U.S. Retail Trade – 2016 $ales Update by Channel – Going for the Gold!

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The Total U.S. Retail Market in 2016 reached $5.5 Trillion dollars – up $172B (+3.2%). This is significantly better than last year’s (+2.3%). In 2016, the decline in Gas prices slowed but still caused a $25B drop in Gas Station revenue. At the same time, the increase in Auto and Restaurant sales also slowed. For this report, we will focus on the “Relevant Retail” Total – removing Restaurants, Auto and Gas Stations from the data. This still leaves us with $3.3 Trillion to “divvy up”.

In a recent report we reviewed the 2016 sales performance of the Top 100 U.S. Retailers. That covered the “Headliners” but everyone can’t be a headliner. How are specific Retail Channels performing? We’ll start with a market overview and then work our way down.    (Base Data is from the U.S. Census Bureau Retail Trade Report)

Also, Please Take Note: As you are reviewing this detailed data and wondering exactly how does all this relate to Pet Products sales, consider these 2 facts from the 2012 U.S. Economic Census:

  1. Retailers other than Pet Stores generated 66.5% of all the Pet Products revenue in the U.S.
  2. Pet Products, on average, generated 1.94% of the total revenue of all non-pet stores that chose to stock them.

  • Restaurants (Food Service) – 12% of Total Retail – up 5.9%, which was about 25% less than last year’s (+8.1%).
  • Automobile Sales – almost 21% of the Total – Revenue also grew +4.1%, but 33% slower than 2015’s (+6.3%)
  • Gas Stations – 7.6% of the Total (In 2014 they were 10.3%) – ↓Down 5.7% from 2015. Gas prices hit bottom in February ‘16 and turned up, passing 2015 prices in November, but still down 11% for the year. (CPI from USBLS)
  • Retail, Less Food, Auto and Gas – Up 3.6% to $3.3 Trillion, about the same as last year’s +3.5%. It is 59.8% of the total U.S. Retail market and is growing 12% faster than the Total but still slower than Restaurants and Auto.

To put this year into perspective, let’s look at the overall performance in recent years.

The U.S. retail market has grown each year since 2012. It is just a matter of how much. In 2015 the precipitous drop in Gas prices had a huge impact on the overall market. Restaurants have shown accelerating growth but dialed it back in 2016. Auto sales are still strong but the growth is slowing. Our “Relevant Retail” Segment has been the most consistent. As expected, its 3.6% growth is below the 4.2% increase of the Top 100 Retailers. However, it will serve as a benchmark as we review the individual channels. Above 3.6%, a channel is gaining market share; Below 3.6%, they are losing share.

Now, we’ll slice up the U.S. “Relevant Retail” Channel “Pie”.

These are large slices of the U.S. Relevant Retail pie. Three divisions – General Merchandise Stores, Food and Beverage and Non-Store account for 58.8% of the total. This is up slightly from 58.6% in 2015. The increase is all from Non-Store Retailers. The other two major segments are losing share. All are very important to the Pet Industry. In our analysis of Pet Products Sales based upon the 2012 U.S. Economic Census, these three major divisions produced 59.7% of total Pet Products sales. Consumers spend a lot of money in Pet Specialty Stores but Pet Products are also “on their shopping list” in the outlets where they spend most of their money.

Because they are so huge, major Divisions of the market generally don’t show much movement in market share in just one year so the changes in General Merchandise, Non-Store and Food & Beverage are very significant. Each of the major divisions includes a number of sub segments. For example, General Merchandise includes Traditional Department Stores, Discount Department Stores, Supercenters and Clubs as well as $ and Value Stores. These specific retail channels can have even greater movement in share because this is the level that the consumer “views” when making their initial shopping choice. Change at this level is where any ongoing consumer shopping migration first becomes apparent.

Here is the Market Share change “Rule” for 2016: To gain 0.1% in Market Share your $ increase must exceed the amount generated by a 3.6% sales increase PLUS an additional $3.3B. Example: If a channel did $100B in 2015, they need to do $100 +$3.6 + $3.3 = $106.9B to gain just 0.1% in 2016 share. You will see channels with revenue increases that still lose share because the increase was less than 3.6%. It shows that even small changes in share are significant.

