Petco's New Policy and Other Market Indicators to Watch
E-commerce and online product subscription services will continue to impact the industry.
At any given moment, it would be an understatement to say big changes are afoot in the U.S. pet industry. Vast and multifaceted, the market is expected to add another $3.8 billion in value in 2019 to total $93.5 billion across its four principal categories: pet food (38 percent of the market), veterinary services (33 percent), nonfood pet supplies (19 percent), and nonmedical pet services (10 percent). Moving into 2019, however, the stakes seem higher than ever as the long-term market drivers of premiumization and humanization wear and tear, e-commerce crunches brick-and-mortar, and pet ownership appears to have leveled off. If that sounds a tad ominous, perhaps it should. These are headwinds to be underestimated only at peril in a saturated market that has defied gravity for more than a decade.
Well aware of the challenges, marketers, service providers, and retailers old and new have gotten busy in ways that are reshaping the U.S. pet industry, and their hits and misses will be bellwethers marketwide. Here are some of the biggest trends and initiatives to keep an eye on:
• Under its new leadership, Petco is purging its shelves of products with artificial ingredients. At a time when natural pet food has long since gone mainstream, it’s a gamble that could determine not just the future of the nation’s No. 2 pet chain, but also the ability of natural pet food to endure as a pet specialty channel bulwark.
• With Blue joining pet specialty crossovers Nutro and Nature’s Recipe in mass merchandisers and supermarkets, and being further rolled out by its new parent General Mills, the trend mainly responsible for keeping pet food dollar sales in the black has officially morphed into mass premiumization. In the short term, this might be a windfall for the brands and retailers directly involved. Looking ahead, the multibillion-dollar question is whether the mass-market pricing demands strangle the superpremium goose.
• While it is largely responsible for the breakdown of the pet specialty/mass-market divide, the e-commerce boom has more than offset brick-and-mortar losses in pet product sales overall. It has forced brick-and-mortar retailers to become omnichannel competitors and to add new services such as click-and-collect (order online, pick up in store) and home delivery. These expanded options are great for pet owners. But by “covering all bases,” retailers such as PetSmart/Chewy.com and Walmart/Walmart.com (and Jet.com) are competing not just with pureplay e-tailers, but also with themselves. This could be a win-win—as one leading retailer put it (and I’m paraphrasing), “If we’re going to lose to e-commerce, we’d rather lose to ourselves”—but it definitely increases the pressure on brick-and-mortar retailers less able to adapt.
• As with natural, the days of grain free as a pet food market shot in the arm appear numbered. Grain-free formulations have gone mainstream to such a degree that the novelty is off and the price pressure in on. Even more ominous is the U.S. Food & Drug Administration (FDA) warning of a possible link between grain-free pet food and canine dilated cardiomyopathy (DCM). The science is far from in, and there might be nothing there. But confirmation of a link could be a blow not just to grain-free pet food, but to the pet market as a whole. With the long-term effects of substituting tried-and-true grains with the likes of peas, lentils, and potatoes unknown, marketers have invested millions in developing and promoting grain-free pet food as nutritionally advantageous, and “we didn’t know” won’t cut it if pet owners’ canine “babies” end up paying the price.
• After a number of false starts in years past, freshly made, minimally processed, human-grade pet food appears to be coming into its own judging from substantial capital investments in companies including NomNomNow, The Farmer’s Dog, Ollie and Pet Plate. Suggesting the trend might go mainstream sooner rather than later, Walmart’s Jet.com has teamed up with Ollie to home deliver Ollie’s fresh meals, and Petco has joined forces with JustFoodForDogs to bring the California-based fresh pet food chef-staffed kitchens into its stores—a move that, taken together with the retailer’s artificial-ingredient embargo, goes a long way toward positioning Petco as the Whole Foods of the pet market. In a business in search of the next big superpremium pet food thing, a big part of the future may be fresh.
• High-tech pet products are becoming pet care service providers, feeding and watering pets, scooping litter, alerting pet owners to product replenishment needs and pet behavior, reordering supplies via Bluetooth/internet, and allowing pet owners to keep tabs on and communicate with their pets from afar. Tracking devices and monitors (aka pet wearables) detail through smartphone (or computer) not just the pet’s location, but also its vitals, and can directly update veterinarians. In its December 2018 report, Durable Dog and Cat Petcare Products, 2nd Edition, Packaged Facts estimates that tech-based durable pet care products (defined as those using Bluetooth, GPS or RFID, and those able to connect to Wi-Fi or home networks) account for 8 percent of the durables market, with sales of $400 million in 2017.
• The e-commerce heat is reinvigorating the trend of pet specialty stores adding services to such a degree that major brick-and-mortar pet retailers are exploring new store formats. Top of the list (again) is Petco, which is rolling out PetCoach stores featuring veterinary and other services along with JustFoodForDogs pantries and high-quality merchandise. PetSmart is testing a new store concept called The Groomery featuring classic grooming services and “hand-picked” products. Receiving less fanfare, but perhaps most intriguing, VetIQ is opening veterinary clinics in Walmart stores. The mega-retailer has downplayed the relationship as “landlord-tenant,” but it nevertheless smacks of testing the waters for a more direct foray into veterinary (and other pet) services, which, given Walmart’s pet business savvy, seems overdue.
• Making it clear that online subscriptions are where it’s at, all major pet food e-tailers avidly encourage auto-replenishment, and fresh food purveyors such as NomNomNow and The Farmer’s Dog do the same. An influx of internet-based startups have begun offering via subscription customizable boxes of pet supplies, including PupBox (acquired by Petco in 2017), BarkBox and Meowbox. Also banking on repeat business are service-linked products such as the American Kennel Club’s Link AKC Smart Collar with a built-in GPS tracker, whose monthly $10 fee is discounted under a one- or two-year plan.
• Tracking human trends, Uber-like services are disrupting the pet sitting, walking and boarding businesses. Three well-funded startups—Rover, DogVacay (merged into Rover) and Wag!—have paved the way for connecting pet owners with independent pet care professionals who have been vetted and insured. Already, such services have changed the pet sitting and boarding business model, and this smartphone party has just begun.
• As if e-commerce businesses weren’t doing well enough, major internet players including Amazon and Chewy are building out further. One front is private label, onto which Amazon has unleashed brands including Wag, Solimo and Simply Perfection since May 2018. In July, Chewy.com launched Chewy Pharmacy, and, in November, Petco began offering Express Scripts-powered pet prescriptions and OTC medications on Petco.com and PetCoach.com. The writing is on the wall: Don’t expect the e-commerce onslaught to slow anytime soon or fail to branch out in additional ways. If, for example, Walmart is mulling pet services, don’t think Amazon/Whole Foods isn’t.
David Lummis is the lead pet-market analyst for Packaged Facts, a division of MarketResearch.com, author of Packaged Facts’ U.S. Pet Market Outlook, 2018-2019, due out this month, and project manager for Packaged Facts’ most recent pet market report, Pet Food in the U.S., 14th Edition.