Pet Market – Page 29 – Pet Business Professor

Spending, CPI, demographics of overall market

Why Invest in the Pet Industry?

November 19, 2014/in Pet Market/by John Gibbons

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:

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:

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…

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:

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

Here’s how the trips broke out.

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:

Milk
Bakery (bread)
Pet Care
Cheeses
Salty Snacks
Soft Drinks
Frozen Meals
Fresh Produce
Ice Cream
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…

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!

The Holiday Lift – I’m dreaming of a “green” Christmas!

November 7, 2014/in Pet Market/by John Gibbons

Many consumer Product categories have strong seasonality. The pet industry is no exception. Of course, consumers buy pet food and supplies all year round. However, many segments, like Collars and leads experience a big boost at retail in the Spring as people and their Pets spend more time outdoors. By the same token, the Fall chill brings the promise of Winter’s inevitable cold, so apparel and “indoor” product sales begin to climb.

In terms of retail “lifts” attributed to a particular date, Halloween has become the U.S.’s second biggest retail holiday. The Pet Industry has jumped on board with hundreds of millions of dollars in pet costume and toy sales.

However, nothing can hold a candle to Christmas. The lift associated with Christmas has been a long tradition in America. It is a season for gift giving and the increased retail “traffic” in the stores generally gives a boost to most categories – people products or pet products.

For many years, the Holiday shopping season officially kicked off on “Black Friday” – the day after Thanksgiving. That has changed. With Christmas items already out in many stores for over a month and Black Friday sales now starting on Thanksgiving day or earlier, the “push” for the consumer’s dollars gets more frantic every year.

How much of a gain in retail sales actually happens during the holidays and has the ever increasing hype boosted the overall “lift” in retail sales. The US Census Bureau historically tracks retail sales by month. Let’s use it.

We’ll use June as the starting point and graph monthly sales for the following 12 months.
Each monthly waypoint will be the cumulative % change from our starting month
We’ll pick 3 years to compare 1992-93; 2002-03; 2012-13. This spans 20 years…..

OBSERVATIONS

The first thing that you notice is the remarkable similarity of pattern. Remember these measuring points span 20 years in 10 year increments.
The next thing is that the December lift is becoming much smaller
- 25% less in 2002 than in 1992
- 23.3% less in 2012 than in 2002
- 42.5% less than it was 20 years ago
The “lift” in November over the years is basically unchanged…. 7-8%
In January, sales fall off a cliff…and reach about the same “bottom” every year.
No matter how bad January is, February can go even lower.

So the lift is unchanged in November as people delay purchasing, waiting for the kick off sales. The December lift is about ½ of what it once was but the Jan-Feb trough is just as deep as ever. It doesn’t seem like the hype is helping. There is one other small factor to consider – profit. You may recall from the earlier posts on Pet CPI that the prices on Pet Supplies and Food drop precipitously in December. It appears that the big lift comes with a price tag…profit margin.

Regarding holiday lifts, not all retail channels are created equal. Let’s take a look at the 2013-14 season from the viewpoint of several large retail channels.

OBSERVATIONS

The internet has the biggest lift in this group. Clothing Stores (not pictured) is the only other retail segment with a higher lift – 68%. The internet is by far the fastest growing retail segment. Amazon’s sales grew 25+% in 2013.
General Merchandise stores, with a 38% lift are probably the closest to the pattern of Pet Stores. Notice the big drop in January. However, unlike the overall market, sales move up…slightly in February. Gift stores (not pictured) also show a 40% peak in December.
Supermarkets have the smallest lift due to the everyday nature of their business.
Drug stores actually have a pretty good lift…19%, as they now stock an ever widening array of “non-medical” consumer products, including pet supplies. December is also in the cold and flu season, which could be a factor.
Hardware and Farm Stores – Although they may get a lift from holiday product sales, Christmas is not a lift season for their overall business. As you can see, Spring is the major lift for this channel.
Put them all together. Nationwide for 2013-14, we got a lift of 22% for December. This is less than the 23% lift in the prior year. The November 2013 lift at 5% was also lower than 2012’s lift of 7%.