With that overview, we’re ready to drill deeper into the data. Let’s look at the 2016 performance of some of the specifically “Pet Relevant” Channels to see which are doing the best…and worst in gaining consumer spending. Eleven of the twelve were chosen because they generated at least 1% of the Total Pet Products (food & supplies) spending in the last Economic Census – 2012. I have also included Traditional Department stores on the list even though they have never truly embraced Pet Products. They have long been a fixture in the U.S. Retail Marketplace. Their continued decline, as consumers migrate to outlets which better fit their needs, has profoundly affected U.S. retail shopping as generally they were the “anchor” stores for the Shopping Malls across America.

We will use 2 separate graphs to illustrate the situation in these Pet Relevant Channels. The first will show the % change in sales in 2016 vs 2015. The next will “show us the money” by translating the % into $ gained or lost. Then we will have observations on each segment

Remember, you must be up at least 3.6% or you’re losing market share!

The leader comes as no surprise. However, 9 of 12 these pet relevant channels, including some huge ones, are losing market share. In the next chart, we’ll “show you the money!” Remember, the Total increase for the “Relevant Retail” Market was $116B and you must be up 3.6% PLUS $3.3B just to gain just 0.1% in Market Share.

The relative growth in the Internet/Mail Order Channel is even more pronounced when you look at the change in $ spent!

OBSERVATIONS BY CHANNEL

Look for: (% of Total Business from Pet Products for stores that stock Pet – 2012 Economic Census)

  • Internet/Mail Order – $490.9B, Up $57.2B (+13.2%) – 49.4% of the total increase for the $3.3T Relevant Retail Market came from Internet/Mail Order. The Consumer Migration to this channel is accelerating – gaining 1.25% in Market Share in just a year and passing SuperCtrs/Clubs for the #2 spot behind Supermarkets. (1.2% Pet)
  • Super Markets – $600.3B, Up $12.4B (+2.1%) This largest sub-segment is no longer holding its ground as it lost 0.3% in Market Share in 2016 and 0.5% since 2014. The Internet/Mail order channel has recently put increased focus on grocery products and is pushing very hard to become the leading retail channel. (1.6% Pet)
  • Department Stores – $56.4B, Down $2.5B (-4.3%). As stated, this segment is not particularly relevant to Pet but they are part of the best “visual” example of the channel migration of the U.S. consumer. 50 years ago they “ruled” the GM category. Then they started to slide as they failed to adapt to the changing wants and needs of the consumer. One small example of this is their failure to address America’s growing relationship with our companion animals. (N/A Pet)
  • Discount Department Stores – $98.2B, Down $9.3B (-6.5%). The rise of this segment started the downhill slide of Department Stores but their tenure at the top of GM was relatively brief as the SuperCenters/Clubs offered true 1 stop shopping. Now, they have begun a precipitous slide as consumers shopping for general merchandise items are clearly opting for either the internet or the one stop shopping in the Clubs/SuperCenters. (2.3% Pet)
  • SuperCenter/Club Stores – $450.6B, Up $8.8B, (+2.0%). These outlets with their broad mixture of grocery and general merchandise…at great prices quickly became a dominant force in the retail market. They were second only to Supermarkets in Market Share for many years. However, in 2016 consumers increasingly chose the value and convenience of the internet. Despite a $8.8B increase in revenue they lost 0.2% in market share and fell to third place in the race for the consumers’ $.  (2.4% Pet)
  • $ & Value Stores – $70.6B, Up $1.4B, (+2.1%). – A Great Value and easy to shop – 2 of U.S. Consumers’ major “wants”. This segment has shown steady growth in recent years but it flattened out in 2016. (4.3% Pet)
  • Drug Stores – $272.4B, Up $9.0B, (+3.4%). 60+% of the revenue comes from Rx Drugs. The growth in this segment is driven primarily by a 4.6% increase in Rx Prices over 2015. (CPI – US BLS) (0.3% Pet)
  • Sporting Goods – $46.3B, Flat +$0.0B, (+0.0%). A Minor player in Pet. There was some turmoil in the category with the closing of Sports Authority. Net for the year was “no gain”.(N/A Pet)
  • Home Centers – $271.7B, Up $17.9B, (+7.0%). Considering their size, these “project driven” outlets have never done a significant Pet Business. Two Top 10 U.S. Retailers – Home Depot and Lowe’s are driving the growth. (0.6% Pet)
  • Hardware – $23.3B, Up $0.2B, (+0.9%). Sales were flat most of the year. An uncharacteristic December sales “lift” produced 70% of the total year’s increase. (2.6% Pet)
  • Farm and Garden Stores – $44.4B, Up 0.3B, (+0.7%). This segment has been growing in recent years in both overall sales and in Pet. However, 2016 looks like a repeat of 2015 in that 100+% of the segment’s small sales growth came from Tractor Supply who reported a $0.55B increase in our Top 100 Post. (8.9% Pet)
  • A/O Miscellaneous Stores $77.9B, Up $7.0B, (+9.9%). Florists, Pet Stores, Art Dealers…are typical of the segments bundled into this group. Based upon the 2012 Economic Census, Pet Stores probably account for over 20% of this segment. These stores, whether chain or independent, tend to be small to medium in size. Their strong increase is evidence of another consumer trend – a move to a more personalized shopping experience. (Pet Stores 91%)

