Spending, CPI, demographics of overall market

Pet Industry $ALES in 2014 – Taking a Closer Look

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2014 brought a 4.16% increase in the total U.S. Pet Industry. This was not quite the projected 5% increase, but even factoring in “Petflation” the increase in the amount of goods and services sold was 3.46%. This means that overall an outstanding 83.1% of the growth was “real”.

In this post we’ll take a closer look at the performance of the total market and its individual segments in terms of Retail Growth and Adjusted Growth, which factors in inflation (The CPI). We will cover 2014 and also put it into perspective for the period from 2009 to 2015.

Here are the details for 2014. Some key data is highlighted:

2014Sales1

Key Observations

  • Deflation in BOTH Food (-0.3%) and Supplies (-1.06%)
    • The Good News is that the amount of goods sold is actually greater than indicated by retail $
    • The Bad News is that deflation intensifies the competitive pressure on manufacturers and retailers. Long term it is not a healthy situation.
  • Inflation in the service segments – NonVet (2.88%) and Vet (3.53%)
    • Good News – Consumer purchases in NonVet services seem to be unaffected – 68.5% of growth is real!
    • Bad News – The Vet Segment didn’t make the projected number but more importantly…76.6% of the growth was from Price Increases!!
  • This means that total Market performance – a 4.2% increase…with 83% of this being “real” due to the second lowest inflation rate in history…was actually produced by a combination of unhealthy inflation & deflation in 3 segments.

The Bar Chart below may make it easier to visualize the situation…especially in the Vet Segment.

2014Sales2

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

2014Sales3

OBSERVATIONS

  • When you look at the cumulative, it looks pretty good.
    • 63% Annual Growth
    • Low average inflation – 1.02%
    • 75% “real” Growth
  • However there have only been basically 2 types of years for Food since 2009
    • half are deflation (-0.4%);
    • half are inflation (2.5%)

The deflation years are the most concerning. 2014 was only the third year with a CPI decrease in Pet Food – 2000 and 2010 were the other two. I don’t know the situation in 2000 but the 2010 deflation came after a combined 20% Food CPI increase from 2007 to 2009 – in the heart of the recession. 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. Interestingly enough it looks like the consumer accepted the initial year of the increases but a 2.8% increase in 2012 and the cumulative effect of the increases dropped the percentage of real increase below 50%.

Here’s what it looks like on a graph:

2014Sales4

2015 Retail Food sales are projected to increase 3.5% to $23.04B. My initial “petflation” projection for 2015 is (-0.5%). No one, including me likes this. However the Pet Food CPI has only dropped in January 3 times since 1997 (including lastYear) and in both January and February only twice. It has done both in 2015 and the January drop was over 1.1% -twice  as much as either of the other 2 years. Things can change but right now it looks similar or even more extreme than 2014.

Let’s turn next to Pets & Supplies.

2014Sales5

OBSERVATIONS

  • DEFLATION
    • Prices are 5.7% below 2009
    • Falling at an annual rate of -0.8%
  • Consumer is still buying more
    • Retail Sales annual growth rate is 4.72%
    • Price Adjusted annual growth rate is 5.76% – 22% higher than the retail rate

Like the Food Segment, the first deflationary year was 2010. However, the story is a little different. From 1997 to 2004 Pet Supplies increased in prices at an annual rate of under 0.5%. Starting 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, the heart of the recession. The consumer reacted – and bought less.

Prices fell almost 2% in 2010 and the consumer bought more. However, unlike Food, the prices briefly stabilized then generally began moving consistently downward.

Here’s the graph:

2014Sales6

Please note that the price adjusted numbers are always above actual Retail. In terms of 2015, Pet Supplies are projected to increase 4.3% to $16.58 B. At the end of 2014 there was some indication that this segment might be pulling out of the deflationary spiral. However, 2015 has drops in both January and February CPIs. The decrease was a little less than in 2014 so I mitigated my projection to -0.8%.

Now onto the Service Segments – First NonVet Services.

2014Sales7

OBSERVATIONS

  • Growth
    • Annual Growth rate 7.69%
    • Inflation – a little high, but doesn’t seem to be slowing consumer purchasing
    • 66% “real” growth
  • If price increases continue or accelerate, eventually the consumer will “push back”, but it hasn’t happened yet.

There are no real negatives regarding this segment. It is growing strongly and consistently, especially since 2011. However, it is a small segment, only accounting for 8.6% of the total market.

Here’s how the sales look on a graph:

2014Sales8

2015 sales are projected to be $5.24 B, an 8.3% increase. This seems eminently attainable. In regard to inflation rate, the average annual rate of 2.5% seems like a reasonable estimate for 2015.

The final individual segment is Veterinary Services. This segment accounts for over 25% of the Pet Market and has had strong retail growth but there is one overriding issue.

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

2014Sales9

OBSERVATIONS

  • Retail Growth
    • Up 30.6% since 2009
    • Annual growth rate 4.55%
  • Inflation is the problem
    • Annual average CPI increase 3.45%
  • Price increases account for 75.8% of Retail growth!
  • “Real Sales”
    • Consumers actually bought less in vet services in 2011 and 2012…they just paid more.
    • Sales have been stagnant since 2009 – average annual growth rate 1.07%
    • Even worse since 2010 – average annual growth rate 0.45%

We certainly think of regular veterinary visits as a “need” not a “want”. The extreme inflation over the years finally generated a consumer response in 2011…they cut back on veterinary services, turned to OTC medicines, supplements, treatments and home testing. 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 steps should be taken within the industry to make regular veterinary care more affordable.

Here’s the graph of sales since 2009:

2014Sales10

Veterinary Services are expected to hit $15.73 B in 2015, a 4.7% increase. Price increases should continue to be the major share of growth. I projected a CPI increase of 3.0%, slightly less than 2014. However, this may be wishful thinking, as prices in February 2015 were already up 1.2% since December 2014.

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

2014Sales11

OBSERVATIONS

  • Retail Growth expected to reach $60.59B in 2015
    • ↑33.1% since 2009; Annual growth rate 4.88%
  • Inflation: Only 8.6% since 2009; 1.38% annual increase.
  • “Real” Sales are 67% of Total increase

These are the kind of great numbers which attract so many people to the Pet Industry. The retail numbers are also consistently good across the segments. However, 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 continues. Commoditization, channel migration, consumer value shopping and lack of innovation have created extreme competitive pressure. Consumers are buying more; paying less.
  • Deflation is also now a concern in the Food segment which looks to be on track to have a second consecutive year of falling prices.
  • The Veterinary segment has the exact opposite problem. Years of inflation finally caught up as consumers actually bought less in 2011 & 2012. Overall actual sales have been essentially flat for 5 years and 75% of the increase in Full Retail Sales is due to Price Increases.

2014Sales12

In 2015 the Total Industry is expected to increase 4.2% to $60.59B. It appears that deflation may be even stronger in 2015, possibly producing the lowest CPI increase in history. We need both the deflating and inflating segments to start moving to the middle…..

Finally, to me, the researching and writing of this post certainly reinforced the need for everyone to look below the surface in their business…to understand where the business is coming from and where it may be going.

Pet Stores in the U.S. – A 25 year $ales history – 1987 to 2012

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Pet Food and Supplies are sold seemingly everywhere today – 150,000 outlets of all kinds – clothing stores, supermarkets, even gas stations. However, when you look at the beginning of this colossal industry, you must think of the independent pet store as the foundation on which the massive “Pet Skyscraper” was built. We will take a look back to 1987 to see where this channel was and how it has evolved through the years.

The data in this report is courtesy of the U.S. Census Bureau – their Economic Census. The early years have only basic information but since 2002, more detailed information is readily available.

Let’s take a look at some data:

PetStores1
This little chart has a wealth of information but let’s make it a little easier. First with Total $ales:

PetStores2

  • Total Growth: ↑ $13.36B (+982.3%); Average annual growth rate = +10.0%
  • Real Growth: ↑ $6.83B (+502,2%): Average annual growth rate = +7.4%

Pet Food and Supply prices went up 79.8% from 1987 to 2012. This is an annual inflation rate of 2.4% which is lower than the overall U.S. inflation rate of 2.9%. However, this doesn’t tell the whole story. From 2007 to 2009 Pet Food and Supply prices increased an incredible 17.0%. (8.2% per year). Coming at the onset of the recession, this drove consumers to look for value. The result was that many consumers moved to other channels, resulting in a 15% drop in market share. Food and Supply prices have fallen or at least flattened out since 2009, but the rate of “real” sales growth in Pet Stores has slowed significantly.

No matter how you look at it, the overall sales growth since 1987 has been amazing! Let’s look at some key contributing factors to the retail $ales growth in Pet Stores.

PetStores3

  • 1987 to 1992 – The Number of Pet Stores grows significantly – from 5475 to 7150 (30.8%). The number of employees per store is about the same. Superstores were just getting started so these were mostly traditional stores. The amount of sales per store increases 50% as American’s love for pets truly begins to show. The result – sales basically double in 5 years – to $2.7B.
  • 1992 to 1997 – The initial rise of Superstores. Note the 37.1% increase in employees per store. They are being built and they generate significantly more volume per store – 76.6%. The result – sales more than double in 5 years and now total $5.5B.
  • 1997 to 2002 – Superstores continue to rise but at a cost to the independents. The net result is 692 fewer outlets (-8.3%). The Sales per store increases 50.8% which reflects the higher percentage of superstores. The total channel sales growth slows markedly from the spectacular rate of the previous the 10 years. The result – sales reach $7.6B – an increase of 38.2%.
  • 2002 to 2007 – The channel adds 1156 stores – a 15.2% increase – and reaches a record high number. Most of the new outlets are superstores. The per store sales volume goes up 30.5%, reflecting this change. The result – sales grow 50.3% to $11.4B.
  • 2007 to 2012 – Huge price increases…plus a major recession in this time period. There is no growth in the number of stores, but an even higher percentage are superstores. Sales reach $14.7B. The increase is 29.9%. This is the smallest in 25 years and exactly mirrors the per store sales volume growth. Also consider:
    • The overall pet food and supplies category (in all channels) grew 50% from 2007 to 2012
    • Actual Pet Store Sales from 2007-2012 was only up 7.7% – (Factoring in the huge price increases)
    • The result – Pet Store Sales grew but the channel had a rather a big loss (-15%) in market share.

