willieWillie Nelson once said, the early bird may get the worm, but the second mouse gets the cheese.  In this case, I’m not sure which mouse I was.  Just days after I published my fall pet report a number of news worthy items came into focus that would have merited a mention in my industry report.  However, several of the items provide direct validation of the trends I have been discussing here over the past year.

Of greatest significance was the headlines coming out of PetSmart’s Analyst Day presentation.  Just prior to their Analyst Day presentation on October 17th, management announced that they expected third quarter same-store-sales (“SSS”) comps to come in below the anticipated range. Management believes 3Q13 SSS will come in at 2.0% – 2.5% versus prior guidance of 3.0% – 4.0%. PetSmart has not seen comps this slow since 2009. Notwithstanding the company’s issues with driving traffic, management is sticking by its full year EPS guidance.

Notably, as part of their presentation, PetSmart finally addressed its web strategy in some detail.  CEO David Lenhardt noted that how to remain relevant to consumers across channels was one of his biggest concerns and that the company would be investing more of its marketing budget and CRM resources online. He went on to detail several new ecommerce initiatives include in-store inventory look-up online, improved mobile experience online, in-store pick-up, and opening of a new West Coast distribution center which will reduce shipping times. Lenhardt continues to believe that PetSmart’s position as a destination retailer and its services platform will continue to enable it to compete effectively against other online players.

Over the past year, I have been highlighting the risk of the internet to PetSmart.  I’ve not been alone in ringing this bell.  While I believe PetSmart is uniquely situated to perform well online long term, my concern has been that they have not had a coherent strategy. In light of recent financial performance, including 3Q13 guidance, I have to believe that other online players are succeeding at eroding some of the premium customer base of PetSmart’s and Petco, especially among a younger demographic.  The company’s willingness to detail their plan, after years of side stepping the question, tells me there is some truth to this theorem. While online will result in erosion of hardgoods share, because of the wide availability of these products online, the concern will not reach its apex unless and until pet specialty sees consumables share erosion to online.

Second, the long running narrative linking imported pet jerky story product to numerous pet deaths finally hit the headlines. News about pet death related to foreign jerky products have appeared in nearly every major online publication during the past week. My historical conversations with domestic manufacturers has been that regulatory bodies are not doing enough to protect consumers from imported product and instead have been myopically focused at cracking down on domestic producers.  While it is terrible that so many pets had to fall ill before we got to this point, it now seems we have arrive at the moment where the paradigm shifts. When the dust settles the winners will be consumers and branded treat companies with domestic sourcing and production pedigrees.

Third, Whole Foods announced that they are launching a house brand of premium value oriented pet products. Whole Paws will consist of 24 SKUs addressing both dogs and cats cutting across multiple categories ranging from grain-free food and treats to cat litter.  The attempts of traditional grocery to cut into pet specialty sales are, like the jerky story, old hat for those that follow the industry closely, but the within the natural segment pet remains an under monetized opportunity. Grocery continues to leak share to both mass and pet specialty, due to price and assortment respectively.  However, natural has a real market opportunity in my opinion because it can provide grocery consumers more of a one-stop-shop.  While space limitations will ultimately cap the potential of the natural channel within pet, this product line launch is a clear demonstration that store managers are starting to understand the potential of pets within their channel.  Natural could become a nice bed for incubation of emerging brands with a wellness oriented theme much the way it was in natural beverage, healthy snacks, and gluten free foods.

Finally, the relative pull of the pet industry on owners was again affirmed to me when I became aware that pet owners will purchase nearly $330 million of costumes for their pet this year. This amounts to approximate 22 million consumers spending, on average $15 annually.  What consumer pressures on pet?

/bryan

 

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