The chart below puts the Market Share of each of these segments for 2016, 2015 & 2014 in a visual format so that it is easier to appreciate the relative sizes. Growth in share since 2014 is indicated by a green box, a decline is boxed in red.

Now we’ll wrap it up with a brief summary and a detailed chart for future reference.

SUMMARY 

Pet Stores remain #1 for Pet Products. However, in the Overall Market, there are 3 Olympic Medalists. In 2016 the gold still belongs to Supermarkets. As you recall, in 2015 we saw the race for the Silver between SuperCenters & Club Stores and the Internet/Mail Order segment really “heat up”. In 2016 that race was all over. Internet/Mail order took over 2nd place in March and continued to pull away. They have now set their sights on the Gold, which has been held for many years by Supermarkets. Amazon, the largest retailer in the segment, has indicated that they will now actively pursue the fresh grocery business. In fact, they recently purchased the Whole Foods Supermarket Chain to facilitate that effort.

Supermarkets (18.2%) currently lead the Internet/Mail order segment (14.9%) by 3.3%. In 2014, the lead was 6.1%. Supermarket sales are increasing, but not fast enough. Unless something radical happens, Internet/Mail Order will become the #1 U.S. Retail Channel no later than 2019 and perhaps by 2018.

Overall, 2016 was similar to 2015 – with a 3.6% increase, up slightly from 3.5%. Once again the Internet/Mail Order Channel provided most of the excitement and 49.4% of the growth. The big increase by the A/O Miscellaneous Channel, which includes Pet Stores and other smaller format retailers, seemed to reinforce a less publicized consumer trend to more personalized shopping. After years of growth, the $/Value Stores segment may have plateaued but the big negative was the increasingly sharp decline in sales by Discount Department Stores – down -$6.9B in 2016 and  -$9.1B since 2014.

The U.S. Retail Market continues to grow and evolve as the consumer migrates to the channels which best fulfill their current wants and needs. This is not a new phenomenon. It has always been that way. Currently, the “Channel of Choice” is Internet/Mail Order and the movement is accelerating. Traditional Brick ‘n Mortar stores will not go away but they must adapt as “electronic” is on track to become the dominant force in U.S. Retail even sooner than we expected.

Finally, the Chart below contains Detailed 2014 > 2016 Sales Performance Data for over 30 U.S. Retail Channels.

Top 100 U.S. Retailers – Sales ↑3.5% 138,572 Stores with Pet Products……plus the Internet!