Now that we have a good overall picture of the growth in the Pet Stores Segment, let’s open the door and go inside. We’ll look at the sales of some major product categories – number of stores, $ales, share of the stores’ total revenue. We’ll see if there is any “internal migration”. Detailed information is available since 1997 so that will be our major focus.

PET STORES: NAICS CATEGORY 45391

PetStores4

Let’s review each of these 6 product categories to see how they have fared from 1997 to 2012. To enhance the visual aspects of the analysis, we will divide them into 2 segments based upon sales volume – major and minor. Pet Foods and Supplies have always generated at least 80% of the receipts in Pet Stores. Here’s what their sales look like since 1997.

PetStores5

Pet Food became the largest category in 2007 and increased its lead in 2012.

  • Sales in 2012 were $6.72B; ↑$4.66B (226.2%) since 1997.

During the same timeframe, overall Pet Store sales were up 167.3% so Pet Food Sales was a major factor in the channel’s growth. The introduction of numerous premium foods probably helped this category take over and hold the number 1 position. Sales of the premium foods were also less likely to be poached by other retail channels.

Pet Supplies was the biggest dollar producing category until Food took over in 2007.

  • Sales in 2012 were $5.16B; ↑$3.1B (150.5%) since 1997.

The rate of growth for Pet Supplies is slightly below the overall channel rate, which is being pushed up by food sales. Growth is slowing in this product category because of the increased retail distribution in competitive channels – especially since the recession. Pet Supplies pricing has actually fallen since 2009, which indicates just how strong the competition is.

Next we’ll look at the “minor” volume product categories including Pets; Fish & Aquarium Products; Pet Care Services; All other NonPet Products. Book sales are bundled in with NonPet sales. Changing technology has depressed all Book Sales. Pet Book revenue in 2012 has actually fallen below 1992’s sales. In this section, changes in the number of outlets offering a product category may become significant.

PetStores6

Pet Sales – This “product” category is what the Pet Industry is all about. Although it should be noted that Dogs and Cats are by far the most popular companion animals and most are not acquired in Pet Stores.

  • Sales in 2012 were $0.36B; Essentially equal to 1997.

If you consider the increase in prices since 1997 (39.8%), the amount of pets being sold is actually down 27.0%. The number of outlets selling live pets has fluctuated up and down but is only down 5% from 1997. The only conclusion is that acquiring pets in pet stores is losing its popularity.

Fish & Aquarium Products – This too was a signature category. Aquariums have always been a mainstay of pet stores.

  • Sales in 2012 were $1.15B; ↑$0.37B (47.4%) since 1997.

Sales dropped sharply in 2002 primarily due to the radical drop in store count. This was a strong growth period for super stores and a lot of independents carrying fish went out of business. Store count and sales bounced back in 2007 but have virtually zero growth since then. Flat sales in a growing market indicate this category has turned downward.

NonPet Products – This category can encompass a lot of ground – clothes, gift cards, hardware…almost always with a pet theme or in some way relating to Pets.

  • Sales in 2012 were $0.2B; ↑$0.05B (33.3%) since 1997.

This is a very minor segment. Considering price increases, it has actually declined since 1997.

Pet Care Services – This puts a retail “face” on services, a fast growing segment of the total Pet Industry.

  • Sales in 2012 were $1.13B; ↑$1.02B (927%) since 1997.

Making pet care services available in Pet Stores makes “total sense” and obviously the consumers have responded. This category contributed 10.8% of Pet Stores’ total increase in sales from 1997 to 2012. Services in Pet Stores grew 54.7% between 2007 and 2012. This was greater than every other category including food and actually greater than the overall Pet Products growth in the entire retail market. Pet Stores lost 5.9 points of market share between 2007 and 2012. Without the strong appeal of in store pet services, the loss may have been greater.

Now let’s try to get a visual of all the movement. The best way to compare these different categories is by looking at their relative share of the total. The following graph shows the market share attained by year for each of the Pet Product categories that we have reviewed. Let’s take a look. Then recap our Pet Store observations.

PetStores7

 

Here’s where the categories are in 2012 and their change in market share since 1997:

  • Pet Food – 45.7% ↑8.6 pts
  • Pet Supplies – 35.0% ↓2.5 pts
  • Aquarium Fish/Products – 7.8% ↓6.5 pts
  • Pet Services – 7.7% ↑5.6 pts
  • Pets – 2.4% ↓4.0 pts
  • NonPet Products – 1.3% ↓0.8 pts

Summary – 1987 to 2012

The Pet Store Channel has grown spectacularly since 1987, becoming the #1 channel for Pet Products in 1997 and holding that position for over 10 years. Then the recession pushed many consumers to more value conscious channels. Some of the major events in this journey were:

  • Creation and proliferation of Super Stores (provided the broad product selection the consumer demanded)
  • Development of Premium Pet Foods (often limited distribution, helped Pet Stores gain & retain market share)
  • Growth of “in store” Pet Care Services (another “plus” in sales which helps attract consumers to pet stores)
  • Stagnated sales in the Aquarium Fish hobby (still a large category, but the growth seems to have stopped)
  • Decline in the purchases of live pets (Not the largest source of Dogs and Cats, but birds, reptiles and small animals)
  • Growth of the internet (provides an even better selection of pet items than stores…and at a better price)
  • Major Recession in 2008 – 2009. (which brought to the forefront the retail pricing in the channel)
  • Radically Increased Competition as Pet Products are available in Outlets doing 47% of total U.S. retail.

Pet Stores, with 33.8% of the market currently hold the #2 position behind the total of All General Merchandise Stores. However, they are still the single biggest individual retail channel segment, with a substantial lead over SuperCenter/Clubs at 24.1%.

What does the future look like for Pet Stores? They are not significantly adding outlets and they are being attacked on all sides by SuperCenters/Clubs, The Internet, Supermarkets and even $ Value stores, who provide varying benefits of value, convenience and in the case of the internet, even wider selection.

The key for Pet Stores is the “personal” nature of pets. People are called “pet parents” for a reason. Pet Stores can and should provide the most personal experience for their customers. How many other outlets allow you to bring your pet into the store…actually try on a harness…sample a treat? Where else can you find a knowledgeable person to talk to about any issues that you’re having? However, they must also respond to the competition…a website, with online ordering (and in store pickup option); take a hard look at margins; run strong, well timed promotions – bundled and/or cross segment; use displays; develop or maximize a loyalty program with consumer specific deals and other  technological advances; conduct regular category management reviews to identify trends and maximize productivity; actively search for and add new products that give a “real” enhancement to the lives of Pets and their “parents”. It’s a battle for the consumer’s hearts and minds…and their Pet $. You must constantly fight hard to get and keep your share.

Pet Product Sales In U.S. Retail Channels – The “migration of pet parents”

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Pets, Pet Food and Supplies sales have shown tremendous retail growth since 1992. According the Economic Census just published by the U.S. Census Bureau, retail sales totaled $40.47 Billion in 2012 – up from $8.2 Billion in 1992. The spectacular growth was fueled by Americans’ growing love and commitment to their pets. Over 60% of U.S. Households have a pet – twice as many as have a child under 18.
While the love was growing in our hearts, the sales of pet products were growing at retail. It was not a simple journey –straight to the top. It involved expansion to a variety of different outlets and consumer migration between channels driven by their search for value, convenience and selection.
In this report we will use detailed data from the Economic Census which is published in 5 year increments.
Here is a visual look at the growth since 1992. I have also included a line on the graph which is adjusted for “petflation” and gives us a better indication of the actual increase in the amount of product sold.

PetMigration-2-1

  1. Total Growth 1992 to 2012
    • Up $32.27 Billion (+394.8%)
    • Average Annual Growth Rate = 8.3%
  2. Real Growth 1992 to 2012 (Adjusted for price changes – Pet Food & Supplies CPI)
    • Up $17.78 Billion (+216.8%)
    • Average Annual Growth Rate = 5.9%

NOTE: Most of the growth (71.1%) in Pets, Pet Food and Supplies has been real growth. Pet Products Prices increased 55.8% in 20 years compared to an increase of 64.7% in the Total U.S. CPI and a 62.4% increase in Total Pet Pricing in JUST the last 15 years.

Increased Pricing in Pet Products was an issue from 2007 to 2009 when prices jumped 17% in just two years, in the heart of the recession. In the overall Retail Market, consumers bought less and started searching strongly for value. This was a key waypoint in the migration of Pet Product consumers.

We’ll stay with the total market and look at some key factors that have affected the overall growth since 1992

PetMigration-2-2 Here’s how each factor changed during the 4 – five year measurements since 1992.

PetMigration-2-3

1992 to 1997 – No growth in outlets or in retailers’ share of overall market. The big growth was increased store volume due to increased consumer product demand – which was filled by expanded departments and bigger pet stores.

1997 to 2002 – A 27% increase in number of outlets and a 15% increase in per store volume push sales up 45%. A huge increase in the representation of Pet in the overall market as it now is available in stores doing over 35% of total retail.

2002 to 2007 – Store count continues to grow – up 18% and the per/store volume goes up even faster – +21%. Sales are up 43%. The overall Retail Market Share of outlets selling products remains stable at 35%.

2007 to 2012 – Another 18,000 stores (+14%) and a huge increase in per store volume (+32.4%). Consumers have started shopping intensely for value since the recession…and they found it as sales increased 50%. It was also easier to find products in a store, as outlets doing 47% of the total U.S. Retail market stocked pet supplies in 2012.

1992 to 2012 – Sales Now $40 B; Up $32B (+394%)

  • 148,000 “pet” outlets; Up 60,000 (+72.6%)
  • Outlets stocking “pet” do 47% of U.S. Retail
  • Pet Products do 3% of an outlet’s total sales
  • Pet Products now 1.4% of total Retail; 0.7% in 1992

These facts sound like a fairy tale. There is obviously a lot of success to go around. Let’s see how the consumers decided to divide it up. We’ll take a look at the share of pet products sales by retail channel.

PET PRODUCTS SALES AND MARKET SHARE BY RETAIL CHANNEL

The following chart shows the shows in detail the number of outlets, total pet product sales and market share of the retail channels and segments stocking pet products from 1992 to 2012. Use it as a reference point. Additional graphs and observations will follow.

