By late 2010, surveys indicated that 93% of consumers had changed their shopping habits because of the economic downturn. (Time 11/1/12)

• After the recession, 64% of consumers now agree with the statement “Brand names are not better quality.” And it follows that if brand names do not represent better quality, why would it be worth paying more for them? (Time 11/1/12).
• Only 25% of Americans say that brand loyalty impacts their buying behavior. (Forbes 3/26/12)
• Price (89%) and quality (82%) are the highest factors in buying decisions. (Forbes 3/26/12)
• 65% of shoppers note that a high level of variety is an important buying factor.(IRI 8/25/09)

The behavior of a customer/consumer has indeed changed beyond all recognition which means forget what you think you know, forget the past. That’s all gone for good. (Forbes 3/26/12)

In the “prolonged new normal”, “value – encompassing attributes such as convenience, price, health and quality – will win.” Products and brands that deliver a strong value proposition have a better chance for success. (A.C. Nielsen 8/6/14)

The Pet Industry has achieved spectacular growth by building on – not exploiting, America’s growing commitment to our companion animals. In 1989 when I came into the industry, dogs and cats were pets. That is no longer true. Now they are valued members of the family.

We achieved growth through the expanding consumer base, but also by producing ever better products and services – time after time, year after year – New products and improvements that helped enhance the lives of animals and their people “parents”. Healthier, safer, easier…and yes, more fun, these were the driving forces in the industry. It was all about recognizing and fulfilling the consumer’s needs through thought, timely innovation and a concerted effort.

What is the current situation? Since an American household is now twice as likely to have a pet than a child under 18, Pet Supplies are found in virtually every retail channel – Food, Drug, Discount, Club, Sporting Goods, $ Stores, discount clothing outlets…you name it, they’ve got Pet. Not only that, but the major retailers have pet products with their own private label and/or a non-pet related licensed names.

What about private label? This concept first gained real traction in the late 70’s. It started as generic but soon morphed into “store brands” – private label. The appeal was higher margins for the retailers and lower prices for the consumers in products that are bought on a regular basis (commodities). At first, there were quality issues but the consumers taught the retailers quickly. Value = price + quality. The retailers improved the quality and started to expand their private label offerings to a multitude of categories. Remember, they make more money!

How did Pet Supplies get into this private label situation? Consider this:

In 2009, IRI noted that Private label growth is best in commodity-driven categories without a dominant national brand and with relatively low innovation. A specific target category noted in their report was – PET SUPPLIES (IRI 8/25/09)

A variety of research sources have found that consumer buying behavior has changed during and after the recession. I would say that a more accurate way to put it is, “After 40 years of lessons, consumers finally get what we have been teaching them.” Brand does not matter in commodity items.

How did sub-categories in the Pet Supplies segment become commodities? We did it. “Me too” companies marketing products pulled from the same showrooms in China flood the market. Don’t get me wrong. Most are quality products. That’s a major factor. To the average consumer, there is no difference in quality or function between products sold at a pet chain and products sold at a discount department store. If this is the case, then the best price is the best value…and the best choice.

At the same time, true functional innovation has slowed as noted by IRI. If manufacturers must focus on price in an attempt to maintain their current market share, then innovation must take a back seat. It’s also hard for small entrepreneurial creators to get noticed in a flood of products in every category. Policies such as “vendor consolidation” make it even more difficult for unique, new ideas to get to market.

Vendor consolidation is my favorite commoditizing policy. You absolutely can’t argue with it from an accounting viewpoint. It is cheaper to do business with fewer companies! However, you must also believe that all important innovation comes from larger companies. If you look at the history of American business, nothing could be further from the truth. Based upon that, Bill Gates and Steve Jobs should have stayed in their garages. After all, we had IBM for all our computing needs!

Vendor Consolidation is “short term”  thinking which can affect the whole industry. Companies would be better served, long term, with creating a “new vendor days” program which makes it easier for inventors to showcase new ideas.

Let’s sum it up:

American Consumers are looking for:

1. Value (Value=Price + Quality)
2. Convenience (Anything that makes the pet parenting experience easier)
3. Selection (Americans need variety, choice)

What do we need to do?

Manufacturers must provide products that meet these requirements and focus on innovation in function and design, Got great products? Don’t rest on your laurels. Make them better – demonstrably. Identify a consumer need and find a way to fill it. Innovation is the only pathway that leads away from “commodity”….However, innovation is not the end of your journey. To reach the consumer, you still need to market your products properly, in today’s environment…

This is definitely easier said than done. I guess we’ll see what “we’re made of”.

The U.S. Bureau of Labor and Statistics released their June CPI numbers while most of us were off at SuperZoo. In my recent posts we have seen that changes in the CPI can affect consumer behavior when they are outside “expectations”.