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The U.S. Retail market reached $5.5 Trillion in 2016 from all sources – Auto Dealers, Supercenters, Restaurants, Online retailers, even Pet Stores. This year’s increase of $172B was more than 2015’s $118B as the decline in Gas Station revenue slowed. (Data courtesy of the Census Bureau’s Monthly Retail Trade report)

In this post we will try to narrow the focus to the top 100 Retailers in the U.S. Market – the headliners. These 100 companies account for 38% of the total retail market! How did they perform in 2016 vs 2015…and of course, which ones sell Pet Products? Remember, according to the 2012 Economic Census, over 2/3 of the Pet Products in the U.S. are sold outside of Pet Stores. The Top 100 group accounts for a huge share of these sales. This report is crammed with data, but we’ll try to break it into smaller pieces with regular observations. All of the base data on the Top 100 comes from Kantar Research and was published by the National Retail Federation (NRF).

Let’s start with an overview:

Observations

  • The Total Retail Market grew $172.4B in 2016 – Up 3.2%, considerably better than the 2.3% growth in 2015.
    • The Top 100 grew $70.8B (+3.5%), better than the overall market but down from (+4.9%) in 2015.
    • The Top 100 accounts generate $2.1T in revenue, 37.6% of the total U.S. retail market.
  • Let’s pare it down a bit. If you take out Auto, Restaurant and Gas Station sales, the “target” retail market for our industry is $3.3 Trillion. – about 60% of the total market.
    • Removing the Restaurant & Gas Station sales from the Top 100 numbers – at $1.91T, they still account 34.7% of the Total U.S. Market and…
    • 58% of the $3.3 Trillion target retail market.

The Top 100 is obviously critically important, and it’s still outperforming the overall market…barely. We need to remember that the “Top 100 club” is in fact a contest. Every year companies drop out and new ones replace them. This can be the result of mergers, acquisitions or simply slumping sales. Changes of note in 2016:

  • 4 Supermarkets from the 2015 list were “combined” into 2 in 2016 – Kroger acquired Roundys and Ahold bought Delhaize (Food Lion). In these cases, I combined the historical sales to give a better picture of the actual growth.
  • We also lost 2 companies from the list due to declining sales – Barnes & Noble and Chipotle.
  • That left space for 4 new additions:
    • Ulta Salon – a cosmetics and fragrance retailer that is “taking business” from traditional department stores.
    • Petco – We now have 2 Pet Chains in the Top 100 U.S. Retailers!
    • Sprouts – A natural grocery store chain
    • CKE Restaurants ( Carl’s Jr, Hardees)

Now let’s start “drilling down” on the Top 100. Here’s a summary of Regular and Online Retailers versus the bundled total for Restaurants & Gas Stations.

  • Regular & Online Retailers have 58.6% of the stores but account for over 92% of the business.
  • All of the $ growth is coming from Regular & Online Retailers as restaurants are down -3.5% (a big turnaround from 2015 when restaurants led the way with a 6.4% increase)
    • Reg/Online Rtlrs had a +3.7% increase in $ales – $69B (Much lower than last year’s +4.8%; +84.7B)
    • +1.7% growth in stores – also a significant drop from +2.9% in 2015 and + 6.9% in 2014.

Now that we have an overview of the Top 100, let’s take a look at the “targeted” retailer segment. There are 82 total companies. How many are buying and selling Pet Products? This will reinforce how Pets have become an integral part of the American Household and how fierce that the competition for the Pet Parents’ $ has become.