PetMigration-2-4

99.1% of Pet Products Sales are done by 6 major Retail Channels. Let’s look at their market share from 1992 to 2012.

PetMigration-2-5

Observations

Drug and Health Stores – This is the smallest of the 6 channels – in Pet Product sales. In overall retail sales, the drug channel has consistently grown in market share. As far as pet products are concerned, their market share dropped steadily from 1992 to 2007. They made a bit of a comeback in 2012, more than doubling their sales and almost doubling their market share. The result – their 2012 market share is still less than half of 1992. In terms of Pet Products, the sales are basically impulse or convenience purchases.

Hardware and Farm – Early growth came from the Farm Store segment. Hardware jumped on board in 2002 and pushed the market share up to 5.4%, capturing 40% of this channel’s pet business. Between Hardware and Farm, there have been some ups and downs, but overall the market share has been basically flat since 2002.

Food and Beverage – Supermarkets account for 98% of the business in this channel. In 1992 Supermarkets were the #1 Pet channel, with 42.1% of the business. They increased their business 9.5% in 1997. Unfortunately for them, overall “Pet” sales took off – up 55%. Their market share fell 30%. Sales stagnated in 2002 and actually dropped in 2007. Needless to say their market share continued to plummet – down 73% from the 1992 high. Where did the business go? – just about everywhere else, but primarily to General Merchandise Stores and Pet Stores. Then from 2007 to 2012 they executed a remarkable turnaround.  The number of Supermarkets carrying pet products increased by over 70%. They more than doubled their pet sales and gained back 3.6 points in market share.

Nonstore Retailers – This channel includes both mail order and the internet. Their share of pet sales in this channel almost exactly mirrors their share of total retail market sales. However, the increases in pet have been truly astronomical. Sales in 2012 are 40 times what they were in 1992. Market share is up 745%. Since 2007 most of the growth is being fueled by the internet – sales have tripled. There seems to be no direction but up.

Pet Stores – In 1992 Pet Stores were the second largest retail channel selling pet products. The category caught fire. Big Box Pet Super Stores were developed and built to offer the consumer the wider selection that they sought. In 1997 Pet Stores moved into the #1 position with a 40.5% share of the business. The proliferation of Super Stores resulted in the closing of a number of smaller Independents so the number of stores and market share dipped slightly to 38.0% in 2002. They were still #1 but now they were being strongly pursued by General Merchandise Stores – not Supermarkets.  More Super Stores, along with a continued high consumer demand, brought their market share back up to 39.0% in 2007. They had maintained the #1 status with a market share of 38 – 40% for over 10 years. Then…the recession happened and consumers became focused on value. Their store count was the same and sales grew but their market share fell 5.9 points (-15.1%). On the surface, it appears that the bulk of the business went to Grocery and Internet/Mail-order but almost every major channel and a few minor players got a piece of their lost share.

Minor Players – Although their combined market share is under 1%, the widespread appeal of Pets has brought in retailers from a variety of other “Specialty” channels – Home Goods (Furniture), Value Clothing Stores, Toys, Sporting Goods, Gift…to name a few. Although their selection is generally limited, they do broaden the consumer availability of certain pet product categories in the overall U.S. Retail Market. The success or failure of their venture into the Pet Products world is usually dependent upon the overall success of the individual retailer. If they are attracting consumers and their business is growing, then they may have some success with Pet. After all it appeals to 60+% of U.S. households.

General Merchandise Stores – Currently the #1 Channel in Pet Products sales. It enjoyed strong to spectacular growth from 1992 to 2007. The number of outlets grew from 10K to 37K (+250%); sales grew $8B to $9.5B (+533%); market share grew from 19.1% to 35.3% (+83.9%). From 2007 to 2012, the number of outlets continued to grow and sales increased to $14.2B (+49.5%) but their market share actually fell 0.1%…Yet, they still took over the #1 position in Pet…by just matching the overall market increase. This is a large and complex channel and deserves a closer look.

PetMigration-2-6

Traditional Department Stores – Although they do 10% of this channel’s overall business, they are basically a nonentity in Pet Products. These stores have consistently loss market share as they have done little to meet the consumer’s changing “needs” – including failing to recognize and embrace the Pet Phenomenon in the U.S.

Discount Department Stores – This segment is the one that started the decline in traditional Department Stores. In terms of Pet Market Share, these stores were at their peak in 1992. The commitment to SuperCenters and the rise of Club Stores started their decline. Sales continued to increase until 2002 and there was even a little uptick in market share between 2002 and 2007. Since then, retail sales have basically been flat and the number of outlets has fallen. In 2012 they were surpassed by the Dollar/Value stores in Pet Products’ market share.

SuperCenters & Warehouse Club Stores – This segment has shown consistent, even spectacular growth and in every measuring period has surpassed even the impressive growth of the overall Pet Products market. They rank#2 behind Pet Stores in sales. While their overall Retail Market Share has flattened out, their Pet business has continued to go up.

$ Stores/Value Retailers – This channel was originally occupied by 5&10¢ Stores. They faded and were replaced by these Value Retailers. Since 1997, the store count and Pet Product sales have gone up dramatically. Their appeal and their share of the total market has grown markedly since the recession. In Pet, their store count is second only to Supermarkets and their sales and market share just passed Discount Department stores. Expect continued growth.

One Last Chart before the recap – Take a look at the chart below and think about this. In 1992 the largest share of Pet Products was bought by consumers where they shopped for groceries. In 2012, have we come full circle?

PetMigration-2-7

   Summary

In the case of Pet Products consumers, “migration” is not truly the best description. Pets improve the health and quality of life of their “parents”. They bring hours of enjoyment. The love of Pets in America and in fact, worldwide is “contagious”. It has reached “epidemic” proportions with pets residing in over 60% of U.S. Households.

Why should the retail trade be immune? They too caught the “pet fever” early and it has spread – rapidly. In 1992, Pet Products were carried in 80,000 outlets doing 26% of the total U.S. Business. In 2012…it was 150,000…and 47%. Not only are Pet Products more widely available, but their importance has grown. In 1992 Pet Products represented 0.7% of Total U.S. Retail sales. In 2012 it was double…1.4%.

In terms of “big” migrations between channels over the period, there are really only two.

  1. The big move from Supermarkets to General Merchandise and Pet Stores which occurred from 1992 to 2007. (Note: Supermarkets bounced back in 2012, recapturing some of their lost share)
  2. The meteoric rise of internet/mail-order –recently driven primarily by the internet

Here’s the 2012 market share by Channel: (Arrows show if they are up ↑, down ↓and by how much in share from 2007)

  • GM Strs – 35.2% ↓0.1
  • Pet Stores – 33.1% ↓5.9
  • Food & Bev (Groc) – 15% ↑3.4
  • Internet/Mailorder – 9.5% ↑1.7
  • Hdwe & Farm – 5.3% ↑0.4
  • A/O Incl. Drug – 1.9% ↑0.5

From 2007-12, the only real loser was Pet Stores and their share was picked up primarily by Grocery and the Internet.

Now let’s look at the individual segments in terms of 2012: (Same rules as above)

  • Pet Stores – 33.1% ↓5.9
  • SuperCtrs/Club – 24.1% ↑1.9
  • Supermkts – 14.7% ↑3.6
  • $ Value Strs – 5.6% ↑1.1
  • Disc Dept Strs – 5.5% ↓3.0
  • Mail-order – 5.4% ↓0.4
  • Internet – 3.9% ↑2.1
  • Farm – 3.1% ↓1.1
  • Hardware – 2.2% ↑1.5
  • Drug – 1.0% ↑0.4
  • Gas/Convenience – 0.8% ↓0.3
  • Furniture/Home – 0.3% ↑0.3

As you can see, the story is a bit more complex. There are ups and downs within major channels. The big losers are Pet Stores and Discount Department stores. Their market share is being picked up by Supermarkets, the Internet, SuperCenters/Clubs and the $ Value Stores. The loss in Farm was picked up by Hardware, in the same Channel.

Value, Convenience and Selection – Sorry for the redundancy, but these are the drivers of the U.S. consumer…and since the recession, Value has moved strongly to the forefront.

Pet Super Stores grew rapidly because they offered an unparalleled, broad selection of products in a category that was exploding. They had sales and frequent buyer clubs, but quite frankly some of the highest gross margins in U.S. retail. When the recession hit, price became a big issue and many consumers looked elsewhere.

Where did they go? What commodity does the consumer shop for most often and as regular as clockwork – groceries. They went to the Super Centers and Supermarkets. Both of these channels are very competitive for value, have expanded their pet section and offer the convenience of getting your pet needs while doing your regular grocery shopping. Note: Club Stores don’t have the selection but they do have great everyday pricing and a full grocery section.

Want a bigger selection…. Go on line. No one can build a store big enough to stock the selection of products available on line…and with no brick and mortar overhead…you can get great value. Plus, you can shop for the best price and get what you want without ever leaving your easy chair…talk about convenient. The only downside is immediate need. However, they are working deals on same day and next day delivery, possibly even delivery by drones. This segment will grow.

Want your product now at a great price but don’t feel like fighting the crowds, $/Value Stores are the answer. Great everyday prices plus brand name “close outs” in a small footprint store that is easy to navigate. This segment has “caught on” with the U.S. consumer and is gaining market share in pet and in the overall retail market.

At this point, Pet Products have spread across the U.S. retail landscape. There is no wholesale mass migration. However, there is definite movement between channels and segments. Moreover, there are individual retail winners and losers in every segment. It is totally dependent upon how well they are filling the consumers’ needs, which we all know are….

In our final post in this series: we’ll look at sales in Pet Stores from 1987 to 2012.

Retail Channel Migration in the U.S. – Consumers are on the move!

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We are all familiar with the reality of migration in the world around us. Massive flocks of birds fly south for the winter. Huge herds of herbivores migrate across the plains of Africa. Much of the population of North America came as a result of migration from other parts of the world. Why? The reason is ultimately the same – both people and animals were seeking survival, opportunity…a better way.

On a smaller stage, consumers exercise the same behavior in the “Retail World”. They “migrate” between retail channels to find a better answer for their “consumer needs”. Thankfully, it is generally not a matter of survival but rather:

  1. Value = Quality + Price (*Note: In some cases value can be filling an emotional need. This could even be a matter of “prestige” or fad and is often short-lived)
  2. Convenience – In today’s hectic world any product or type of outlet that makes life or shopping easier has a strong appeal.
  3. Selection. – Regardless of product category, Americans want choices.