Let’s take a look at the 2014 first half CPI numbers by market segment and compare them with:

• Year end 2013 (Dec) – What’s happened this year to date
• vs 2013 Annual numbers (Note: The CPI is measured every month. The annual number is simply the average over the 12 month period)

Then I’ll look in my crystal ball (and at history) and take a shot at predicting the annual change for 2014.

Here is the math:

Here is the visual representation:

OBSERVATIONS & RECAP BY MARKET SEGMENT

Veterinary Services – Prices UP 1.53% since December; UP 3.02% over the 2013 average number.

• Veterinary prices go up every month like clockwork. The USBLS has measured the Vet Services for 198 consecutive months and prices have dropped in only 13 individual months over that whole period – almost all were less than 0.1%.
• Based upon history, I project that prices in this segment will be up 3.73% in 2014 over the 2013 annual number. In my initial projection from my blog on the period from 2009-2014, I used a CPI increase of 2.6% which was equal to the previous year. This year’s increase is now projecting to be 43.5% GREATER than expected.
• Even if this segment hits the projected retail number of $15.25B, over 60% will come as a result of price increases. Moreover, the adjusted growth (factoring out price increases) for the period from 2010 > 2014 will be a total of 2.0%…or 0.5% per year.
• Rising prices have basically stagnated the Veterinary Segment in terms of growth in the amount of services sold. It appears that this trend is continuing.

Non-Veterinary Pet Services – Prices UP 0.72% since December; UP 2.42% over the 2013 average number.

• Prices have also consistently gone up month after month in this segment, although not as fast as the Veterinary Segment.
• Based upon recent history, I project that prices in this Service segment will be up 3.23% in 2014 over the 2013 annual number. The previous year’s increase was 2.1% which was used to estimate the 2014 adjusted growth numbers. This increase is 53.8% GREATER than last year’s.
• Over 44% of this year’s growth will come from price increases…if they can hit the projected number.
• Unlike the other segments, Pet Services has not yet hit a “price wall” triggering reduced use by consumers. We’ll see how long that this continues.

Pets and Pet Supplies – Prices DOWN -0.8% since December; DOWN -1.17% from the 2013 average number.

• Totally opposite from Services but equally concerning. This “deflation” began in 2010 and continues.
• Based upon recent history, I project that prices in this Supplies segment will FALL 1.55% in 2014 from the 2013 annual number. The previous year’s decrease was -2.1% so it is a little better than last year. However, I used a decrease of -0.8% in my previous estimates. I had hoped that the ongoing deflation would flatten out. It is slowing but not to the extent we would hope.
• Prices on Pets and Supplies have now dropped 5.5% since reaching their historical peak in 2009. That is an average annual deflation rate of 1.1%.
• As long as the consumer keeps increasing the amount of purchases the segment is fine. The concern is the increasing pressure on the manufacturers and the distribution channel due to deflating prices.

Pet Food – Prices DOWN -0.35% since December; DOWN -0.55% from the 2013 average number.

• This is a bit of a surprise – to me, at least. After the unique price drop in 2010, this segment had been operating with a regular CPI increase of about 2.3%.
• Based upon the YTD numbers and history, I project that Food prices will FALL -0.39% in 2014 from the 2013 annual number. If Food hits the retail number of $22.62B the adjusted growth rate will be 5.3% – over twice the 2.5% adjusted growth that was expected with increasing prices.
• Pet Food prices have fallen in only 1 other year (2010) since the CPI was first measured in 1998.
• The prices in all segments rose strongly up through the recession in 2008-2009. The consumer reacted by buying less (amounts). A Drop in both Food and Supply prices in 2010 spurred a rebound in consumer activity. There is really no parallel in the current situation. The economy is not great but we are not in a recession. Prices in food have been growing at a manageable rate and consumer purchases were increasing at a regular rate. We’ll see if this is a short term anomaly or if Food prices have reached a price ceiling of some kind.

TOTAL PET – Prices UP 0.17% since December; UP 0.42% over the 2013 average number.