  • Of 82 possible companies, 66 are selling some mixture of Pet Products in stores and/or online.
    • Their Total Retail Sales of all products is $1.8 Trillion which is…
      • 93% of the total business for Regular & Online Retailers in the Top 100
      • 32% of the Entire $5.5T U.S. Retail market – from 66 Companies who sell Pet Products.
    • 54 Cos., doing $1.6T in sales are selling pet products off the retail shelf in 138,000 stores – 3800 more than 2015.
    • Online only is another Story –
      • Amazon accounts for $15.4B (97.7%) of the entire online only increase.
      • Many Traditional Retailers who only sell Pet Products online are closing stores and losing ground in the total Retail “race”. Not carrying Pet Products could be another indication that they are “out of tune” with America

Sales for Retailers with pet products remain strong. Also note that the store count totals are only for the Top 100 and include only 2 Pet Chains and 1 Farm Store Chain, as they were the only companies to make the list. Pet Products are sold in thousands of other retail outlets – 20,000 more grocery stores, 10,000 more pet stores, 16,000 Vet Clinics plus…. A reasonable estimate would be that there are 200,000 outlets selling pet products in the U.S. plus… the internet.

Before we analyze the whole list in greater detail let’s take a quick look at the Top 10 retailers in the U.S.

  • They do $1 Trillion in Sales
    • 51.5% of the Top 100’s Revenue
    • 19.5% of the Total U.S. Retail Market
  • It’s the same list as 2015 although 6 changed rank
  • Target had the only negative performance
  • 8 Retailers produced 29.2% of the increase for Total U.S. Retail

In the next part of the report we will look at the detailed list of the top 100. First, we’ll sort it by retail channel with subtotals in key columns. Then we’ll break it into smaller sections for comments. At the end of the post there will be a download link for an Excel file with the data. This will allow you to sort it as you choose…by rank, alpha, pet/nonpet…it’s your call.

I have not done a lot of highlighting however:

  • Pet Columns ’16 & ‘15 – a “1” with an orange highlight indicates that products are only sold online
  • Rank Columns – Change in rank from 2015: (Remember 4 from 2015’s list were consolidated into 2 in 2016. There were also other acquisitions of companies not in the Top 100 which can cause a big improvement in rank)
    • Up 4-5 spots = Lt Blue; Up 6 or more = Dk Green
    • Down 4-5 Spots = Yellow; Down 6 or more = Dk Pink

Let’s get started. Remember online sales are included in the sales of all companies.

Observations

  • Drug is still strong. However, acquisitions are a big factor. The Walgreens and Rite Aid merger fell apart but CVS acquired Omnicare and the pharmacies in Target Stores.
  • The Traditional Department store segment overall continues its decline. There are a couple of exceptions in some “high end” stores. However for most, the trend is down.
    • Sears (includes Kmart) and Macy’s remain the 2 big “red flags” and more store closings are planned.
    • Although many carry a few pet items, generally online, this channel has never fully embraced Pet Products.
  • Much of the growth in the Convenience Store Chains in the Top 100 in recent years has come through acquisitions. In 2016 there was a reduction in store count so overall sales were basically flat.
  • Military Commissaries have added locations in recent years. Sales are finally catching up with a 9.1% increase.
  • The Auto Parts Stores are a mixed bag, with all chains opening new stores. Only Advance is underperforming in sales. With the continued growth of the Pet Travel product category, it is somewhat surprising that everyone’s offering of Pet items continues to be so small. This could be an opportunity.
  • Among Apparel retailers, the value outlets continue to show strong growth. All three of these chains carry pet products. The big increase at Ascena came solely from the acquisition of Ann Taylor and Loft.

Observations

  • Want proof of the evolving face of U.S. Retail? – Amazon sales are up 91.3% in 3 years!
    • The Phone People – Verizon and Apple, continue to grow. However, not a good year for AT&T.
    • Barnes & Noble dropped off the list in 2016. Best Buy, Toys R Us and Gamestop continue to decline.
  • Signet Jewelry made the list in 2014 by acquiring Zales. After an initial drop in sales, they rebounded – up 10.7%.
  • Mass Merchants’ growth percentage is subpar and is being driven by Wal-Mart and Costco.
    • Wal-Mart is the “big dog” and their 2.7% increase in 2016 is slightly above recent years. Sales in SuperCenters continue to grow but “regular” Discount Department Stores are losing market share. This impacts the overall business in both Wal-Mart and Target.
    • Target sales are down almost $4B. Sales have been flat in the last 2 years, but in 2016 turned down – sharply.
    • Costco continues its spectacular growth. BJ’s revenue fell $2B. They are seeking help to improve online sales.
  • Home Improvement/Hardware is showing continued strong growth by all “players”. The big guys are doing especially well with a $9B combined increase from Home Depot and Lowe’s – both are Top 10 retailers.
  • Home Goods sales were flat except for Ikea, whose spectacular growth came as a result of corporate restructuring.
  • Tractor Supply continued their strong growth (+8.9%). Their average annual growth rate is 9.5% since 2013.

