Basic instincts

The pet category is more robust than ever, but grocers are losing their status in the retail pack. Competition from mass merchandisers and category-killer pet superstores has eroded the supermarket channel's share of dollars spent, from what had been nearly 80 percent down to around 30 percent.

"It's true," says Jon Hauptman, v.p. for the Barrington, Ill.-based retail consultant firm Willard Bishop Consulting (WBC). "Supermarkets are losing share, primarily to pet superstores and mass merchandisers, which have dramatically increased their share over the past 10 years."

The reason is simple economics. "For mass merchandisers the shift has been price-based," says Hauptman. "They're offering everyday low prices. Across the store, mass merchandiser prices are approximately 13 percent to 18 percent lower than the prices in traditional supermarkets for the same goods. I would expect to see a similarly strong price advantage for mass merchandisers in pet products."

Because of their singular focus, specialty pet stores also have a huge advantage in creating an exciting environment for their shoppers.

"PetSmart's model and advertising to bring your pets to the store are hard to beat," admits Bill Carlson, senior category manager, grocery for Richmond, Va.-based Ukrop's Super Markets, Inc. "However, there should be real opportunities [for supermarkets] to include pet products in marketing to consumers about 'providing the best' for their family, be it comfort food, healthy options and nutrition, preparing for celebrations, or convenience."

These days Fido and Whiskers are definitely part of the family—indeed, in a growing number of cases, they're all that's left of it once the human children move on and leave the nest empty. That opens a huge opportunity for sales in the grocery channel, where the traditional family for the most part still makes the weekly stock-up trip.

"Supermarkets offer convenience, because the shoppers are in the store already," says Jolanda Stewart, spokeswoman for Wal-Mart, which has staked a big claim in the pet business with low-priced assortments and private label. "Consumers are willing to spend more today, especially if they see value," she adds.

The key for grocers is to rely on their natural instincts as merchandisers, and employ strategic pricing that allows them to hold their own against low-ball competitors on the basics, while setting aside enough space for the right assortment of higher-margin items that will cater to the growing segment of today's pet owners who can't resist the impulse to treat and pamper their furry family members.

According to the Greenwich, Conn.-based American Pet Products Manufacturers Association (APPMA), the premium segment accounts for 33 percent of all dog food sales in the United States.

"It's true that consumers are spending more on their pets and indulging them more than ever before," observes Hauptman. "But the answer isn't to charge them more for basic items. The answer is to offer them a wider variety of interesting, fun, and indulgent products that they will want to purchase for their pets, and will likely purchase at a premium."

According to Mintel International, a global supplier of consumer, media, and market research, growth in new pet-related products is outshining new food products overall. Mintel data shows that 617 new products were introduced in the United States in 2005, a 48.3 percent increase over the 416 new pet food products that hit the market in 2004.

The news in nonfood pet products—encompassing many high-margin rings such as pet beds, collars, leashes, medicines, and grooming supplies—was even better. In 2005 the number of debuts swelled to 350, a 169.2 percent jump over 2004.

But just because more is being spent overall on pets, don't assume that most mainstream consumers are eager to overpay for items for their precious pups.

"Customers care about price, particularly on similar or identical items," continues Hauptman of WBC. "If they find the same item at a different [retail] format for significantly less, they're likely to purchase it there. And if prices are 10 percent, 15 percent, or 20 percent lower at a mass merchandiser on a similar or identical item, then consumers, even those who desperately love their pets, [will still look] to get a good value."

Beyond food, it's clear that Americans are pampering their pets like never before. According to ACNielsen data, spending on cat and dog treats has increased 8.7 percent—to $629.6 billion from $579.1 billion—in the past four years at supermarkets with $2 million or more in annual sales. Pet treats generally attract more spontaneous, indulgent spending than food, and they carry higher tags and higher margins.

Overall, supermarket margins in the pet category range from 20 percent on the low end (basic pet food) to 45 percent and higher at the high end (pet luxury items).

"We've seen much more free spending, as indicated by the current trends of buying everything from shirts to jewelry [including tiaras] to deluxe beds to birthday gifts for their four-legged family member," observes Stephanie Volo, general manager and president of sales for Portland, Maine-based Planet Dog, maker of dog treats. "There seems to be much more [being spent] on accessories than on [gourmet] pet foods, but there are definitely strong niche markets for both."

Make room for Fluffy

Compared with specialty pet chain, mass, and wholesale club competitors, the supermarket retailer is at a distinct disadvantage when it comes to space. That makes the grocer's decisions on which pet products make it to the shelves, and which don't, crucial.

"If grocery chains offer a larger variety of products, perhaps more customers will stay loyal to purchasing their food there," notes Margot Kenly, founder and president of Blue Dog Bakery, a Seattle-based maker of premium dog treats. "This is hard, as space in grocery is tight and expensive. But we do see chains expanding their pet space to capitalize on this growing segment. Meijer's is a great example."

One way to increase efficiency in the pet aisle is to execute innovative merchandising programs and create excitement that can compete with what's being done in the specialty pet channel. Cross-merchandising is a natural.

"One of the fastest-growing segments in the greeting-card business is greeting cards associated in some way with pets," notes Hauptman. "That is, greeting cards to pets, or greeting cards that are ostensibly sent from pets."

According to the APPMA, Americans spent $2.6 billion just on pet gifts this past holiday season.

"Supermarkets have lost a lot of the pet food and supply business the same way they've lost a lot of the nonedible grocery business to mass merchandisers," continues Hauptman. "The answer is to bring in innovation and new products. I think a great opportunity for supermarkets with limited space for pet [products] is to focus on in-and-out deals, particularly seasonal and holiday promotions. Pet gifts and pet cards are two great ideas that can be merchandised with other gift products and/or merchandised in the pet aisle as well, thereby bringing increased excitement and sales without expanding shelf space."

Another area to consider for increasing the overall profitability of the pet aisle is private label. Whereas other indulgent categories, ice cream in particular, have seen some recent success in positioning store brands and control brands in the premium price point, private label pet products are a veritable giveaway.

According to WBC citing ACNielsen data, private label sales in the pet category own a 21 percent dollar share in the supermarket channel, and have seen 11 percent growth over the past year.

"Private label is doing well, and a supermarket retailer with strong trust in a private label brand can do well," explains Hauptman. "But the same ACNielsen data shows that the average price differential between private label and name brands is 42 percent in the pet category. That's much higher than you find in most other categories."