piggyAs has often been discussed, the post recession rise of the pet industry is often linked to the ongoing upgrade cycle in pet food. Pet owners, fueled by a combination of love for their companion animals, human food trends, and supply chain concerns associated with foreign sourced product, began to spend more on what they were putting into their pets bowl on a daily basis, focusing on solutions with higher quality ingredients, known sourcing, and production integrity. The result was a proliferation of brands targeting consumers with premium and super premium offering that met these emerging needs. Premium solutions now make up 42% of total consumables sales according to Packaged Facts. The net result was that the pet food upgrade cycle fueled a disproportionate percentage of industry growth.

From 2008 to 2014 estimated year end, according to the American Pet Products Association, sales of pet food increased from $16.8 billion to $22.6 billion, over 35% or nearly 5.1% annually. What is less often discussed is that this period of time coincided with de minimus growth in the pet population, especially large dogs who are the primary driver of pet food volume. If consumers of pet food were not growing, and therefore volume was flat to down, the resulting rise in pet food sales had to be price driven. In fact, during this period annual pet food inflation averaged over 3.0% annually according to Federal Reserve Economic Data.

screen shot 2015-02-14 at 8.26.25 amWhile rising pet food prices have been a boon for the industry, a lack of real wage growth has meant that these premium solutions are increasingly cutting into the discretionary spend of pet owners. While on the surface this may not be a problem for the industry — sales afterall continue to be robust — over the long term it is and will be. Our belief is that cost inhibits ownership, and for the industry to continue to grow the population must expand. Further, the increasing presence of higher cost solutions can serve to undermine the trust relationship between the retailer and the pet owner given that most of the benefits of these premium solutions are not easily observable.

When I walked the aisles of my local pet store, I noted that approximately 15% – 20% of the dog food SKUs would result in an after tax price of over $100.  A few other stores I sampled had SKU counts that comprised between 10% – 30% of their dog food merchandising mix at, or above, this price point.  This highlights a further concern of the pet food upgrade cycle for independent pet specialty stores. As conventional and natural grocery introduce more emotive brands with similar product characteristics, in an effort to capture their share of the pet food pie, the risk of consumers defecting the channel increases. Why would one pay $100 for a 40 lb bag of dog food when they could get a solution with a high percentage of the same attributes for 60% – 75% of the cost? According to Packaged Facts, 69% of pet product shoppers look for lower prices when they shop for pet products; further, 74% of pet owners believe that many pet products are becoming too expensive; finally, 52% of dog and cat owners are actively channel shopping. Given that premium and super premium solutions command a higher profit margin profile for both the pet specialty retailers who carry the products and the manufacturers/marketers who supply the channel, a pet food “downgrade cycle” could be devastating.  Absent a change in the personal economic fortunes of pet owners, we see the potential in this thesis.

The net of this is that the pet industry needs to become more acutely focused on product transparency and value. Manufactures/marketers of pet food and the retailers who sell their products need to be doing more to help consumers understand what they are getting for their premium price and why it is justified or they risk losing customers to lower priced solutions would in turn slow industry growth. Companies that cater to the value oriented wellness segment of the market stand to benefit from these changes in pet consumer behavior.

/bryan

Note: This blog is for informational purposes only. The opinions expressed reflect my view as of the publishing date, which are subject to change.  While this post utilizes data sources I consider reliable, I cannot guarantee the accuracy of any third party cited herein.