Observations

  • Supermarkets – $389B in Sales; 17 Companies; Over 16,500 stores; All Selling Pet Products. This is a very important group for the Pet Industry. With the highest frequency of consumer visits of any channel, the competition is fierce. The mergers and acquisitions continue as companies try to strengthen themselves for the daily battle. This year we saw 4 of 2015’s Top 100 Retailers become 2 as Kroger acquired Roundy’s and Ahold acquired Delhaize.
    • The % increase is below average. However, all but 2 cos. are showing sales growth. Kroger’s +$2B leads the pack.
    • With only Sprouts joining the Top 100, the number of Supermarket chains dropped to 17, but the store count still increased by 400 over the 2015 group.
  • Small Format Value Stores: Overall, this retail channel does more business than Traditional Department Stores.
    • Dollar General continues as the top performer, up 7.9%, matching their average annual growth rate since 2013.
    • Dollar Tree’s 2015 acquisition of Family Dollar Stores seems to still be producing.
    • Only Big Lots performance is subpar, but they have 2 consecutive years with increases after 2 years of declines.
    • This retail channel continues to grow in numbers and popularity. They are committed to Pet Products and their focus on value appeals to today’s ever more price conscious consumers. Plus, they are easy to shop.
  • Pet Stores – PetSmart’s growth is 3.4%, slightly better than last year’s 3.2%. However, the big news is Petco’s entry into the Top 100. This provides further evidence of the strength of the U.S. Pet Industry.
  • Office Supply Stores – This channel is under siege. As store closings continue, retailers are turning to online ordering.
  • Sporting Goods – Sports Authority closed in 2016 but the 2 remaining retailers, Dick’s and Academy, continue to show strong growth in both store count and sales.

Restaurants & Gas Stations and the Grand Total

Restaurant & Gas Station Observations

Although restaurants & gas stations aren’t relevant in terms of Pet Products Sales, they are relevant in our daily lives.

  • Last year Restaurants had a 6.4% increase, driving the Top 100 $ up. This year’s -3.5% is a big turnaround. However, this is somewhat deceptive. Although sales at Yum are suffering, the big drop is due to a business re-structuring of their franchisees. Without Yum, Top 100 restaurant sales are up 3.4%, basically on par with regular retailers.

Wrapping it up!

The Top 100 got there by producing big numbers so it’s not surprising that their performance exceeds the overall market. Although in 2016, their increase (+3.5%) was only 10% better. In 2015 it was more than double – 4.9% to 2.3%

Pet Products are an important part of the success of the Top 100. Sixty-six companies on the list sell Pet Food and/or Supplies in 138,000 stores and/or online. If we drill down a bit, we get to 54 retailers who stock pet in their stores. This group generated $1.6T in sales. Now, let’s “Do the math”. If we take out the $10B done by PetSmart and Petco and the remaining companies generated only 1.5% of their sales from Pet, we’re looking at $23B in Pet Products sales from only 52 “non-pet store” sources! By the way, the 1.5% estimated share for Pet items is low based on data from the U.S. Economic Census.

Whether you are a manufacturer, a distributor or a competing retailer, monitoring the Top 100 group is important. What happens in this group reflects the evolution of the overall retail market. We see the continuing decline of Department Stores coinciding with the growing popularity of Value outlets. Nothing demonstrates the growing influence of the internet better than Amazon’s continued spectacular growth. The competition in the market is clearly shown in Supermarkets, where 8 Top 100 retailers became 4 in just 2 years through mergers/acquisitions. In business, like in biology, you must adapt to a changing environment or face extinction.