The change can also be the result of technological advances. There is no doubt that computers, the internet and ultimately smart phones have literally changed the environment that we live in and have radically affected consumer behavior.

As I researched this article, I was stunned by the changes in my lifetime.

  • Department stores were “it” when I was young. Sears, Macy’s, J.C. Penny’s and regional chains like Marshall Fields – This is where America shopped. In 1977 Department stores accounted for 10.7% of all retail sales in the U.S. – including Auto, restaurants and gas stations – everything. They had the highest per store volume – $8.7M – of any retail activity. In 2013, their share of retail was less than the $ Stores – incredible.
  • Speaking of $ stores, 50 years ago there were 5 and 10¢ Stores. Ben Franklin, W.T. Grant, Woolworths – this is where I bought comic books and greeting cards. Remember Walmart started out as a Ben Franklin store and morphed into…
  • I also remember in the 1970’s there were over 60,000 independent drug stores. Then came the rise of regional chains which became consolidated into a few national chains. In between, someone got the idea of putting a pharmacy in supermarkets…and clubs…and SuperCenters (another brilliant idea). The result is that there are about 3 national drug chains and still 20,000 independent stores. However, the indies are all in markets with a population of under 20,000.

You get the idea. We’ll take a look at the migration of the U.S. consumer between channels. We won’t go back 50 years – just to 1992. The data is courtesy of the U.S. Census Bureau.

First, let’s look at the whole retail pie, before we see how it is sliced up! The Total U.S. Retail market in 2013 was over $5 Trillion. For this study, I have cut out certain segments which don’t relate to most consumer products, especially Pet Food and Supplies. I have removed Auto Vehicle Dealers and Parts stores, Restaurants and Gas Stations. The result is still huge – $3 Trillion in 2013 and is conducive to more valid comparisons. I also put in a line which is adjusted for price changes – up 64.7% since 1992.

Migrate-1

  1. Total Growth 1992 to 2013
    • Up $1.76 Trillion (+141.9%)
    • Average Annual growth rate = +4.3%
  2. Real Growth 1992 to 2013 (Adjusted for price changes – CPI)
    • Up $.57 Trillion (+46.0%)
    • Average Annual growth rate = +1.8%

You can see that more than half of the growth comes from increased prices. The buying power of the 2013 Dollar was 60.7% of the 1992 Dollar.

The Adjusted “line” gives a “behind the scenes” picture, especially regarding the major recession. Total Retail sales didn’t drop until 2009. However, you can see that the problem started 2 years earlier when the amount purchased in 2007 was just equal to 2006. Consumers actually started buying less in 2008, not 2009.

In terms of recovery, the “real” recovery didn’t occur until 2013, when we finally got back to the level of purchases made in 2006 and 2007. This took 6 years…not 2 years, which is the time frame for full retail $.

We also had a flat spot in 2001, when price adjusted sales just matched 2000. Thankfully, sales started a slow rise again in 2002.

Now that we have the overall picture, let’s take a look at the individual channels.

The chart below shows 10 key channels and their share of the U.S. Retail Market in 1992, 2002 and 2013. The data is available annually but we have pared it down to make it a little more digestible and still show any migrating trends.

Note: Channels can actually increase sales but lose market share because they are not keeping up with the overall marketplace. Share seems to be the best way to look at the competition for the U.S. Retail $.

Migrate-2

There will be observations about each of the channels in the chart. However, consider the top 3…

  • In 1992 – Grocery, Gen Merchandise, Hdwe & Farm
  • In 2002 – Grocery, Gen Merchandise, Hdwe & Farm – The same order, but a battle for #1.
  • In 2012 – Gen Merchandise, Grocery, Internet/Mail-order- GM edges out Groc for #1; Internet/Mail comes out of nowhere and knocks out Hdwe & Farm to win the “bronze”.

Now let’s look at the trends in the individual channels.

TRENDS IN KEY U.S. RETAIL CHANNELS 1992 > 2013

  • Clothing and Accessory Stores – They have lost 14% in market share in a slow decline since 1992. This has flattened out and they have actually gained some traction since the recession. This is being driven by the Value Clothing Stores like T.J. Maxx, Marshall’s and Ross. They actually have dipped their toes into Pet on a limited basis.
  • Electronic and Appliance Stores – This channel reached its peak in the years surrounding the Millennium. Many of their products are now being poached by different channels. The recent bankruptcy of Radio Shack does not bode well for this segment.
  • Furniture & Home Furnishings – After 10 years of market share gains, this channel lost momentum and sales turned sharply downward during the recession. Current market share is being maintained due to home products stores like Home Goods, Bed Bath & Beyond, etc.
  • Sporting Goods, Hobby, Book & Toy – Overall, this channel is headed down. Technological changes have seriously hurt books stores. Toys retailers have seen their products commoditized and deflating prices have caused consumers to migrate to other channels – SuperCenters, Discount/Value Stores and the internet. Sporting Goods stores are the only bright spot. They account for 83% of the sales in this channel and have actually increased their small market share by 16% since 1992.
  • Miscellaneous Stores – This is a mixed bag which includes gift, office supply and Pet Stores. Pet represents about 20% of the total outlets. This Channel actually reached its peak market share in 1997 and has been falling ever since. Sales and share both turned sharply down since the recession. We take a closer look at Pet Stores in a separate report on the specific migration of Pet Products.
  • Hardware & Farm Stores – This Channel had steady growth until 2005 when sales flattened out, then turned down during the recession. The Farm segment has shown recent strength and has stopped the downward slide of the whole channel.
  • Drug and Health – This channel had steady growth until it reached its peak in 2009, at the depth of the recession. It then fell slightly and has essentially flattened out. About 60% of this channel’s sales come from Rx sales so it is much more dependent on 1 commodity than other channels.
  • Internet & Mail-order – A true success story. Steady growth in sales and share, year after year. Driven by the internet, this channel has taken market share from most segments with its combination of value and selection. Grocery is probably the least affected as food is not a major category…yet. It has been especially hard on “specialty” retailers in a myriad of product categories.
  • Food & Beverage – This channel is almost all grocery with Supermarkets the vast majority of the business. This channel has been #1 since they began these surveys…until 2013, when it was edged out by General Merchandise stores. The drop since 1992 has been precipitous – 31.3%. Where did all these consumers go? The only other channel which gained that much was the internet…and they didn’t go there. The answer is they went to other Supermarkets – SuperCenter/Club stores are general merchandise stores which include a full service Supermarket.
  • General Merchandise – This segment is now the largest channel in the U.S. Retail Market…yet is remarkably steady – flat in share since 2002 – up only 8.5% since 1992. This is a more complicated situation and requires a closer look.

Let’s take a look “inside” the General Merchandise Channel to specifically see what’s happening.

Migrate-3

  • Traditional Department Stores – This channel has consistently lost market share every year, 71% since 1992…and an astounding 88% since 1977. In 2013, their share dropped below the $/Value Stores. This would have been beyond comprehension back in 1977.
  • Value Dollar Stores – This segment began as the 5 & 10¢ Stores then a few years ago morphed into the current Value Store Concepts. They have a small market share – about 2%, but it has started to grow, up 17% since 2007. Most of this gain has occurred since the recession as consumers look for value in a store with a convenient “footprint”.
  • Discount Department Stores – This is the channel that started the Department Stores on their decades long fall. They actually reached their peak in 1995 and have been dropping ever since. Their market share has dropped more than 50% since 1997.
  • SuperCenters/Clubs – Both of these stores combine a Supermarket with a Discount Store. They offer Value and in the case of SuperCenters, a large selection. Consumers must shop for groceries and bundling this with a wide array of general merchandise items has resulted in a 337% increase in market share. Where did the Supermarket business go – right here. Of note, these stores peaked in market share in 2009 and have remained flat or down slightly – about 0.1%, for 4 years.

Overall – This channel has only 1 success story. SuperCenter/Clubs gained 10.8 points in market share since 1992. The other segments are down 9.1 pts. The Value/Dollar Stores have turned upward since 2007…but overall the net gain in the channel is only 1.7 pts in market share.

Summary

Like the natural world, the U.S. Retail market is a complex environment with every retailer competing for the same nourishment – the consumer $. Here is a brief summary of our analysis of the migration of the consumer within the U.S. retail market over the past 20+ years and the current situation.

The biggest channels are:

  • General Merchandise
  • Grocery
  • Internet/Mail-order

The ranking may change but these should remain the top 3 for the foreseeable future.

In terms of retail segments, the big consumer winners since 1992 are:

  • The Internet/mail-order – Still moving up – driven by internet – no signs of the growth slowing.
  • SuperCenters/Clubs – Big but has stopped gaining ground since 2009.

The “small” winners, at least in the current market, are listed below. With the exception of Drug Stores, the others are usually the only positive segment in channels which are trending down.

  • Drug Stores – have gained through the years but have limited range in product mix.
  • Farm Stores – have shown recent strength and is the largest of these small segments.
  • Value/$ stores – the only Gen Mdse store segment actually gaining market share.
  • Sporting Goods stores – small market share but gaining…slowly.
  • Home Goods stores – the only + in the Furniture/Home channel
  • Value Clothing stores – a positive in the sixth largest channel.

Up and then down – Hot product categories generated a “wealth” of “big box” specialty stores in Electronics, Media, Books, Office, Toys, Home, Pet… Technological changes and the allure of Super Centers and the internet have lessened their consumer appeal and in some cases virtually killed these outlets. Big Box Retailers require high levels of consumer store traffic to prosper…or even to survive.

Admittedly, this is a somewhat oversimplified view. There are still individual losers in winning segments and winning retailers in fading segments. We can identify the trends but it comes down to how well the retailer fulfills the consumers’ needs – Value, Convenience and Selection. The great recession has caused Value to come to the forefront. At the same time, technological changes – the internet and smart phones – have made the consumers more knowledgeable and given them a new shopping option.

