June 2016 – Pet Business Professor

BUYING PET PRODUCTS? – PRICE MATTERS!: “PETFLATION” UPDATE AND MORE!

June 26, 2016/in Pet Market/by John Gibbons

Since the great recession, price has become perhaps THE critical factor in the buying behavior of U.S. Consumers. In our recent reviews of Consumer Pet Spending we saw that inflation and deflation can affect retail spending. However, there is not a universal rule. Price changes, up or down can have a different impact on the different Pet Industry Segments. Deflation can spur spending in a “discretionary” segment but retard it in a “need” segment. Moderate inflation is normal and expected by consumers. However, when it gets out of hand, it can negatively affect sales.

In this report we’ll update the changes in the CPI (from the USBLS) since December, both for total Pet and the individual segments. However, before we get to that, let’s do some “pricing” groundwork. We’ll take a look at some relevant facts from a study on The Shopping Habits of American Women done by Blackhawk Engagement Solutions and presented in a webinar by Retailing Today.

First, what matters most in the shopping decision?

Obviously, price matters most in today’s world. However when you consider Price + Quality = Value, then Value is also twice as important as brand – a big change from pre-recession days.

If Price is so important, then how does the shopper compare prices? With 71% of shoppers owning and using a smartphone daily, it’s not surprising that retail websites and other online sources, like Amazon and Google are usually the first choices. However, preference does vary by product category.

Here’s how consumers price shop for pet products. You may be surprised by what is #1.

For Pet Products, the # 1 place for checking prices is…in the retail store. The study covered a variety of product categories including clothing, furniture, sporting goods, toys and more. Only 2 categories had retail stores as the consumer’s first choice – Pet Products and Grocery. Grocery is certainly not surprising, with fresh food being such an important share of the category’s business.

The preference for “in store” price checking doesn’t say that you don’t need an effective web presence (with a store pickup option) or that shoppers don’t use their smartphones to price check pet products when they are standing in the retail aisles. Perhaps, it just “speaks to” the personal nature of our relationship with our companion animals.

Retail price and “value” are more important than ever in the consumer products business and the Pet Industry is no exception. Let’s see what has happened with the Pet Consumer Price Indices since last December.

This chart shows the change from December 2015 to May 2016 and how the average for the first five months of 2016 compares to the same period last year.

Observations

Veterinary – Prices in this segment are up over 4% vs the same period last year. This is exceptionally high but in fact, the inflation may still be accelerating. With a 2.2% increase just since December, it could reach 5% by yearend. One result of the prolonged high inflation rate is a reduction in the amount of Veterinary Services across a broad spectrum of demographic groups. There is a plus side…for the Supply segment, as there has been exceptional consumer demand for OTC treatments, meds and supplements.
Pet Services – Although not as high as the Veterinary Segment, Pet Services pricing has been inflating over a prolonged period. So far there have been no major consequences in terms of consumer spending. The chart above shows that the inflation rate is starting to slow down, especially since December.
Pet Supplies – Supply pricing is up 1.9% since December. This is a bit deceptive as the pricing is still recovering from the biggest drop in history last Oct-Nov. YTD prices are slightly below a year ago.
Pet Food – Food prices have been gradually recovering from their record drop in Jul-Aug and are up slightly since December. However, they are below the same period in 2015. We’ll have to see which of these 2 opposing factors has the most impact on the consumer.
Total Pet – Both increases are moderate, although somewhat higher than recent history. The 1.4% increase since December is unusual because it reflects increased prices in every segment. The 1.3% increase versus a year ago is more in tune with recent activity because it comes from decreases in both Food & Supplies which were overcome by increases in the Services…especially Veterinary.

To understand and appreciate what is happening, you need to see it. Take a look at the monthly flow.

Veterinary shows an unbroken string of increases and is even accelerating. The increase in the Service segment has clearly moderated beginning in September of last year. The product segments are on rollercoaster(s). Look at those record drops in the second half of 2015…but both Food & Supplies seem to be slowly recovering.