Don’t forget to download the 2016 Top 100 Retailer Excel file to do your own analysis

[button link=”https://pmud8a.a2cdn1.secureserver.net/wp-content/uploads/2017/08/Top100-US-Retlrs-2016-Ranked.xlsx” type=”icon” newwindow=”no”] Download 2016 Top 100 U.S. Retailers List(Excel)[/button]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Price Matters: Petflation Update – Current Trends…Plus a Look Back

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Price has always mattered but it has truly come to the forefront in the consumers’ mind since the great recession. In this report we will review the latest “Petflation” trends for all industry segments but we will also take a look back in time 10 years to 2007, before the economic crisis struck. Let’s see what has changed and how we got to where we are today.

The following chart graphically shows the annual CPI change from 2007 to today – Ytd May of 2017.

  • The first thing that you notice is that since 2009 the Supply Segment has travelled to the beat of a different drummer. Prices are only 0.8% higher now than in 2007. In fact, prices now are almost exactly equal to August 2007.
  • The period from 2007 to 2009 was a strong economic time. Prices in all segments just went up, like clockwork. With a 20.5% increase in 2 years, Pet Food was “leading the pack”. There is a story behind this. As a result of the melamine recall of 2007, U.S. consumers became concerned over Pet Food Safety. They moved strongly toward U.S. made Pet Foods, with all U.S. ingredients. These products cost more to produce and drove the overall price of Pet Food up – significantly. Although the 6% increase in 2 years for Supplies may seem tame in comparison, it was triple the segment’s annual rate of increase for the earlier years in the century.
    • The revenue growth in the industry for these years was primarily due to increased prices.
  • Then came the great recession. Most industries felt the impact on prices in 2009, with a drop in the national CPI for the first time since 1955. (The recession was a big deal!) However, prices in the Pet Industry weren’t affected until 2010. Prices fell in both Food and supplies and the increase in Non-Vet Services was slowed. Prices in the Veterinary segment were unaffected. They just kept going up at the same rate.
  • From 2010 to 2013, prices in all segments but supplies increased, but at a slower rate than the “pre-recession” time. Supplies was a completely different story. There are a variety of Supplies categories. Many are considered discretionary spending and have relatively low usage rates. With the consumers’ new shopping priorities – Price is #1, many supplies categories began to be looked upon as commodities and sales became very price sensitive. The initial price drop of 2010 was followed by an even bigger drop in 2013. Obviously, new rules applied to Supplies.
    • With lower inflation rates in this period, more of the industry’s growth was real.
  • From 2013 to 2016, prices in both of the Service segments continued to inflate – the Veterinary segment at 3.5% per year and Services at 2.4%. Revenue in the Service segment was unaffected, but the Veterinary Segment saw all growth coming from price increases. The amount of Vet Services provided in 2015 was actually about equal to 2010 – they just cost more.
  • From 2013 to 2016 – Pet Food prices began to fall. It had become a more competitive environment in this segment. Food sales usually tend to stagnate when prices fall. Consumers don’t buy more food. They just spend less. However, in this case, we were on the edge of a change in food buying behavior. During the second half of 2014, the older Millennials began to try the new classification of foods, dubbed Super Premium. In early 2015 they backed away from this experiment but another group caught the fever – The Boomers. They went for these new, nutritionally concentrated, pet foods in a big way, over a $5.8B increase in spending. However, overall Food prices continued down as the manufacturers of “regular” recipes tried to “buy back” their lost customers.
  • In 2013 and 2014 – Supply Prices dropped sharply. By 2014, this had caught the consumers’ attention and Supply sales moved up strongly. Then prices stabilized and began to move up. Apparently, the price sensitivity in Supplies had become very pronounced. In 2015 Consumers decreased their frequency of purchases by 10% and sales fell about $2B. Prices stabilized in 2016 but still moved up slightly.

As you can see, in the Post-Recession world, price can make a huge difference in consumer spending behavior. Now let’s take a closer look at the recent history of “Petflation”. The following chart documents the monthly change in CPI by Industry segment over the last 24 months, from May of 2015 through May of 2017.

