Internet Retailing in US Pet Care: Has its Time Finally Come?
The second of a three-part series on North American pet care takes a closer look at two new pet food e-commerce players and asks whether or not the time has now come for the internet to have a major impact on pet care retailing in the US.
Internet retailing in US pet care still lags behind other markets and categories
Internet retailing remains underdeveloped as a retail distribution channel in the US pet care market, accounting for just 0.4% of retail value sales in 2011 (forecast figures), up from 0.3% in 2006. Retail distribution of US pet care continues to be dominated by supermarkets/hypermarkets (retail value share of 37% in 2011), pet superstores (22%), other non-grocery retailers (17.8%), veterinary clinics (10.4%) and pet shops (9.5%). It is also notable that internet retailing in the US is confined almost exclusively to pet products, with this channel accounting for 1.3% of overall category value sales in 2010. In pet food, the value share of internet retailing remains largely insignificant.
In general, internet retailing is much less developed in US pet care than in many Asian markets, particularly South Korea (where the channel is expected to account for nearly 18% of pet care retail value sales in 2011), Taiwan (3.7%), Japan (3.1%) and even China (1.5%). Internet retailing is also evolving more quickly in some Western European markets, such as Ireland (6% of retail value sales in 2011), the UK (2.5%), France (1.3%) and Germany (1%).
Moreover, internet retailing has been much slower to develop in pet care in the US than in other retail markets. The proportion of overall retail sales in the US accounted for by internet retailing grew from 2.5% to 4% between 2005 and 2010. Moreover, having formerly peaked at a market capitalisation of US$23.84 billion in 1999 (the height of the dot-com boom), leading US-based online retailer Amazon.com’s market capitalisation stood at US$58.76 million in 2010.
The legacy of Pets.com continues to haunt the industry
Perhaps the lack of development in this channel is partly due to the legacy of Pets.com, which has come to symbolise the excesses – if not outright intransigence – of the 1990s dot-com era. It frequently features in lists of the greatest e-commerce failures and is often cited as a textbook example of how not to run an online business as it actually lost money on most of its transactions. Having raised over US$80 million in an IPO in February 2000, it had collapsed by the end of that year after wasting much of that investment on such follies as an attention-grabbing Super Bowl commercial. The company’s cumulative losses exceeded US$150 million. Ironically, one of its major backers was Amazon.com.
It would of course be extremely unfair to cite a single case as proof that the entire e-commerce concept is inapplicable to US pet care. Nonetheless, the spectre of the Pets.com debacle remains a cautionary tale that has contributed to the slow development of pet care e-commerce in that country.
Attracting the attention of consumers in a crowded market is difficult
Another factor in the retardation of the development of internet retailing in the US pet care market is the fact that its bricks-and-mortar retail infrastructure is probably the most developed in the world. The US has more pet specialist retail space per capita than any other developed economy in the world, with pet superstore chain PetSmart alone having more than 1,000 stores in the country. Coupled with the fact that the average American household has just over two cars, it is relatively easy for most households to stock up on pet supplies at large out-of-town retailing sites.
Contrast this with China, where the internet channel is expanding rapidly in pet care. In this market, particularly in central and western provinces, the retail infrastructure remains somewhat underdeveloped, making e-commerce an attractive option for the relatively small number of local consumers seeking premium pet food and pet products.
Amazon.com comes back for another bite
However, a decade on from the failure of Pets.com, a new crop of companies are ready to take on the challenge of selling pet food and pet products to US consumers over the internet. Despite getting its fingers burnt with Pets.com, and with more than a decade of (mostly) success behind it, Amazon is at the front of the pack. During July 2011, the company’s Quidsi e-commerce division launched Wag.com as a companion site to Diapers.com and Soap.com. Wag.com sells in excess of 10,000 different products, ranging from dog food to hamster cages. The site promises a 365-day return policy and free two-day domestic shipping on orders with a value of more than US$49.
Could premiumisation be a game changer?
According to New Jersey-based Quidsi (which was acquired by Amazon.com during 2010), co-founder Marc Lore maintains that the economics of selling pet food online have also improved. Speaking to the New York Times during March 2011, he asserted that this was because consumers now purchase more premium pet food, which costs more per kg, so shipping costs are reduced as a percentage of total revenue. This certainly appears to be the case, with retail value sales of premium dog and cat food having significantly outperformed the wider US pet food market in recent years.
Nonetheless, co-founder Vinit Bharara acknowledges that shipping bulky items at low prices “has always been expensive and it still is”. As a result, Quidsi focuses on nurturing long-term customers: “That pays out much more in the long run than the transient connection you may acquire when you make a tonne of money by delivering one product to one customer once,” he added. Quidsi has also attempted to make Wag.com as user-friendly as possible, according to Lore. For instance, once pet owners indicate what type of pet they have, they only see products for dogs or fish on the site.
Will consumers go with the flow?
Another relatively new entrant to this market is PetFlow.com, which was founded in 2009. PetFlow claims to “only offer high-quality health-conscious foods”. The brands showcased on its website include Taste of the Wild, Onijen and Blue. Its USP is “a unique automated delivery schedule” that shoppers can use to ensure they never run out of food. Users can set up a schedule that will see pet food and pet product supplies dropped off at their door at regular intervals. It also currently offers free shipping on orders of at least US$59. As of July 2011, PetFlow claimed to be shipping 500,000 pounds of pet food per month.
“Most pet food today is bought by women, who have to haul 40lb (18.1kg) bags of dog food from the store to their car, and then from their car to their home. It’s heavy, it’s expensive, and sometimes they run out unexpectedly with little time to run to the store and buy more. That’s a bad user experience and it makes no sense given the evolution of e-commerce,” said Justin Caldbeck, Managing Director of Lightspeed Venture Partners, which has invested US$10 million in PetFlow. Apart from being convenient for owners, PetFlow’s business model is obviously specifically designed to generate repeat business.
Pet care 2.0?
The business models of both these enterprises appear to be a significant improvement on those of their predecessors, having matured from the Wild West days of the 1990s when attention-grabbing marketing that grew volume sales at any cost was seen as the key to success. However, with established retailers like PetCo and PetSmart (which both enjoy notable brand recognition, nationwide distribution networks and significant economies of scale) already offering online ordering (including repeat delivery), it is difficult to see how operations like Quidsi.com and PetFlow.com can ever be more than niche players.
Even in nappies/diapers, a market in which Quidsi.com has already enjoyed significant success, internet retailing accounted for just 2.5% of US retail value sales in 2010. If these companies can enjoy a similar level of success in pet care, they will likely turn a tidy profit, but they will hardly revolutionise pet care retailing. In the absence of a dramatic economic shock, such as a spike in oil/petrol prices, most US pet owners are likely to continue purchasing pet food and other products from local bricks-and-mortar retailers.