Percentages are one way to look at the situation. Let’s try looking at it with a slightly different “spin”.

Let’s assume the holiday lift & fall runs from November through February.
We’ll use the prior 10 months from January through October as a base for determining an average month’s business leading into the “season”.
We can then use this to determine how many extra days of sales are generated by the lift or…lost in the fall.
Here’s what it looks like for the Total Market and specifically for Gen Mdse stores.

In the Total Market, we gain 9.1 extra days of sales (Nov+Dec) but…lose 4.2 days after the first of the year. The net gain is about 5 days of average business. It’s a 120 day period so we get an extra 4.2%.
In the Gen Mdse store channel, the November lift of 5 days equals the Jan-Feb fall so the 13 days gained in December are all plus business. It’s about ½ of an average month’s business, a 10% gain spread over 4 months.

In terms of actual $ spent,

In November & December of 2013, we spent $663B. This is
- $383B more than in 1992; +136%; Ave annualized growth rate of 4.2%
Now to put this in the perspective of “Scrooge” , the buying power of the $ in 2013 was only 60.8% of 1992
- Adjusted actual growth was $123B; +43.8%; Ave annualized growth rate of 1.7%

Christmas holiday retail spending is still growing. However, despite all the publicity and work, the “traditional” retail holiday “lift” seems to be getting relatively smaller and perhaps less profitable. We have no choice but to keep it up. The competitive pressure is just too strong. However, maybe we should consider expending some time and effort to try to bring January and/or February out of their “traditional” trough…pad the “fall” with some extra dollars.

Later this month, we’ll do a CPI update. Will Pet Food and Supplies pricing continue to rise…?

Petflation September Update – Supplies Pricing Up…Way Up!

October 22, 2014/in Pet Market/by John Gibbons

The CPI data for September is out. The big news again is from…Supplies – Prices Up, Way Up! This is the first September increase for Supplies prices in 5 years and at 1.38% – the 6th largest monthly increase in history. In recent years, driven by drops in Supply Prices, September had become the month for lowest overall pet prices…not in 2014.

Key 2014 September Facts:

Huge price increase in the Pet Supplies Segment.
Prices almost flat in Service segments.
Food continues “normal” Fall increase.
Overall result…Total annual projection basically unchanged from last month

Here are the specifics:

Vet Service CPI – up 0.19% over August – As expected – a little lower than anticipated
- Up 2.5% since Dec.
- Projected – Up 3.66% for year. (last month’s projection was 3.68%)
Pet Services – down -0.03% from August – Essentially flat. Unusual.
- Up 1.5% since Dec
- Projected – up 3.21% for the year (last month’s projection was 3.36%)
Pet Supplies – Up 1.38% over August – First September increase in 5 yrs…and a big one.
- Down -0.7% since Dec.
- Projected – down -1.39% for the year (last month’s projection was -1.56%)
Pet Food – up 0.44% from August – Normal Fall increase continues
- Up 0.3% since December – Finally got back to where we started the year.
- Projected – down -0.42% for the year (note: last month projection was -0.47%)
Total Pet – Up 0.6% from Aug – Back on track
- Up 0.7% since Dec
- Projection – up 0.60% for the year (last month’s projection was .55%)

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

Ultimately there is little change from last month’s overall Total Pet projection…up 0.6% for the year versus up 0.55% for the year. However, the way that it was produced was interesting. Service Prices (Vet and Non-Vet) have slowed their inevitable climb while Pet Supplies started back up…in spectacular fashion

I think the best way to appreciate what is happening and to discuss what is possibly in store for the balance of 2014 is to look at the pattern by month.

Here’s what the last 13 months of CPI’s look like.

This graph is definitely more interesting and makes it easier to “see” how the action in the 4 individual segments produce the overall industry total. There is a mix of slow steady climbs and…roller coasters.