  • Total Pet – Prices in Total Pet increased 1.71% in 2 years, an annual rate of inflation under 1%, which is low. It was produced by a very reasonable 1.49% increase in the first half followed by a dramatically low increase of only 0.22% in the second 12 months. The 0.22% increase is the lowest 12 month inflation rate for Total Pet since they began keeping records back in 1997. This CPI history also clearly demonstrates that you should always look beneath the surface of any summary numbers. The individual parts can tell a very different story from the total.
  • Veterinary – The first half was “business as usual” or even stronger, with a 3.97% increase in prices. However, there was a distinct change in the second 12 months. Prices only went up 1.8% and included a rare one month price drop of almost 1%. Perhaps, this segment is starting to react to a decrease in frequency of consumer visits.
  • Service – The Service segment has a pattern somewhat similar to Veterinary. Prices were up a “normal” 2.25% in the first 12 months. In the second half prices only increased 0.6% and there were 3 monthly price drops, including a 0.7% drop in May ‘17. It’s possible that this discretionary segment is starting to experience competitive pressure.
  • Pet Products – There is one situation of note that applies to both Food and Supplies. The annual CPI numbers can give the impression of a smooth increase or decrease. In the last few years, the norm for these two segments has been wild short term swings in prices. You can see examples of this for both categories in the first 8 months of the graphs. There have still been ups and downs but since January of 2016 the changes have been less radical.
  • Pet Food – As we said, in 2015 the Boomers moved to upgrade their food to Super Premium. This chart shows how strongly the regular brands reacted – with over a 2% overall drop in prices in just 2 months – July and August 2015. The prices gradually worked their way back up to more normal levels by year end. However, another drop began in late summer of 2016. So far the prices have not recovered. One possibility is that even the high end products are now experiencing competitive pressure. Consider this fact. In 2015 there were 108 exhibitors selling Dog and/or Cat Food at SuperZoo. In 2017, just 2 years later, there were 147 – a 36% increase. If you have a good idea, others will try to get a piece of the action.
  • Pet Supplies – Prices were up for most of 2015 and sales were down over a billion dollars. As we approached the prime holiday season, retailers reacted and prices fell almost 2%. It was not enough. The CPI only showed a slight overall increase for the year but sales fell by $2B. Prices moved back up to at or near previous levels and stayed there until the fall of 2016. They have generally moved down since then. The Supplies CPI actually has been relatively stable for 20 months now. We will have to wait and see how this affects consumer spending in this segment. The USBLS’ spending numbers for 2016 will be available in September.

In the past 24 months we have 2 trends that may have long term significance.

  • The high inflation rate in both Service Segments has slowed in the past 12 months.
  • Although both the CPI for Food and Supplies are trending down slightly, they have become more stable. They still have monthly variations but the pricing swings are less severe.

Thus far, we have focused solely on the CPIs for the Pet Industry. Let’s see how they compare over time to the National CPI and other relative industries. The final chart compares the CPI change from 2009, a pivotal year, to May of 2017.

  • The annual inflation rate of Total Pet is only 1.42% – 23% lower than the overall national CPI. However, we know that the story behind the Total Pet number is not quite as rosy as it seems to be.
  • The inflation rate for Pet Food is less than half that of Food & Beverages. There have been big pricing swings in Pet Food and the segment has been in deflation since 2013.
  • The deflation in Supplies is both unusual and concerning because it puts strong profit pressure on manufacturers and retailers.
  • Even with the recent slowing of inflation in the Veterinary segment, prices have increased 13.1% faster than Human Medical care. The consumer impact is magnified because Pet Insurance is not as effective as Human healthcare policies in lowering out of pocket expenses. Plus, the participation percentage is far lower.
  • The inflation rate for the Service Segment has remained relatively constant over this time frame with little to no impact on revenue – so far.

That wraps it up for this Petflation update. We’ll check again when the Spending numbers for 2016 are released.