeping inside. And people get really attached to their fish. I had a woman that came into the store and had a 200 gallon freshwater tank and her tank was cracking so she was frantic. She came in and bought the largest tanks I had to be able to keep her fish on life support while I ordered her another 200 gallon tank and she was telling me stories about each one of her fish and how attached she was to each one of them. It’s interesting because you don’t cuddle with fish, they are not one of the most interactive in the pet world but people still get really attached to them.
“With the fish segment and the aquatic segment, it’s something you can keep in your home. People love it, people see it, it’s a focal point, and it’s a talking piece. But you can also still go on vacation. If you leave for three days your fish aren’t going to die most likely.”
In late November, the World Pet Association put on the first ever Aquatic Experience, in Chicago, Ill.
“Many in the aquatic industry have been asking for an aquatic only show for many years,” Doug Poindexter, president of the World Pet Association, said. “I think they feel somewhat lost in the larger pet trade shows with all the dog and cat exhibitors. One of our past chairman, Andy Schmidt, reminded our board of this desire about three years ago and the board began discussing the possibilities. At the end of 2012 or early in 2013, the board gave its approval to produce the show. We also wanted the show to be all things aquatic so to the best of our knowledge, this is the first show to have marine, fresh and pond segments under one roof.”
Since it was the first show, the WPA wasn’t sure what to expect. They anticipated that they may have 2,000 people attend and were pleasantly surprised when their totals were over 3,500.
“While I believe in recent months the first industry is showing signs of improving, there is still lots of room for growth,” Poindexter said. “Back in the 60s or 70s, fish keeping was the number two or three hobby behind photography. One of the main purposes of our show was to expose families and children especially to the joys of fish keeping and the benefits that can come from that. It teaches life lessons, responsibility, empathy and much more.”
Damian Hall, senior marketing manager for Hagen, said they have seen some growth in it recently.
“Over the past five years technology and innovation within aquatics has grown leaps and bounds,” Hall said. “So for instance, five years ago, if you wanted to purchase a LED light for your aquarium you could be looking at anywhere between $900 and $5,000 depending how crazy you wanted to get with it. Well, today, you see LED lights anywhere from $129.99 to $399.99 and that shows you the growth in that just one specific category in aquatics. Now you take that and you also look at the other things that have gotten better, filtration has gotten better, more energy efficient. It’s getting easier to succeed.”
Continued Success for the Future
According to Vetere, over the next year he thinks the industry will continue to see the challenge of online availability of products particularly as Amazon and others increase the availability and timeliness of delivery of products coupled with lower costs.
“Service on a personal level will become even more important as a way to encourage store purchases version online,” Vetere said. “It will be interesting to watch closely the behavior patterns of baby boomers as they begin to approach retirement and are only a few years away from hitting 70 years old.”
According to Jaffe, specialty retail has been a hot bed of innovation post-recession.
“Successful concepts have changed the nature of the consumer experience to get out in front of consumer’s needs – active as opposed to reactive and connect with them on a social and community level,” Jaffe said. “The pet retailers that we see growing at above market rates are able to guide their clients to solutions sets that solve real problems for their companion animals. They are also able to build recurring relationships through social media and community outreach. Ultimately, the large pet specialty retailers are vulnerable on customer experience. Retailers who invest in understanding their customers should continue to experience success.”
Frattini said The Hungry Puppy has a lot of competition close to them, but it doesn’t bother him.
“We have now 14 Petcos and PetSmarts within a 20 mile radius of us,” Frattini said. “We have three Super Walmarts within eight miles, then we have PSPs, six Pet Values, so with all of that advent of competition, it does make for a challenging environment but by the same token it keeps us sharp and we are doing something right because we are still able to grow.
“We don’t mind the Petcos and the PetSmarts of the world. If nothing else, they create the awareness of the different products out there so we don’t have to spend all of our money trying to create that awareness. So a lot of times it’s just a matter of them creating the awareness and us taking their customers. And that’s probably what we do best, we take their customers.”