For the balance of 2014

Pet Services – Basically climbed steadily for the first half of the year, then flattened out. Expect prices to climb to a peak in December. The prices in this segment have grown unchecked for 16 years at a 3.4% average annual rate of increase. They need to slow down or they will inevitably face a correction in the amount of services consumers buy. This “correction” has occurred in every other pet segment.

Vet Services – As you recall from a previous post, since 1997 Veterinary Prices have risen at a rate that is 46% faster than Human Medical Care. For the past 4 years the amount of Veterinary Services purchased by consumers has been effectively flat. Price increases have slowed since April and been minimal since June. The August “dip” this year was normal. Last year the “dip” was followed by 5 months of rapidly rising prices. Expect prices to continue up for the balance of the year – peaking in December.

Services Total – Since February 2014, these two segments have been performing in “lockstep”. You almost only need 1 line on the graph.

Pet Food – This largest segment of the market has been performing in “untypical” fashion. In a “normal” year Food prices climb from August through November and then drop sharply for 1 month in December. They start back up again in January. Last year, Food prices were essentially flat from August through November. They dropped in December then kept on dropping to the low point in March. The second quarter brought increases followed by a “normal” July drop. So far, August and September look pretty normal. Expect prices to rise through November with a fairly substantial drop in December. Note: the CPI for Pet Food in September of 2014 is almost exactly the same as it was in September of 2013. Expect overall prices to be down for the year – the second time in history.

Food Clarification: Although the segment is called Food. The USBLS includes treats in this survey. Basically, if it has calories, it’s a food. The consumer has a wide variety of pet foods to choose from, especially for dogs and cats. There are actually even more companies that provide treats. At SuperZoo and GPE, there were over 240 exhibitors (1 in 4) offering dog and/or cat treats. This enhanced competitive environment could be a factor in pricing pressure.

Pet Supplies – Although it came in an unexpected month, Supply prices finally went up…big time… +1.38%. Monthly price changes of over 1%, up or down, have occurred on average less than once a year. The last time that Supply prices rose in September was 2009. Prices then uncharacteristically dropped in October and November. In fact, October 2009 marked the starting point of the current 5 year deflation. Let’s hope that history doesn’t repeat itself.

Coincidently, the big increase in the CPI also put this segment at exactly the same level as it was one year ago – in September 2013. Although, we have a different perspective, as September was the pricing low point for last year. We also should note that prices are currently at the same level as they were in March 2008 – over 6 years ago. Expect prices to continue up in October and November, then drop sharply in December. Net drop for the year should be less than 1.5%.

Pet Food & Supplies – Both of these segments usually have an annual rollercoaster ride. Although, the peaks, valleys and monthly changes on the Supplies ride tend to be more extreme. Let’s note again that both segments are almost exactly where they were one year ago. Combined, the difference is less than 0.02%. Look for 1 more dip in this year’s ride – December.

Total Pet – The monthly performance of the Total Segment is also a roller coaster because of the influence of Food & Supplies. Services are pretty consistently up so they just tend to keep the prices in the market higher. The Food segment is the largest, so the overall market tends to mirror it’s pattern – except when there is a big disparity in performance. Look at August 2014. Services – Flat; Slight increase in Food; Big drop in Supplies. Result: Total Pet down slightly.

Expect prices to rise in October and November, then drop slightly in December. The amount of the December dip will depend on how much Food and Supplies fall. For the year, prices should be up about 0.6%, matching the lowest annual increase ever – which occurred in 2010.

Note: An updated printable version of all relevant 2014 posts is available. It has a table of contents for easy reference and is segregated by chapters to facilitate printing of specific sections. To receive an electronic copy (including this post) by e-mail, contact me at gpsforpetbusinesses@gmail.com

Pet Spending Gets Its Own Category

October 12, 2014/in Pet Market/by John Gibbons

We made the grade. Expenditures on Pets are now being reported as a separate entity on the annual Consumer Expenditure Survey done by the Census Bureau on behalf of the U.S. Bureau of Labor and Statistics. Previously, Pet expenditures were bundled with toys and playground equipment. (go figure)

What is the CE Survey and what does it mean? The first Consumer Expenditure Survey was done over a 3 year period in 1888-91 to look at worker’s spending habits. The spending of our workers was considered to be a factor in U.S. production costs and impactful on foreign trade. Over the next 90 years, 7 more expenditure surveys were done for various reasons usually in response to radically rising prices, a depression or an impending or current war.