Sometimes the consumer migration between channels has an even larger impact on society. Consider:

  • Indoor shopping malls had become a major gathering place. They were invariably “anchored” by department stores. With department stores fading, whole malls are shutting down.
  • Perhaps the single smartest “recent” decision in U.S. Retail was the commitment to build Super Centers. However, grocery items have incredibly low margins. Expanding discount stores to accommodate a huge amount of low margin items required the retailers to push the general merchandise suppliers for radical price reductions. These reductions were often not possible with U.S. manufacturing costs so they looked first to Mexico and ultimately to the Far East in order to stay on the shelf – a big impact on the whole world.

Consumer migration is ongoing and always evolving. Retailers must recognize the “drivers” and be prepared to adapt to better meet consumer needs.

In our next post: we’ll look at the retail migration of U.S. Pet Parents.

 

Petflation Update: December – Ready for a surprise?

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The CPI data for December is out – and it brought a big surprise… The total pet market prices are up +0.14%. It may not seem like much, but prices have fallen in December in 4 of the last 6 years…and this was the biggest increase since 2007. In 4 consecutive years December has brought precipitous drops in both Food and Supplies prices, driving the Total Pet Market pricing down…but not in 2014!

Key 2014 December Facts:

  • All segments are now higher in price than they were one year ago in December 2013.
  • Supplies and Food went up in December for the first time since 2009.
  • Pet Services were basically flat and the Vet prices increase was half what it was in 2013.
  • Overall result…Total annual numbers inched upward…but still the second lowest increase in history.

Here are the specifics:

    • Vet Service CPI – Up 0.14% over November – 70% less than last year’s increase!
      • Up 2.88% since Dec.
      • FINAL ANNUAL CPI – Up 3.53% for year. (last  month’s projection was 3.59%)
    • Pet Services – Down -0.01% from November – Essentially Flat; usually up 0.2% or more.
      • Up 1.78% since Dec
      • FINAL ANNUAL CPI – Up 2.88% for the year (last month’s projection was 2.98%)
    • Pet Supplies – Up 0.09% over November– Last year down -0.75; A big turnaround!
      • Up 0.35% from December 2013
      • FINAL ANNUAL CPI – Down -1.07% for the year (last month’s projection was -1.19%)
    • Pet Food – Up 0.1% from November – Last year down -0.44; More than a 0.5% difference.
      • Up 0.42% from December 2013
      • FINAL ANNUAL CPI – Down -0.30% for the year (last month projection was -0.37%)
    • Total Pet -Up 0.14% from Nov. – Last year down -0.25%; Food & Supplies made the difference.
      • Up 1.17% from December 2013
      • FINAL ANNUAL CPI – Up 0.68% for the year (last month’s projection was .64%)

Here’s what it looks like vs December 2013 and comparing 2014 against the 2013 annual number:

Dec-1

The Total Pet 2014 CPI trended up in the final quarter and finished at +0.68% for the year. This was primarily “fueled” by increases in the Supplies Segment. The Service segments slowed their rate of increase and Food Prices have become essentially flat.

Here’s what the last 16 months of CPI’s look like, using August 2013 as a starting point:

Dec-2

Here’s how we stand in pricing in at the end of December 2014 versus a year ago or 2 or 3:

Dec-3

 OBSERVATIONS

Pet Services – Prices are 1.8% higher than they were 1 year ago. The increases have slowed in recent months. Most of the 2014 price increase was in the first 6 months. Unlike all the other Pet Market segments, Services hasn’t hit a “pricing wall” resulting in slowed consumer purchasing…yet. If it can maintain an annual increase in the 1.8% – 2% range “real” growth in the amount of services should continue.

Vet Services – Prices are 2.9% higher than they were a year ago. However, driven by early, substantial increases, the annual increase was 3.53% – almost a full percentage point higher than each of the last 2 years. Although retail sales have gone up, the actual amount of Veterinary Services provided has been essentially flat since 2010. In the second half of 2014 the price increases slowed considerably. If this segment can keep this “second half model” and annual price increases are in the 2.4% to 2.6% range, “real” growth should increase.

Services Total – Over the past 20 years, the price increases in the service segments have been almost a mirror image and always headed up. In fact, since 1999 the cost of Veterinary and Non-Veterinary services have more than doubled. It’s time to slow down.

Pet Food – Pet Food prices are 0.42% higher than they were a year ago. Although they have generally been down most of year generating an overall decrease of -0.3%. A price decrease in Food has happened 2 other  times – in 2000, down -0.1% and in 2010, down -0.38%. Food Pricing was definitely a roller coaster ride in 2014 right up until October. In the last quarter, prices flattened out and unlike the 5 previous years, there was no December price drop. This largest segment of the market has become even more competitive. With the consumer looking for value, the food segment comes up first on everyone’s comparison shopping list so price is a major issue. It looks like the food segment could support a rise in the2015 CPI in the 1.5% range.

Pet Supplies – Prices went up 0.09% in December, which is miniscule. However, when you consider that prices dropped an average of -1.1% in the last 4 Decembers, it’s is quite a turnaround. The December prices in 2014 are actually 0.35% above what they were in December 2013. Of course, prices overall fell -1.07% in 2014. But it could have been much worse. Before they started up in September, prices were projecting an annual drop of -1.5%. The September increase was a bit extreme at 1.4% but the final quarter brought moderation…and no precipitous drop in December prices. The supplies segment is more prone to seasonal pricing fluctuations so even if it gets back on track, it will never have slow moderate monthly increases. It will always be a “roller coaster” ride. However, if the extremes can be mitigated and the deflation stopped it will be a much healthier environment for all concerned. This segment is highly competitive with a huge number of “players” a CPI increase in the 1.0% to 1.5% range should support healthy growth.

Pet Food & Supplies – These segments are about 0.26% above where they were in December 2013 but they finished down -0.79% for the year. This was just slightly less than the -1.04 drop in 2010. However, that drop came after price increases in 2008 & 2009 totalling an amazing 16.9% – at the depth of the recession. Since 2010, prices have gone up only slightly. It appears that a combined annual increase in the 1.4% to 1.6% range would be reasonable and be supported by consumer growth.

Total Pet – Prices are 1.2% higher than they were 1 year ago in December 2013. For the year, prices were up 0.68%. Only 2010 at 0.62% had a lower increase and actually no other years have been below 1.4%. The consumer products market has become incredibly sensitive to pricing since the great recession. Priced to high and consumers look for alternatives or just buy less. Price deflation can also bring trauma to a market because of the pressure it puts on both retailers and manufacturers. So what is the “sweet spot”? 2014 was not a typical year and we wouldn’t want to repeat it’s wild swings. However, the last quarter of the year, with moderating prices in the service segments and slight increases in the Products side could be a good “role model” for the future. It would seem that an annual increase in the 2015 Total Pet CPI in the 1.5% to 2.0% range would be ideal.

We’ll see what 2015 brings!

The Holiday Season “Lift”- Time to check out!

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The Holiday season is a critical selling period in the U.S. retail market and December is the most critical month. In recent years, there has been an effort to push the “starting” date earlier. However, these earlier sales don’t occur in a vacuum. In this post we will try to put the November and December Sales in context with the total Holiday Lift…and the resulting yearend total sales.

The best way to do this is visually with graphs so there will be a few more than normal.

As usual, the data is from the U.S. Census Bureau and includes the just released Advanced Retail Sales for December. In this first section, we will take a look at retail sales for November and December of 2014 compared to 2013.

  • Year to date $ales through October (before the start of the holiday lift)
  • November 14 $ vs November 13 $
  • December 14 $ vs November 13 $

Dec1 OBSERVATIONS

  1. The Retail less Auto and Restaurants is the most relative overall view for the Pet Industry. December was better than November but neither was as good as the ongoing increase through October.
  2. Grocery definitely had a great December.
  3. Drug had spectacular December which made up for November.
  4. Building, Hardware and Farm stores – Fall/winter is not their season but – a good December!

Let’s take a look at other channels, including General Merchandise and the Internet:

Dec2OBSERVATIONS

  1. The General Merchandise Stores include Department Stores, Discount Stores, Clubs, SuperCenters and Value stores. They are generally the channel trying to “push the season” earlier. It looks like the tactics worked…but the cost for a better November was a slower December.
  2. The Internet/Mailorder Channel was up 5.7% in November, slightly below their October YTD rate but they bounced back in December.
  3. Clothing and Accessory Stores had a good November and an even better December. This channel depends on a strong Holiday Season.
  4. Sporting Goods, Hobby, Book Stores and Toy Stores – Talk about a turnaround. Amazing!
  5. Miscellaneous Stores includes outlets like Florists, Gift and Pet Stores (Pet is about 20% of the total outlets). November was not good…as sales were down -1.0%. December sales were up slightly, but not enough to make up for November.

We have looked at December sales vs YTD October and November. Overall it was stronger than November but didn’t quite match the rate of increase prior to the holiday season. We’ll give it a “C-“ Let’s next look at the % of December lift compared to recent years.

Here is the first group, including the overall National numbers:

Dec3OBSERVATIONS

  1. In the total Retail Market, December was slightly better than last year. However, the Auto and Restaurant segments had a good December – up 10% in sales vs 2013.
  2. The Auto and Food Service Segments represent roughly 30% of the total Retail market. However, because of the nature of these businesses, the trends in these industries are often not directly comparable to the rest of the U.S. retail consumer products market. In 2014, when you look at the Retail Market – less Auto and Restaurants, the lift in December is pretty stable but actually trending down – slightly.
  3. Although Grocery stores don’t traditionally have a big lift, this December was definitely improved versus 2013..
  4. The December lift in Drug Stores is steadily improving. This channel is a bit of a special case. Most of the sales are not driven by consumer choice but rather need. The past 2 years have seen rather intense flu and cold seasons…reaching epidemic proportions in December.
  5. As we have noted, the late fall and winter months are not a “lift” time for Building, Hardware and Farm stores. However, December 2014 was markedly better than last year or 2012 – the drop in sales versus October YTD was less.

In the next chart we will take a look at Miscellaneous Stores which includes Pet and Gift outlets along with some major channels that are impacted strongly by the Holiday lift.

Dec4OBSERVATIONS

  1. To most U.S. consumers, the General Merchandise stores are the big drivers in the Holiday Sales Season. They are the most visible promoters and have been trying to push the kickoff time up a little bit in November. They have seen somewhat successful but as a result they have lowered the lift in December.
  2. The Internet/Mailorder has a strong…and growing December lift.
  3. In December, Sporting Goods, Hobby, Book and Toy Stores almost doubled a normal preholiday month’s business – amazing!
  4. The December lift for Clothing stores is a big deal and 2014 was a good year.
  5. In Miscellaneous Stores (includes Pet and Gift) the December lift was equal to last year but down from 2012.