One last chart: This is simply a snapshot in time. May 2016 vs 1, 2 and 3 years ago

Vet Services: Up about 4% per yr & increasing

Pet Services: Increasing about 2.3% per year but moderating.

Food & Supplies: Deflation slowing – Moving towards “Flat”

Total Pet: Being pushed up ”↑” by services while products move to flat “↔”

Pricing in the Summer and Fall of 2015 was very volatile with record CPI drops in Products. We’ll see what 2016 brings.

PET INDUSTRY $ALES IN 2015: $60.3B – TAKING A CLOSER LOOK

June 14, 2016/in Pet Market/by John Gibbons

According to the numbers from the APPA, the total U.S. Pet Industry increased $2.24B (3.86%) in 2015. This was not quite the projected 4.4% increase and slightly less than recent years. If you factor in “Petflation”, the increase in the amount of goods and services sold was 2.86%. However, this means that 74.1% of the industry’s growth was “real”. Only 25.9% came from price increases. This is less than last year’s 83% real growth…but still very good.

In this post we’ll take a closer look at the performance of the total market and importantly, the individual segments. We’ll see which segments are “driving” or “retarding” the industry’s growth. The report will cover 2015 and also put this year’s numbers into perspective for the period from 2009 to 2015, the time since the great recession.

Here are the details for 2015. Some key data is highlighted:

Key Observations

The ongoing deflation in the Food segment got markedly worse in 2015 (-1.03%).
- Good News – The consumer actually bought even more product at the deflated prices.
- Bad News – The deflation increases the competitive pressure on manufacturers, distributors and retailers.
The Supply segment came within 1% of hitting the projected retail number and…prices were flat (a pause in the deflationary spiral) so 99% of the growth was real!
The Service segment exceeded projected sales and while inflation was relatively high, 78% of the increase was real.
The Veterinary Segment retail increase was only 55% of the projection and the high inflation rate resulted in Pet Parents actually buying less in terms of the amount of veterinary services in 2015!
The Total Pet Market performance – up 3.9%…with 74% % of this being “real” looks pretty good. However, the high inflation rate in the Vet Segment has reached the point where it is depressing consumer sales, affecting the entire industry’s numbers. Food prices have been deflating for 2 consecutive years. Time for a change in these segments.

The Chart below may make it easier to visualize the situation…especially in the Vet & Food Segments

Now let’s take a look at the performance of the individual segments from 2009 to 2015 starting with Food!

OBSERVATIONS

When you look at the cumulative Pet Food Sales since 2009, it looks pretty good.
- 4.64% Annual Growth Rate
- Low average inflation – 1.02%
- 68% CPI adjusted Growth Rate: 79% of the growth since 2009 has been “real”.
In the 6 years since 2009…
- 3 were deflationary (-0.6%) Average
- 3 were inflationary (2.5%) Average

The deflationary years are the most concerning. We have only had 4 deflationary years in Food (2000 was the other) and now we’ve had 2 in a row. The 2010 deflation came after a combined 20% Food CPI increase from 2007 to 2009 – in the heart of the recession and real growth ceased. The decrease in 2010 brought a positive response from the consumer – adjusted growth exceeded retail sales.

The years from 2011 to 2013 brought CPI increases in the 2+% range. The increases dropped the percentage of real growth below 50%. In 2014 & 2015, prices fell so the consumer paid less but the actual growth rate improved. The big concern with deflation is the impact on the supply and distribution channels and ultimately on the consumer… thru reduced choices.

Here’s what it looks like on a graph:

2016 Retail Food sales are projected to increase 4.2% to $24.01B. This may be a little high. The 3.5% range seems more likely unless we have a turnaround in pricing. I haven’t projected the CPI for this segment or others. It’s a little too early, especially with the volatility in Food and Supplies. Recently, the December and January Pet Food CPIs were up. February and March were down. Remember prices were pretty stable for the first half of 2015…then we had the biggest drop in history. If prices can stabilize or even turn up 0.5% in 2016, then the 4.2% increase in revenue becomes more likely.

Let’s turn next to Pets & Supplies.