• All Services are up more than expected and both Food and Supplies are down, basically flattening the pricing in the total Pet Market.
• Based upon the performance in the individual segments, I project that prices in the Total Pet Industry will be up 0.6% in 2014 over the 2013 annual number. This is equal to the smallest increase of all time which occurred in 2010 and is only 35% of the average annual increase in the years since then. If the increases in the services weren’t greater than expected, we would be projecting a CPI increase of only 0.4% for the total industry – the lowest in history.
• How does the YTD Pet performance compare to other Categories? Two that we relate to are:
  • The Overall CPI – which is up 1.4% since December
  • Food & Beverages – which is up 1.2% since December
  • Our overall increase of 0.6% is less than half that of these key indicators.
• The last time we had this low of an increase in the CPI the price drops in Food and Products helped boost us out of declining consumer activity in a recession. There is no recession now. Consumers were accepting moderate prices increases in Food and the segment was growing. The continued low prices for supplies was actually still generating consumer purchases in increased amounts. The pricing in both of the Service segments is still growing at a concerning rate – with seemingly no impact on the Pet Services segment but a stagnation in the quantity of Veterinary Services. Prices always go up for both of these segments in the second half so the increases will continue. The big concern now is the continuing deflation in the supplies segment and the sudden drop in food prices which is contrary to the activity in the overall CPI and the corresponding “human” food & beverage category.

Many of you responded very positively regarding the info from my earlier CPI blogs. So when I got the USBLS info for June, I wanted to do a quick update. I assumed that it would be a simple checkpoint -“we’re halfway through”. It ended up being a bit more complicated.

We are into the second half of the year with anticipated strong holiday and fall/winter lifts in many categories. The pricing situation in all Segments is not as positive as we expected. Everyone in the industry needs to focus on efficiently maximizing their efforts in this critical time of the year. Then, we will just have to wait and see how it plays out in terms of the impact on the consumer and whether we meet or beat our forecasted numbers.

In my next Post, we’ll try to answer the consumer question, “What is the best (cheapest) and worst (most expensive) month to buy…?”

In our last post we discussed the performance of the the Services segments during 2009-2014. We’ll now turn the spotlight onto Products – Food and Supplies.

We’ll start with the largest segment – Pet Food

 Here’s a “Visual” comparing Retail $ to Sales adjusted to remove price increases:

Pet Food Market 2009-2014 Recap

Growth

• Retail for Pet Food grew 28.8% (average annual growth rate 5.19%)
• CPI (Prices) went up 9.6% (average annual increase 1.85%
  • Only 35% of this segment’s growth was from price increases
• Adjusted growth (factoring out prices) – 20.64% (average annual growth rate 3.3%)

Key Waypoints

• 2010 – Spurred by price drop – sales “took off” – 7.2% adjusted sales growth…actually exceeded full retail growth.
• 2012 – Price “bump” slowed growth
• 2011-2014 Generally steady growth

The Future

• This is the largest segment and has a great impact on the market. Although it is a necessity there is price sensitivity. It appears that the best growth appears when the annual increase in CPI is kept to 2.3% or less

Now let’s look at Pets & Supplies

 Here’s a “Visual” comparing Retail $ to Sales adjusted to remove price increases:

Pets & Supplies Market 2009-2014 Recap

Growth

• Retail for Pets & Supplies  grew 26.6% (average annual growth rate 4.83%)
• CPI (Prices) went DOWN 4.7% (average annual DECREASE 0.96%)
  • Adjusted Sales growth (the amount) ACTUALLY EXCEEDED Full Retail Sales $
• Adjusted growth:  32.8% (average annual growth rate 5.84%)

Key Waypoints

• 2010 – Spurred by price drop – sales “took off” – Adjusted Sales Exceeding full retail $ Sales
• 2011-2012 – Continued strong sales – Peak adjusted growth 7.1% in 2012
• 2013-2014 Sales Growth – Both Full and Adjusted slowing but still strong

The Future

• The consumer is buying more and paying less. This demonstrates the price sensitivity in the market. However, a prolonged period of deflation will increase pressure on all manufacturers. In the estimate above, it was assumed that the CPI would only fall 0.8% in 2014. So far through May, the indications are that prices could drop a full point or more again!

In the final Post in this series we will take a look at how these segments blend to produce the overall Total Pet Market!.

The Retail Pet Market has grown from $22B in 1997 to $58.5B in 2014 – a 165.9% increase. At the same time prices in the industry have gone up 66.8%. How do you factor out the price increases to show the growth in terms of the actual amount of goods and services sold?

One way is to use the CPI published by the USBLS to adjust each year’s retail sales back to 1997 ($) Dollars (the base year).

When you do that you get a spreadsheet that looks like this:

A lot of details! We can refer back to this chart to reference specifics. Let’s look at the Bottom Line in a more visually friendly way.

Here you go: The Pet Market from 1997 to 2014 – Full Retail and Adjusted to 1997 $ (removing price increases)

Let’s pull this all together with a brief summary of the 1997 – 2014 history

Overall growth

• Full Retail Sales – 165.9% (Average annual retail growth 5.92%)
• Petflation – 66.8% (Average annual price increase 3.06%)   
  • More than half of the industry’s average annual growth came from price increases
• Adjusted Growth Taking out price increases – 59.4% (Average “actual” growth 2.78%)

Petflation

• Driven by huge increases in Veterinary Services (125%) and Other Services (75%)
• Pet Food Price increases are close to those for Human Food & Beverage
• Pets and Supplies have only increased by 14% in 17 years.