HERE’S A SPECIFIC DECEMBER SALES RECAP

  • Total Retail – $505B; Up $22B (4.6%)
  • Tot Retl – Food/Auto- $366B; Up $9B (2.5%)
  • Grocery – $52B; Up $1.7B (3.3%)
  • Health/Drug – $29B; Up $2.1B (8.2%)
  • Hdwe/Farm – $25B; Up $1.7B (7.3%)
  • Gen Mdse – $74B; Up $0.7B (0.9%)
  • NonStore – $58B; Up $4.2B (7.7%)
  • Sport/Hobby – $13B; Up $0.8B (7.2%)
  • Clothing – $34B; Up $1.4B (4.4%)
  • Miscellaneous – $11B; Up $0.2B (1.8%)

Now let’s pull all the lift numbers together and look at sales before, during and after this year’s lift

Dec5THE SPECIFICS AND OBSERVATIONS

  • Total U.S. Retail & Restaurants  
    • Total Nov /Dec $ales = $948B; Up $35B (3.8%)
    • Total 2014 $ales = $5,271B; Up $203B (4.0%)
  • Retail Less Auto & Restaurants –
    • Total Nov/Dec $ales = $679B; Up $16B (2.3%)
    • Total 2014 $ales = $3,642B; Up $92B (2.6%)
  • Grocery Stores  –
    • Total Nov /Dec $ales = $103B; Up $2.9B (2.9%)
    • Total 2014 $ales = $594B; Up $14.7B (2.5%)
  • Health & Drug Stores  –
    • Total Nov /Dec $ales = $53B; Up $3B (6.2%)
    • Total 2014 $ales = $299B; Up $14B (6.0%)
  • Bldg, Hdwe & Farm Stores  –
    • Total Nov /Dec $ales = $51B; Up $3B (6.4%)
    • Total 2014 $ales = $328B; Up $3B (5.0%)
  1. In general, the retail economy was slowed slightly by the November/December sales period as the holiday increase did not match the YTD %
  2. However, Grocery, Drug and Hardware/Farm stores had a good season!

Dec6THE SPECIFICS AND OBSERVATIONS

  • Misc. Stores (Includes Pet & Gift)
    • Total Nov /Dec $ales = $21B; Up $0.1B (0.5%)
    • Total 2014 $ales = $120B; Up $1.9B (1.6%)
  • Sporting Goods, Hobby, Book & Toy –
    • Total Nov/Dec $ales = $21B; Up $1B (5.0%)
    • Total 2014 $ales = $88B; Down $0.05B (-0.1%)
  • Clothing Stores  –
    • Total Nov /Dec $ales = $57B; Up $2B (4.3%)
    • Total 2014 $ales = $254B; Up $5B (1.7%)
  • Nonstore Retailers (Mail order & Internet) –
    • Total Nov /Dec $ales = $102B; Up $7B (6.8%)
    • Total 2014 $ales = $481B; Up $32B (7.1%)
  • Gen Mdse, Dept & Value Stores –
    • Total Nov /Dec $ales = $136B; Up $2B (1.5%)
    • Total 2014 $ales = $663B; Up $11 (1.6%)
  1. Business as usual in Nonstore retailers – continuing strong growth through the holiday season.
  2. Gen Mdse Stores – disappointing performance.
  3. Clothing stores– a good season: For Sporting Goods, Hobby and book stores…a “life” saver.
  4. Miscellaneous Stores – not a good season. Couldn’t make up the ground from a bad November.

Lets take a look at the total holiday lift trends for the past 3 years.

Dec7OBSERVATIONS

Let’s first put the overall Holiday List in perspective. We are measuring 2 months’ worth of sales which accounts for 16.67% of the available year. The percentage of total sales will vary by channel depending on how much they have come to rely on the lift.

  1. The overall retail market is showing a downward trend in the percentage of the holiday lift. In the (Less Restaurants and Auto) total, 18.6% of annual sales are done during the Holiday Lift so November and December are about 11% more important that an average month.
  2. The lift in the Grocery channel is steadily increasing. However, with 17.3% of annual sales coming during the holiday period, the lift is not that important – only 3.5% greater than an average month.
  3. The lift in the Health/Drug channel has jumped markedly in the past 2 years. However, as we mentioned the occurrence of epidemic flu outbreaks is a major factor in the past 2 years. In all three years the total of November and December business accounts for about 17.8% of annual sales – about 6.8% greater than average.
  4. In Building, Hardware and Farm stores the November/Dec ember period accounts for only 15.5% of annual sales. So the question in this channel is how much lower will these months be than earlier in the year. Normally the total sales of the holiday months is about 7% below an average 2 month period. Of note, there was a definite improvement in 2014 over 2013.

In the last chart let’s take a look at the lift history of some retail channels that are more dependent on the Holiday Season Sales.

Dec8OBSERVATIONS

  1. The lift in General Merchandise stores has fallen slightly over the last 2 years. They have also increased the November portion…at the cost of reducing December. Nov/Dec account for a consistent 20.5% of sales or about 23% more important than an average month.
  2. The NonStore channel has a strong lift but it is eroding. It has definitely become driven by December. It seems that the consumer may be making early season (Nov) purchases from the highly publicized Gen. Mdse stores …then switching over to the internet in December About 21.2% of total annual purchases occur in Nov/Dec making those months 27% greater than average.
  3. Sporting Goods, Hobby & Book stores generate 24% of annual sales during Nov/Dec, making those months up to 43% above average. The lift is huge in this segment and got even bigger in 2014.
  4. Clothing stores are also very dependent on holiday sales, with 22.6% of annual sales coming in Nov/Dec. This period performs 35% better than an average month. The lift has rebounded strongly in 2014 after a small dip in 2013.
  5. Misc Stores – (Pet Stores account for only about 20% of the outlets.) Overall the holiday season generates 17.4% of annual sales – only 5% above average. Even the small lift is dramatically falling. Sales in November were actually less than 2013 and December didn’t make it up.

Final Thoughts – The holiday season is a major part of U.S. retail. In general, the lift is slowly but consistently decreasing. Efforts to push the season earlier have worked to increase November sales but at the expense of lowering the lift in December.

The 2014 December sales increase was greater than last year but the combined Nov/Dec increase was not…and both were in the bottom 5 smallest % increases since 1992. Channels doing 42.9% of the total did add to their annual rate of increase through holiday business. Others doing 34.7% lost ground. Overall the “lift” earned a “C-”. Before we can do a final assessment of the total 2014/15 holiday season we have to measure the Jan/Feb “fall” which happens EVERY year.

Petflation November Update – Have prices peaked for the year?

/in /by

The CPI data for November is out – a pretty “normal” month overall – for a change. The total pet market prices didn’t change much +0.17%. Every segment was up. Pet Supplies prices were up but the increase was less than half that of 2013. The Pet Food CPI was up – just barely. Service prices were both up about 0.2%. This is about twice the normal November increase. So we stand at what is the “normal” pricing peak for the year. In recent years December has brought precipitous drops in Food and Supplies prices, driving the Total Pet Market pricing down.

Key 2014 November Facts:

  • All segments showed price increases
  • Supplies and Food were up slightly less than “normal” for November
  • Vet and Pet Services were up more than a usual November
  • Overall result…Total annual projection still basically unchanged from last month

Here are the specifics:

    • Vet Service CPI – Up 0.18% over October – Higher than normal.
      • Up 2.74% since Dec.
      • Projected – Up 3.59% for year. (last  month’s projection was 3.63%)
    • Pet Services – Up -0.21% over October – Higher than normal.
      • Up 1.79% since Dec
      • Projected – up 2.98% for the year (last month’s projection was 3.08%)
    • Pet Supplies – Up 0.31% over October– About ½ usual   jump for November.
      • Down -0.26% since Dec.
      • Projected – down -1.19% for the year (last month’s projection was -1.26%)
    • Pet Food – Up  0.03% from October – Essentially flat.
      • Up 0.32% since December
      • Projected – down -0.37% for the year (note: last month projection was -0.39%)
    • Total Pet – Up -0.17% from October – All segments up.
      • Up 1.03% since Dec
      • Projection – up 0.64% for the year (last month’s projection was .62%)

Here’s what it looks like along with updated annual projections:

NovCPI-Update

The Total Pet 2014 CPI projection is inching upward. It’s now at +0.64% versus + 0.62% last month and +0.60% two months ago. This is primarily being “fueled” by increases in the Supplies Segment. The Service segments have slowed their rate of increase and Food Prices have become essentially flat.

Here’s what the last 15 months of CPI’s look like.

CPI-Monthly-Nov-2014

Here’s how we stand in pricing in November 2014 versus a year ago or 2 or 3:

NovHistorical

 OBSERVATIONS AND EXPECTATIONS

Pet Services – Prices are 2% higher than they were 1 year ago. The increases have slowed in recent months. Expect December prices to go up about 0.2% to produce an increase in the annual CPI of 3.0%

Vet Services – Prices are 3.2% higher than they were a year ago. The usual Fall price increases have been lower than normal. In recent years, the December CPI change has been inconsistent in this segment, ranging from No Change to +0.6%. Expect an increase of about 0.3% in December and an annual CPI increasea of 3.6%. Much of this was driven by strong increases in the first half of 2014.

Services Total – There will still be a 3+% increase in prices for the year but it was almost all generated in the first half of the year as price increases have slowed markedly since June. As was stated in an earlier Post, without the increases in Vet & Non-vet Services, Total Pet Prices would be down for the year!

Pet Food – Pet Food prices are -0.1% lower than they were a year ago. They are also only 1.0% higher than they were 2 years ago. That means that the prices in this largest Pet Segment have been essentially flat or down for 2 consecutive years. The Food and Treats segment has become increasingly price competitive as the Consumers have become more “value conscious” in their shopping habits. Expect prices to drop -0.4% in December and the overall CPI to fall -0.4% for the year.