OBSERVATIONS

DEFLATION
- Prices are 4.94% below 2009 (and about equal to what they were in April 2008)
- Falling at an annual rate of -0.84%
Consumer is still buying more
- Retail Sales annual growth rate is 4.53%
- Price Adjusted annual growth rate is 5.42% – 20% higher than the retail rate

In Supplies the first deflationary year was 2010. However, we should remember that inflation has generally not been a big issue in this segment. From 1997 to 2004 Pet Supplies increased in prices at an annual rate of under 0.5%. Then in 2005 and continuing through 2009, the CPI increased an average of 2.75% per year. This doesn’t sound like much but remember it was 5 times the rate of the previous 7 years and 2 of the biggest increases (+3.0%) came in 2008 and 2009, in the heart of the recession. The consumer reacted – and bought less.

Prices fell 1.7% in 2010 and the consumer bought more. The prices briefly stabilized in 2011 and then began moving downward. The consumer’s reaction was to buy more. 2015 brought another pricing pause, almost exactly equal to 2010. Overall Retail growth slowed slightly to 3.1% and adjusted growth dropped from 4.6% to 3.1%. The good news for the sellers is that this growth was 99% real and more profitable, exactly the same consumer reaction as in 2011.

Here’s the graph:

In 2016 Pet Supplies are projected to increase 4.2% to $17.09 B. That seems a bit high. 3.5% may be closer. In 2015 there was some indication that this segment might be truly pulling out of the deflationary spiral. However, a record CPI drop in the second half produced a year similar to 2011. Remember, 3 years of deflation followed that year. However, January through March of 2016 have seen moderate monthly increases in the Supply CPI. I’ll update you throughout the year.

Now onto the Service Segments – First, NonVet Services.

OBSERVATIONS

Growth
- Annual Growth rate 8.26% – Amazing!
- Inflation – a little high at 2.48%, but doesn’t seem to be significantly slowing consumer purchasing
- 68.3% “real” growth
If price increases continue or accelerate, eventually the consumer will “push back”, but it hasn’t happened yet. Right now, a 2.5% inflation rate seems to be acceptable to the consumer.

There are no real negatives regarding this segment. It is growing strongly and consistently, especially since 2011. Last year the growth even reached double digits at 11.8%. However, it is a small segment, only accounting for 9.0% of the total market…but that’s better than 8.3% in 2014.

Here’s how the sales look on a graph:

2015 sales are projected to be $5.73 B, a 5.9% increase. This may even be a bit low. Based upon recent history 7-8% seems more likely. In regard to inflation rate, the average annual rate of 2.5% seems like a reasonable estimate for 2016. This would produce a “real” growth rate of 3.4% (42.4% of growth from price increases). The 2016 adjusted sales would be $4.83B.

The final individual segment is Veterinary Services. This segment accounts for over 25% of the Total Pet Market.

Let’s take a closer look at the Veterinary Service Segment.

OBSERVATIONS

Retail Growth
- Up 28.1% since 2009
- Annual growth rate 4.21%
Inflation is the problem
- Annual average CPI increase 3.58%
Price increases account for 85.6% of Veterinary Retail growth!
“Real Sales”
- Consumers actually bought less in vet services in 2011, 2012 and 2015. They just paid more.
- Sales have been stagnant since 2009 – average annual growth rate 0.6%
- Even worse, 2015 sales were about equal to 2010. Consumers bought the same “amount”. They just paid almost $3B more,

Regular veterinary visits are generally viewed as a “need” not a “want”. The high inflation rate over the years finally generated a consumer response in 2011…they cut back on veterinary services. Consumers have turned to OTC medicines, supplements, treatments and home testing whenever possible. Pet Health Insurance is growing and there may be fundamental changes in Veterinary Clinics – more chains and groups. Major medical procedures and emergency care will always be needed but it seems steps should be taken to make regular veterinary care more affordable.

Here’s the graph of sales since 2009:

Veterinary Services are expected to hit $15.92 B in 2016, a 3.2% increase. If that happens, we will probably have another decrease in the amount of services. Prices are already up 1.7% from December and we’re only through April.