Key Waypoints

• 2002 – The first year that the Petflation rate exceeded the National CPI
  • The result – actual increase in the amount of Pet Goods and Services only 0.3%

• 2008 & 2009 – The 2 largest price increases in the 17 year history
  • Retail Sales went up in 2008 but Consumers BOUGHT LESS – they just paid more.
  • Retail Sales also increased in 2009 but Consumers BOUGHT EVEN LESS – paid even more.

• 2010 – Prices continue upward in Services but drop in Food and Supplies. Net increase: 0.6%
  • The consumers respond with renewed purchasing vigor. Adjusted growth rate is the largest in 7 years and the third largest in the 17 year period.

• 2011 > 2014 – Service prices continue to go up rapidly but Food price increases come back to a more reasonable rate. Supply prices stabilize and even fall further.
  • Price increases now represent less than half of the average annual growth %.

So… “How much of the growth is real?” Obviously, in terms of full retail dollars, the growth is all real. You can take it to the bank. However, more than 50% of the average annual growth has come from price increases, not from increased sales of goods and services. The resulting price adjusted annual growth rate of 2.8% still indicates a moderately strong Pet Market.

It should also be noted that like other markets, Pet does have price sensitivity. While Retail Sales have increased every year, large price increases in the Recession years resulted in consumers buying less – usually not a good plan for long term growth. The good news is that they have responded positively to subsequent price drops and a continuing moderate rate of increase in the CPI.

Of concern is the continued high rate of price increases in the Veterinary Segment. When will the consumer react? On the other end of the spectrum, will deflation continue in the Supplies Segment. This will put added pressure on manufacturers.

In our next post we will begin a detailed look at the period from 2009 to 2014. This recent history has the most relevance to the continued growth of the market .

The Pet Industry has shown outstanding and continuous retail growth in the last 17 years. From 1997 to 2014 (projected) it has grown 165.9%. This is an average annual growth rate of 5.92%.

Here’s what it looks like:

Why pick 1997 as a “starting” year? Why not 1996 or 1994? As it turns out 1997 was a very significant year for the industry. In 1997 the United States Bureau of Labor and Statistics (USBLS) recognized the growing significance of the market by dividing the Pet market into distinct segments and establishing 1997 as the base year for future measurements.

The USBLS produces a variety of important economic statistics but perhaps the most famous and arguably most impactful is the CPI – Consumer Price Index – the inflation rate. Changes in the CPI directly affect the income of over 80 million Americans. It is also used by the President, Congress and the Federal Reserve Board in formulating fiscal and monetary policies.

We all know that price increases in Pet Products are a part of the business. When the costs of energy, labor and raw materials rise, price increases become a business necessity. However, since price increases can directly affect consumer purchasing decisions, they can’t be taken lightly.

Let’s take a look at “Petflation” since 1997 and see how it compares to the overall CPI and to some other industries:

The first thing that you notice is the strong and unchecked increase in prices for human medical services. Regardless of overall economic conditions, medical prices have consistently gone up. This has to be a factor in our current health care situation.

By the way, prices don’t always go up. Prices in the Apparel market are actually 3% less than they were 17 years ago. A big factor is probably the “offshore” movement of manufacturing in this segment.

But back to Pet. The CPI increase in overall Pet Products and Services is 66.8%. It is not as great as Medical but it is 26% higher than Food & Beverage (53.0%) and 41% higher than the overall CPI (47.2%).

Was it always this way? The answer is no. The first year that Petflation exceeded the national CPI was 2002. It also began to accelerate in 2006 with major increases in 2008 and 2009 – in the midst of the national economic recession.

In 2010 this abrupt upward spiral stopped. In the years since, Petflation has “mirrored” the overall CPI and the Food & Beverage Market.

What does all this mean? How has it affected the consumer? We will get to that “bottom line” but first we’ll look at what is “driving” the Pet price increases. Remember the USBLS divided the market into segments.

In our next post we’ll look at the CPI since 1997 for each of the segments in the Pet Market. Have prices gone up equally across the board or….

[box] Note on Data in this and related Posts: The Pet Retail Sales data is taken from numbers published by the APPA which they obtained from various sources. The APPA published sales of $21B for 1996 and $23B for 1998. The $22B sales for 1997 were estimated by assuming an equal growth rate of 4.65% for 1996>97 and 1997>98. The CPI data is the annual rate from reports downloaded from the USBLS website. For 2014 estimates, the change in CPI was assumed to be the same as for 2013.[/box]