Pet Supplies – Prices went up 0.31% in November, which is just slightly less than ½ of last year’s increase (+0.7%). Three consecutive months of strong increases have brought Supply prices back somewhat, -0.5% below where they were 1 year ago. They are still -3.5% below the prices in November of 2011. Expect prices to drop -0.7% in December, resulting in a CPI drop of -1.19% for  the year.

Pet Food & Supplies – These segments are about -0.5% below where they were in November 2013 and -0.3% below 2012. Taken together the prices in these Product segments  have basically been flat to just “below the surface” for about 2 years. Expect a drop of -0.6% in December and -0.9% for the year.

Total Pet – Prices are 0.8% higher than they were 1 year ago. This is driven totally by the Service Segments as Pet Products prices are down. We should see an overall increase of 0.64% in the Total Pet CPI for 2014. This would be second only to 2010 which had a 0.62% price increase over 2009. It will be close. In fact if Service Price increases are less than expected and Product Prices have a deeper drop…we could see a new low.

Question for December – Will the price drop in December be even greater than expected? We noted in a recent post that overall the November Retail Lift for 2014 was about the same or a little less than 2013. In fact, sales in the Miscellaneous Store Channel (includes Pet & Gift Stores) were actually less than 2013 – no lift, a drop. Will the pressure to make yearend numbers result in even deeper and more widespread discounts than usual? We’ll see.

Prices are prices…Why the concern about inflation or deflation?

Because extremes of either, especially over an extended period of time, can severely affect a segment or even the whole market.

Let’s look at an inflation example – Veterinary Services. For 16 years the annual inflation rate averaged 5.0%. The segment continued to show growth beyond just price increases…until 2011, when for the first time consumers actually bought less in terms of the amount of Veterinary Services. In 2012 they bought even less and the amount of Veterinary Services in 2013 was effectively the same as it was in 2010. What’s next for this segment remains to be seen. Pet Insurance, consolidation of clinics, an increased number of OTC medications, home testing…all could be possibilities…if they help to mitigate the cost of Veterinary visits. The consumer has become more value driven since the “great recession” and price increases must be reasonable…or they find an alternative or buy less. This behavior is most noticeable in discretionary spending but it also affects “essentials” like food and veterinary services.

Deflation is most common when a product group becomes commoditized and there is an abundance of supply. With no demonstrable difference in quality, price becomes the overriding factor to the consumer. Let’s look at a nonpet market that affects us all – oil. OPEC producers have decided to keep oil supplies extraordinarily high. This has produced a precipitous drop in gasoline prices…great news, right? Initially, yes. However, there may be some costs to the consumer in this strategy. OPEC countries produce oil cheaply and have a greater profit margin than some of the alternative production methods being employed elsewhere. These producers have a lower margin. They must be competitive so a substantial drop in retail prices results in either NO sales or turns low margins into NO margins…they can’t afford to run their businesses…so they will start to close them. This will ultimately cost thousands of jobs but gasoline prices are still low, right? That’s right. However, when a substantial number of “alternative” competitors have gone out of business, the OPEC members could decide to start scaling back production. As supplies fall, the prices start back up. To what level? With less competition, the OPEC members now have greater control…so it’s up to them. They can sacrifice margin for a period of time to reduce competition. As prices rise, some of the “alternative” competitors will come back…but fewer than before. Of course, the OPEC members can start the whole process over again.

As we have noted in an earlier post, deflation in the Human Toys market began in 1997 and prices have fallen ever since. The result: There are far fewer manufacturers competing in this category. We have only 1 major Retail Toy store chain left and they are on shaky ground. The retail sales in this market have migrated to general merchandise stores and the internet. In fact 30% of all toy sales are done by 1 National General Merchandise Store chain.

We are seeing indications of consistent deflation in the Pet Supplies segment and some initial signs in the Food Segment. Driven by the commoditization of more and more categories, overall Supply prices have been generally falling since 2009. This reduces margin which makes competing more difficult so companies start to “opt out”. There is less money to fund innovation and it becomes increasingly difficult for start ups. At retail, consumers start migrating… looking for value.

What’s in store for Pet? That’s up to us.

I know that you’re tired of hearing this…but since the great recession the consumer has demonstrated every day that they are driven by:

  1. Value
  2. Convenience
  3. Selection
  • Run your business more efficiently. Keep price increases to a minimum. Consumers expect prices to go up over time, but reasonably. What is reasonable?…only the consumers decide and they don’t tell us in advance. For the overall Pet Market it looks like a CPI increase in the 1-2% range is reasonable.
  • Need more $? Innovate! People will pay more for a demonstrably better product.
  • There is a lot of emotion in Pet Ownership. Consumers will also pay more for products with an “emotional” value. Some licensed products fit this description.
  • Convenience – Business and life in today’s world are both tough. Look for ways to make being a pet parent easier. “If you find it, they will come.”
  • Selection – Manufacturers and retailers should understand the consumer buying decision tree in each category and make sure they offer choices at the key decision waypoints. Retailers – Face it. You can’t build a store as big as the internet. You can offer online ordering with a larger selection…and when it makes sense, give them an in store pick up option…with a discount for their in store purchases.

Get a fast start in 2015 and make it your best year ever!

It’s the Holiday Season – How’s the lift going?

/in /by

Recently we took a look at the history of the Holiday Lift. As you recall, overall the peak has dropped considerably since 1992. At that time the peak of the lift was over 40%. In 2012, it was down to +23% – a  decrease of over 40%.

Remarkably, the lift for November has remained relatively constant through the years at about +7% – despite the increased hype over Black Friday and even with the kickoff time being pushed up to Thanksgiving day and earlier.

The Census Bureau just released the Advanced Retail Sales for November. Let’s take a look and see how we’re doing this year in retail sales compared to 2013. To make it easier to view the results from different channels, we’ll break the data into 2 charts and compare:

  • Year to date Retail $ales through October (before the start of the holiday lift)
  • November 14 $ vs November 13 $
  • Year to date Retail $ales including November vs the same period in 2013

RtlSales1

OBSERVATIONS

  1. The Retail less Auto and Restaurants is the most relative overall view for the Pet Industry. Note that November was up 2.4% over last year. However, since October YTD was up 2.7% November sales actually lowered the YTD increase.
  2. Grocery had a good month but not enough to make a difference in YTD overall.
  3. November is traditionally not a good month for Drug. This year, November didn’t match the YTD rate of increase.
  4. Building, Hardware and Farm stores – Fall/winter is not their season but they are holding their own.

RtlSales2

OBSERVATIONS

  1. The General Merchandise Stores, including Department Stores, Discount Stores, Clubs, SuperCenters and Value stores expect and need a strong Holiday Season. November sales were up 2.3% – not much but it is better than the YTD rate so it helps.
  2. The Internet/Mailorder Channel was up 6.3% in November, slightly below their October YTD rate so November was a slight drag overall.
  3. Clothing and Accessory Stores had a good November. This channel depends on a strong Holiday Season.
  4. Sporting Goods, Hobby and Book Stores – November sales were up…finally. It will be very difficult for this Channel to break even for the year.
  5. Miscellaneous Stores includes outlets like Florists, Gift and Pet Stores (Pet is about 20% of the total outlets). November was not good…as sales were down -1.9%. December is the most critical month in this channel.

We have looked at November’s sales. Overall it was an OK month, give it a “C” or “C-“. How does this affect the anticipated Holiday Lift which starts in November? The next 2 charts will compare this year’s November “lift” to the ones in 2012 and 2013.

Here is the first group, including the overall National numbers:

NovLift1

OBSERVATIONS

  1. Overall the lift in November is definitely trending down. However, there is a factor that is “unseen” in the data. We have noted that VALUE is increasingly becoming the key driver in consumer purchasing behavior. Thanksgiving is the kickoff time to the holiday “deal” season. Consumers often delay purchases until then. In 2014 Thanksgiving was on 11/27. In 2013 it was on 11/28. However, in 2012 Thanksgiving was on 11/22 – 5 or 6 days earlier. This meant that in 2012 the November portion of the holiday season had almost a week more of intense shopping so it is not surprising that the lift was higher.
  2. Retail Less Restaurants and Auto – Had almost an 8% lift in 2012. The extra 5-6 days of shopping probably pushed November up close to an additional 1%. However, even allowing for this “bump” in 2012, the subsequent years are still trending downward.
  3. Grocery is not traditionally a channel with a big holiday lift. However, you can see that this big segment is steadily improving.
  4. The lift in Drug usually occurs in December. November is often flat to down.
  5. The late fall and winter months are not a “lift” time for Building, Hardware and Farm stores. The drop in 2014 was similar to the pattern in 2013.

In the next chart we will take a look at Miscellaneous Stores which includes Pet and Gift outlets along with some channels that are impacted early and strongly by the Holiday lift.

NovLift2

 

OBSERVATIONS

  1. General Merchandise stores are big drivers in the Holiday Sales Season. They are big promoters and try to push the kickoff time up a little bit. The lift has increased slightly in November each year since 2012.
  2. The Internet/Mailorder has had the greatest overall holiday lift. In this chart you can see that, while still substantial, the November portion is trending down. Part of this is due to the fact that this segment has substantially increased everyday sales so the Holiday lift is less pronounced.
  3. Sporting Goods, Hobby and Book Stores – A substantial increase every year since 2012.
  4. The November lift has remained relatively strong and steady for Clothing stores.
  5. Miscellaneous Stores (includes Pet and Gift) didn’t have a good November. The bulk of the lift in this segment comes in December but in 2014 they’re starting out “in a hole”.

In November the Retail Sales for all channels less Restaurants and Auto was $314B – up $7B (2.4%) from 2013. It will be the third biggest month of 2014 – behind only May and of course December. By the way, a reasonable estimate of December sales this year is $365B vs last year’s $356.5.

Regarding the November portion of the lift, it seems to be trending down slightly. Moving up the kickoff of Holiday shopping may help…at least when it is done by the calendar…and especially when November 1 is on a Thursday, which can give us up to 6 more “official” holiday shopping days in the month.

By the way, in the midst of the Great Depression, President Roosevelt tried to move Thanksgiving to the third Thursday of the month (from the last Thursday) in the years 1939-1941. Some people say he was urged to do this by Retail executives in order to extend the Holiday shopping season. The effort ultimately failed and Thanksgiving was set as the fourth Thursday of the month by an act of Congress which was signed by the President on December 26, 1941…less than 3 weeks after we entered World War II.