Now in our final section we’ll go back to the total pet market.

OBSERVATIONS

Retail Growth expected to reach $62.75B in 2016
- ↑32.4% since 2009; Annual growth rate 4.79%
Inflation: Only 9.1% since 2009; 1.45% annual CPI increase.
“Real” Sales are 68.6% of Total Cumulative increase – a 3.28% annual growth rate.

The great Total Pet numbers are a big reason why so many people are attracted to the Pet Industry. The retail numbers are also consistently good across the segments. However, as I’ve said so often, when you look a little deeper into “petflation” and the actual amount of goods and services sold, you find that the total industry numbers are generated by two undesirable situations that tend to counteract each other when the numbers are combined. Specifically:

Deflation in the Supplies Segment, which has paused after 5 yrs. We’ll see if it begins again or if we have reached a turning point. Commoditization, channel migration, consumer value shopping and lack of innovation have created extreme competitive pressure. Consumers have been buying more… but paying less.
We now have had 2 consecutive years of deflation in the Food segment, including an all-time record monthly price drop in July of 2015. This is a big concern in the industry’s largest category. What will 2016 bring?
The Veterinary segment has the exact opposite problem. Years of inflation have caught up. Consumers bought less in 3 of the last 6 yrs. 85% of growth is from price increases and 2015 “real” sales are equal to 2010.

In 2016 the Total Industry is expected to increase 4.1% to $62.75B. If the deflation and inflation both improve, we could see an inflation rate of perhaps 1.25%. This would generate a “real” increase of 2.85% and 2016 adjusted sales of $56.9B in the chart above. Bottom Line: We need moderation in the CPI trends for Pet Food and Veterinary Services.

Finally, always look beneath the surface in your business numbers. The headlines may not tell the whole story!

U.S. TOTAL PET SPENDING $63.4B…UP $2.6B: MID-YEAR UPDATE

June 1, 2016/in Pet Market/by John Gibbons

In a reversal of the normal flow, we first looked at the performance of each of the 4 Pet Industry Segments in the Consumer Spending Survey conducted by the USBLS. We saw a definite disparity between the segments, both in the overall performance and in the demographics of consumer spending behavior. Now let’s put these different parts together to get the Industry Total covering the period 7/1/2014 to 6/30/2015.

Total Pet Spending is now $63.38 B. Let’s put that into perspective with recent history.

After strong growth in 2014, spending in the first half of 2015 was down. Let’s compare like time frames:

2014 vs 2013: Sales up $6.6B (+11.4%)
- By Half Year vs previous year: Jan>Jun 14 up $3.05B; July>Dec 14 up $3.52B
Mid-Year 2015 vs Mid-Year 2014: Sales up $2.6B (+4.2%)
- By Half Year vs previous year: July>Dec 14 up $3.52B; Jan>Jun 15 down –$0.94B

Now, let’s look at the numbers by Industry Segment:

Observations

Food is driving the entire increase…with a little help from Services.
It’s not a 12 month issue…Total Sales were up $6.6B in 2014 and the Jul>Dec 14 $ are included in both the annual and mid-year reports. Let’s look closer.

In this chart we look at $ change by segment overall and by 6 month time periods.

Observations – Does Price Matter?

July to December of 2014 was a “dream” half year. All 4 segments were up…3 for about a $ Billion each.
January to June of 2015 brought a different story. Retail pricing is likely a factor:
- Supply Prices were up versus a year ago…sales fell $1 Billion.
- Food Prices were up…slightly for the entire 12 months which countered the recent deflation and contributed to the huge increase. Notice the different behavior in these 2 product segments.
- Services saw their growth slow in the first half of 2015 as inflation reached 3.2%.
- Veterinary Services had a precipitous, inflation driven drop in virtually all age and income demographic groups. Only the Over 65 and Under 25 age groups and the Under $30K income group showed increases. Note: 65> and <25 make up a big portion of the Under $30K group.

