Recession drives marginal consumers from pet shops to pet superstores

Increasingly price-sensitive consumers are seeking value in pet superstores, other non-grocery stores and on-line, but private label has yet to benefit.

Pet shops take a hit as consumers become increasingly price-sensitive

Growth in the value of the global pet food and pet care products market is forecast to slow from 6.2% to 4.2% in 2009, and pet shops appear to be bearing the brunt of this decline. The global market share of this segment is predicted to dip from 22.4% to 21.8% between 2008 and 2009, the first time it has lost ground since 2001.

Given that 2001 also saw a recession, this is redolent of a strong pro-cyclical tendency among pet shops. When they are confident about their economic prospects, consumers are less value-conscious and place a great emphasis on the strong customer service provided by pet shops, but when times are tougher, price becomes more of a factor in their decision making, leading to a loss of marginal consumers to retailers with more competitive pricing.

The main beneficiaries of the woes of pet shops appear to be pet superstores and other non-grocery retailers, the global market shares of which are predicted to jump from 11.9% to 12.2% and from 12.9% to 13.1%, respectively, between 2008 and 2009. In spite of downward pressure on prices arising from heightened competition between retailers, the share of pet food and pet care value sales accounted for by grocery retailers is forecast to be unchanged between 2008 and 2009.

Pets at Home flotation plan underlines dynamism of pet superstores

The buoyancy of pet superstores has been underlined by the announcement of plans to float the UK-based Pets at Home chain during 2010. Having enjoyed like-for-like sales growth of 7.5% during the 12 months to March 2009, its owner, private equity firm Bridgepoint, is planning a 2010 IPO that it hopes will value the 230-strong chain at around £700 million (US$1.1 billion).

Bridgepoint acquired Pets at Home for £230 million in 2004. The UK is relatively underserved by pet superstores, leaving significant potential for growth. Between 2001 and 2009, the share of pet food and pet care value sales accounted for by these outlets in the UK has doubled to 8.6%.

However, not every pet superstore has fared so well, with Canadian retailer Petcetera filing for bankruptcy protection in May 2009. However, even this business has staged a recovery, emerging from bankruptcy protection in September with a slimmed-down portfolio of stores. In spite of Petcetera’s problems, the share of the Canadian market accounted for by pet superstores is set to jump by 0.6 percentage points, to 21.5%, between 2008 and 2009.

Pet shops hold their ground in the US

In the US market, pet shops are holding their own against pet superstores in spite of what has become known as the “great recession”. By the end of 2009, they are forecast to command market shares of 9% and 21.4%, respectively. This may partly be due to the lingering after effects of the 2007 Menu Foods’ recall, which had a significant impact on the price sensitivity of many consumers in this market, leading them to place more of an emphasis on quality, rather than price.

Market saturation may also be playing its part, as most urban markets are now more-than-adequately served by pet superstores. This has led leading pet superstore chain PetCo to experiment with smaller format stores in suburban areas, opening the first of these stores in a San Diego suburb during summer 2009.

Other non-grocery channels enjoy strong growth in Latin America

Other non-grocery stores, such as feed stores, have also benefited from the economic downturn. This is particularly the case in Latin America, where the channel’s market share has jumped from 17.2% in 2006 to a projected 19.7% in 2009. However, it would be erroneous to ascribe all of this growth to macro-economic fluctuations.

Latin American economies have to date been relatively unaffected by the downturn (with the notable exception of Mexico), and this retail segment was already growing strongly anyway. Nonetheless, the pace of growth has picked up as the global economic environment has deteriorated. Moreover, there is a precedent. Sales through this channel surged in Argentina in the wake of that country’s 2002 currency crisis.

On-line sales grow, driven by increased broadband penetration rather than price sensitivity

While still marginal in the overall scheme of things, internet retailing is continuing to evolve in the pet food and pet care arena. Having accounted for just 0.2% of the market in 2002, the channel’s market share has grown by 0.1 percentage points every year since, and is forecast to reach 0.9% in 2009.

The timing of this growth, together with its consistency, strongly suggests that it has more to do with the spread of affordable, high-speed internet access than macro-economic fluctuations.

For example, in Sweden, the proportion of households with a broadband-enabled computer rose from 48% to 84% between 2000 and 2008, while in South Korea it grew from 49.8% to 97.2%.

Such markets have tended to experience stronger growth in on-line sales (in overall retail market share terms) than the likes of Germany, where broadband has made less of a mark (rising from 14% to 69.1% over the same period).

Private label offerings see little improvement in most markets

In contrast to previous recessions, the current downturn appears to have done little to boost the popularity of private label pet food and pet care products. Globally, private label’s share of value sales of pet food and pet care peaked at 9.3% in 2004, falling back to 9.2% in 2006 and 8.9% by 2008.

This trend is particularly marked in North America, where the previously discussed Menu Foods’ recall still appears to be weighing on the market share of private label pet food. Having peaked at 9% in 2006, the share of pet food and pet care sales accounted for by private label had fallen back to 8.3% by 2008. However, given that the recession only really began to bite in the real economy during the fourth quarter of 2008, perhaps too much should not be read into the 2008 figures.

In Western Europe, this figure has been stable at around 14% in recent years. Germany, traditionally among the strongest markets for private label pet food, saw the market share of private label dip by 0.5 percentage points, to 27.1%, between 2007 and 2008. However, in the Italian market, where private label is not so well established, its market share expanded from 7.4% to 7.8% between 2006 and 2008.

These figures suggest that while the demand for private label pet food and pet care products may have plateaued in Germany, strong potential for growth remains in more undeveloped markets like Italy. Moreover, unlike many of its Western European peers, the rate of unemployment in Germany has been relatively stable. In contrast, the Spanish market, which has had to cope with a significant hike in unemployment, has seen strong private label growth, from 11.8% to 12.6% of pet food and pet care sales between 2007and 2008.

Even in such regions as Latin America and Eastern Europe where private label products are gaining ground, these increases are largely in line with pre-recessionary trends and would appear to have more to do with the maturation of local retail infrastructures than any deterioration in household disposable incomes. For example, in Latin America, the market share of private label products in cat and dog food grew from 1.9% to 2.1% between 2004 and 2006 and had reached 2.3% by 2008.

Entrenched brand loyalty provides challenges and opportunities for retailers

While tentative signs of economic stabilisation have begun to emerge during the second half of 2009, global consumer sentiment remains for the most part fragile. With unemployment continuing to rise (albeit at a slower pace than previously), household debt levels elevated and disposable household income still depressed, consumers are likely to retain a heightened sensitivity to price for some time.

This presents both a challenge and an opportunity for retailers, particularly in pet food, as consumers in this segment are unusually brand loyal. As a result, larger retailers, particularly pet superstores, may continue to gain market share by leveraging the economies of scale they enjoy by offering consumers their favourite pet food brands at a cheaper price, rather than attempting to market cheaper alternatives to them.