So I guess we could write our Congressmen….or better yet…..Enjoy the Holiday Season and have a great New Year!

Petflation October Update – Truly Mixed Signals!

/in /by

The CPI data for October is out – with truly “mixed signals” – up, down and sideways. The total pet market prices didn’t change much +0.14% over September. Pet Supplies were up, but the increase was slightly lower than 2013. However, the Pet Food CPI dropped, which is unusual for October. Service prices were both almost “flat” – up less than 0.1%, very low for the Fall. Since the October Total Pet CPI surpassed June prices, the previous high point, we’re back on track for November to once again be the priciest month for the consumer to buy pet supplies and services.

Key 2014 October Facts:

  • Another large price increase in the Pet Supplies Segment – up 2.1% in 2 months. Huge.
  • Prices continue almost flat in Service segments.
  • Food prices drop slightly…. the norm is an October increase
  • Overall result…Total annual projection basically unchanged from last month

Here are the specifics:

    • Vet Service CPI – up 0.08% over September – Increases “flattening” out.
      • Up 2.55% since Dec.
      • Projected – Up 3.63% for year. (last  month’s projection was 3.66%)
    • Pet Services – up 0.03% over September – Continuing essentially flat. Unusual.
      • Up 1.57% since Dec
      • Projected – up 3.08% for the year (last month’s projection was 3.21%)
    • Pet Supplies – Up 0.69% over September– Normal jump for October.
      • Down -0.055% since Dec.
      • Projected – down -1.26% for the year (last month’s projection was -1.39%)
    • Pet Food – down  0.05% from September – Small change but Oct drop is not normal
      • Up 0.29% since December
      • Projected – down -0.39% for the year (note: last month projection was -0.42%)
    • Total Pet – Up -0.14% from September – Back on track…barely.
      • Up 0.86% since Dec
      • Projection – up 0.62% for the year (last month’s projection was .60%)

Here’s what it looks like along with updated annual projections:

Oct14CPISummary

Once again there is little change from last month’s overall  Total Pet projection…up 0.62% for the year versus up 0.60% for the year. However, Food prices dropped, which is very unusual for October. Service prices were almost flat. In fact the only normally performing segment was Supplies which had a reasonable increase. It has been a while since we have described Supplies as performing “normally”.

I think the monthly pattern helps us all to get a better understanding of what is happening in the market and what may occur during the balance of the year. I added the October numbers to the graph that I produced last month.

Here’s what the last 14 months of CPI’s look like.

Oct14MonthlyCPI Hopefully, the graph makes it easier for you to see both the similarities and the differences between segments and how they blend together to produce the overall industry total.

For the balance of 2014

Pet Services – The biggest price increases in this segment tend to come in Spring and Summer and slow down in the Fall and Winter months.This segment is performing according to the expected pattern. However, the Fall increases are considerably lower than normal. We can expect slight price increases in November and December.

Vet Services – This segment is not performing according to the expected pattern. The biggest price increases come in the Fall and Winter months. While prices have moved up since August, the change has not been of the usual order of magnitude. We can still expect increases in November and December. The only question is, “How big will they be?”

Services Total – Overall the prices have been basically flat since June. There will still be a 3+% increase in prices for the year but it was almost all generated in the first half of the year. These segments have had almost an identical pricing performance “footprint” since February of 2014. Without the increases in Vet & Non-vet Services, Total Pet Prices would be down for the year!

Pet Food – As you know, Food is the largest segment and is the biggest “driver” for the Total Pet Market. Food and Treats have become even more intensely competitive, driving prices down and resulting in somewhat erratic behavior in terms of pricing. The pricing in this segment still has a roller coaster pattern but it has been all downhill as prices this year have consistently remained below 2013. Also in recent years prices rise through November, then drop sharply in December. August and September had “normal” increases but October produced a rare price drop. We should expect some sort of increase in November followed by a December drop. The question is how big of a drop? It does seem to be a pretty good bet that overall Food prices will be down for the year – for only the second time in history.

Pet Supplies – Prices went up 0.69% which is just slightly less than  last year (+0.8%). However, with last month’s 1.38% increase, it means that prices are up 2.1% over 2 months. The last time that happened was Jan-Mar 2009. As you recall, Supply prices hit their all time peak in 2009 and have been deflating ever since.

With the October increase, prices are only 0.1% below what they were in October of 2013…and equal to June of 2008. What about November and December? Prices should continue up in November but how much? This has been a steep rise in prices. Let’s put it in perspective. If we have a 0.0% increase in November, this 3 month price increase “run” would still be the 6th largest in history. While we are unlikely to overtake the #1 spot , a 3.2% increase from June to September of 2007 (before the recession), it still is concerning. And how steep will December’s drop be? The recent increase has certainly mitigated the deflation in supplies…now expected to be less than 1.3% for the year. However, it has also reinforced the “volatility” of this segment.

Pet Food & Supplies – These segments are only about 0.1% below where they were in October 2013. However, they have basically been “below the surface” in the interim months. Both should rise in November and drop in December. The question is how much?

Total Pet – As we said earlier, without the price increases in the service segments, prices in the Total Pet market would be down for the first time ever. As it is, we are on track to compete for the lowest increase of all time – 0.6% in 2010. This may be a very real possibility. If Service prices continue their current pattern of minimal increases and Food and Supplies prices have their normal December price drop, then 2014 could beat 2010.

The pricing in the Total Pet Market is being driven consistently up by the Services but gets its rollercoaster pattern from Food & Supplies. While service price increases have been happening for a long time, this rollercoaster pattern in Food & Supplies just started in 2009. In the years prior to 2008 these segments were less erratic and prices grew at a relatively slow and steady rate. Prices on Food actually went up in December in all but 1 year (1998) prior to 2009. In 2008 prices started sharply upward. The biggest price increases in history occurred in 2008 & 2009 – during the teeth of the recession. Then in September of 2009 the bottom dropped out of food and supply prices and we have been on a rollercoaster ride ever since.

It would be nice to get back to “normal” but all the major business publications say that the recession changed the U.S. consumer forever…with value (price+quality) becoming the overwhelming factor in purchase decisions. It seems that this new “normal” is contributing to the erratic CPI in the segments in our industry.

Why Invest in the Pet Industry?

/in /by

Why Invest in the Pet Industry?  To answer that question, let’s look at the numbers.

In sheer numbers, America has a lot of pets – 400M – more companion animals than people. According to the APPA there are:

  • Cats – 95.6M
  • Dogs – 83.3M
  • Birds – 20.6M
  • Small Animals – 18.1M
  • Freshwater Fish – 145M
  • Saltwater Fish – 13.6M
  • Reptiles – 11.5M
  • Horses – 8.3M

But how widespread are they in society? In September of 2014 the U.S. Census Bureau released updated data. In 2013 there were 125,670,000 Consumer Units (Households) in the U.S.

The APPA reports that the % of pet ownership among U.S. Households is:

68% have a pet(s) = 85.4M H/Hs

  • 46.7% have a dog = 58.7M
  • 36.3% have a cat = 46.9M
  • 5.7% have a bird = 7.1M
  • 5.7% have a small animal = 7.1M
  • 11.8% have freshwater fish = 14.8M
  • 1.5% have saltwater fish = 1.9M
  • 4.5% have a reptile = 5.8M
  • 2.3% have a horse = 2.9M

As expected, Dogs and cats are by far the most popular. Let’s put some of these numbers in perspective:

HHsWithKids

As you can see, Pets are a major part of American life and have become part of the family. However, we are talking about business so how much do Americans spend on their pets?

The U.S. Census bureau just released their annual study on consumer spending which found that the average U.S. Consumer Unit (household) spent $460 annually providing for their pets. That’s for all households – with and without pets. ..and does income matter?  Let’s take a look:

PetSpendByHH

Income does matter as the rate of pet spending  increases radically with an increase in income.

So what is the top line? According to the APPA, Pet Spending in the U.S. in 2013 was $55.72B The U.S. Census Bureau’s estimate is actually higher…$57.95B. Either way, it is a lot of $…and more than is spent on alcoholic beverages (at home), non-alcoholic beverages, dairy products or men’s clothes…to name a few categories that Americans are fond of.

Where do we spend all this money? A review of a recently published list of the top 100 U.S. Retailers from the National Retail Federation is very enlightening. Before we take a look at the summary results, we should note that this report just reflects the top 100 Retailers. It doesn’t include approximately 8000 other Pet Stores and thousands of other outlets selling pet products across many distribution channels.

So how do the Top 100 Retailers feel about selling Pet Products? Let’s see…

Top100

Obviously, Pet Supplies are sold in a huge number and wide variety of outlets…all across America. There is another factor to consider. How important is shopping for Pet Supplies to the U.S. consumer? A.C. Nielsen has done a survey which gives some insight into how the consumer feels and acts.

The Nielsen survey addressed the nature and number of consumer shopping trips. They divided them into 4 segments:

  1. Immediate(need) – $15 ave.
  2. Fill-in – $51 ave.
  3. Routine – $98 ave.
  4. Stock up – $242 ave.

Here’s how the trips broke out.

ShoppingTrips

As you can see most trips are smaller – with 82% at $51 or less. Let’s take a look at the immediate trips. These are “need” driven and make up 61% of all of Americans’ “forays” into the retail market. What “needs” motivate these trips?

According to A.C. Nielsen, 9 of the top 10 are for “food”. Ranked in order, the top 10 reasons for an immediate shopping trip are:

  1. Milk
  2. Bakery (bread)
  3. Pet Care
  4. Cheeses
  5. Salty Snacks
  6. Soft Drinks
  7. Frozen Meals
  8. Fresh Produce
  9. Ice Cream
  10. Cereal (ready to eat)

Number 3…behind Milk and Bread…It looks like their companion animals are pretty important to American Consumers or should I say “pet parents”.

What then is the bottom line for the Pet Industry? How does it stack up against the total U.S. retail industry? One last chart…

PetRetlComparedUS

Through good times and bad, at full retail or adjusted for inflation, since 1997 the Pet Industry has performed at least 50% better than the overall U.S. retail market.

It is different from many industries because of the emotional element in caring for and providing for companion animals. Americans have almost a “family like” connection to their pets. They also have proven that they are very willing to put their money where their heart is.

So to answer the question, “Why invest in the Pet Industry?”… Because it makes $ and sense!