Total Pet Spending increased $2.58B in the 12 months ending June 30, 2015 versus the same period a year earlier. Two segments were up and two were down. In the next chart we’ll “Show you the money”! We’ll identify the specific segments within each demographic category with the biggest gain or loss in Total Pet $pending.

Income Winner – Over $100K. Money does matter. These high income households, 21% of the total number, generated 137% of the Total Pet Spending increase…so the remaining 79% of U.S. H/H’s were down a total of –$.95B. Although even the over $100K group had a drop in Veterinary Spending, -$0.2B.
- Income Loser – Middle Income America – The $50>$80K group had a $0.4B increase in Food but spending fell in every other segment, including a -$2.9B drop in Veterinary.
Age Winner – The 65>74 group, primarily aging “Boomers”, spent 1.29% of their total H/H expenditures on their pets and had increased spending in every segment.
- Age Loser – The 45>54 age group has the highest income, but their spending still decreased slightly in every segment except Services which was up $0.2B.
Occupation Winner – Self Employed had a spending increase in every segment but Supplies, which was down –$0.2B. Most of their increase was due to a $1.2B increase in Veterinary spending.
- Occupation Loser – Managers and Professional increased spending in 3 segments, including a $1B increase in Food. However, this was not enough to overcome a -$3.7B drop in Veterinary spending.
Race/Ethnic Winner – The White, not Hispanic group generated 192% of the Industry’s total increase but even they were down -$0.3B in Supplies.
- Race/Ethnic – African-Americans actually had increased spending in Supplies and Services but decreases in Food and especially Veterinary, -$1.3B pushed them negative. Hispanic and Asian Groups were also down in Total Pet Spending by -$1B.
Education Winner – The group with Less than a College Degree had the largest Total increase, including even a $0.1B increase in Veterinary spending. Although their spending on Supplies was down -$0.2B.
- Education Loser – The Advanced Degree group was the only education level with a decrease in Total Pet Spending and it was only -$0.05B. Pet Parenting crosses every level of Education.
H/H Size Winner – 2 People only was the big winner with increases in everything but Services. Although every H/H size of 2 or more people had an increase in Total Pet spending.
- H/H Size Loser – 1 Person H/H Spending was driven down by decreases in Supplies and Veterinary.
H/H Composition Winner – With increases in all segments, Married Couple Only H/H’s had the biggest gain.
- H/H Composition Loser – Single and All/Other Households – No surprise here.
Region Winner – Midwest: A big increase in Food and Services; Flat in Vet and down -$0.5B in Supplies.
- Region Loser – West had increases in 3 Segments but a -$2.3B drop in Veterinary made the difference.
Area Type Winner – Rural areas with <2500 Population and not within a Metropolitan Area are surprisingly the biggest winner with increases in every segment but Supplies, which was down -$0.2B. Never fear, The Urban areas outside the Central City are also up $1B, despite a -$1.1B decrease in Veterinary spending.
- Area Type Loser – A decrease of –$1.1B in Veterinary Spending made the Central City negative…slightly.
Housing Tenure Winner – Homeowners without a mortgage is a bit unexpected. They are down slightly in Supplies and Services – a total of only -$0.06B. Food & Veterinary are up an incredible $3.6B.
- Housing Tenure Loser – Another surprise. Homeowners with Mortgages were up $1.9B in Food and Services but down -$0.1B in Supplies and -$3.1B in Veterinary. Even Renters were up $0.4B overall.

Comments

Without the spectacular performance by Pet Food, this would be a completely different report. Food was the positive “Driver” across almost all demographic segments. Some of the winners and losers were the “usual suspects” – High income and White, not Hispanic were big gainers. Central City and Singles lost ground. However, there were some groups that are new to the chart. Among the winners were the 65>74 age group, 2 person H/H’s, Married Couple Only and Homeowners without a mortgage. Actually these 4 groups all reflect many demographic characteristics of older Baby Boomer H/H’s. The under 25 group also had a good showing and are also more likely to be 2 person households. Unusual losers were Homeowners with mortgages and Mgrs/Professionals. In September, we’ll see how the second half of 2015 matches up against the “dream” second half of 2014.