The rapidly changing economic conditions of the 1970’s highlighted the need for more timely data. In late 1979 the current program of annual reports was begun. The primary purpose was and is to collect data to revise the pricing sample used in the Consumer Price Index and to provide information on the spending patterns on U.S. households from the viewpoint of a variety of demographics.

Since the CPI has become such an important factor in U.S. fiscal policy making, the accuracy is of paramount importance. The CE survey is somewhat complicated and the methodology is constantly being reviewed and revised to facilitate the process. Basically, it consists of 5 consecutive quarterly interview surveys with each participant in conjunction with a separate “spending” diary survey. This data is then merged into a summary report. The participating households change every year. (The households are selected but participation is voluntary.)

OK, enough background. The report lists 100 categories and subcategories of expenditures. I have cut it down to the “pet-essential” information and added some calculations. Here’s what the Pet Expenditures for 2013 look like from the viewpoint of household income.

Clarification: The study is based upon Consumer units. The term Consumer Unit is often used interchangeably with household but a household can have more than 1 financially independent consumer unit; ex: boarders, dormitory situations, permanent hotel residents, etc. The number of consumer units is always slightly greater (1-2%) than the number of households. The key is financially independent buying decisions. For our purposes the difference is not significant.

KEY DATA

Total Pet Expenditures in 2013 – $57.8B. This is a little higher (3.8%) than the APPA reported number of $55.7B, but very close.
1. $30.0B (52%) spent by consumer units (CU’s) with income over $70K
  1. 40.5 million CU’s (32.2%)
2. $27.8B (48%) spent by CU’s with income less than $70K
  1. 85.2 million CU’s (67.8%)
Pet Expenditures per CU (all CU’s – pet owning & non-pet owning)
1. $460 per year
  1. $743 for CU’s with income over $70K
  2. $326 for CU’s with income less than $70K
Pet Expenditures for pet owning CU’s.
1. Used 68% of CU’s (APPA number for % of households with a pet(s) )
2. $676 per year (85.5 M Pet owning CU’s)
  1. $1093 for CU’s with income over $70K (27.5M CU’s)
  2. $479 for CU’s with income less than $70K (57.9M CU’s)

OBSERVATIONS

The results from this survey, while not in exact agreement with other sources, reinforce the size of the Pet Market and the spending in regard to income demographics. It confirms that slightly over 50% of the spending on pets comes from households with an income of $70K or more. This supports the assertion that there definitely is a market for “higher ticket” Pet items.

However, we also need to remember that $70K is not what it once was. Since 1997, the U.S. Dollar has lost 45% of its buying power. The numbers also highlight the spending disparity that goes along with income disparity. The under $70K households spend less than less than half as much on their pets as the over $70K group…and there are twice as as many of them – 58 million. In a non-pet related fact, take a look at the average total spending for the under $70K group. They spent 10% more than they made – usually, not a good long term plan.

Under $70K or over $70K, Americans are looking for a value. I believe that we are seeing this reflected in the current pricing deflation in Food and Supplies and in the slowed growth in the amount of Veterinary Services. There is also a retail consumer “migration” going on with Supercenters, Value Stores and the Internet becoming favored destinations. All these are issues which should be addressed.

In comparison to many other categories, the growth of the U.S. Pet Market has truly been a “success” story over the past 20 years. Driven by America’s growing love for their companion animals and nurtured by organizations, manufacturers and retailers, the Pet Market has become an economic force in the consumer marketplace. As you recall, the U.S. government first took note of the significance of the market back in 1997 when they established separate CPI measurements for each of the Pet Segments. In their most recent Consumer Expenditure Survey, published last month, for the first time they separated spending on Pets as it’s own category. This is another piece in the puzzle which will give industry professionals more data from which to make more informed and better decisions – critical to maintaining the industry’s strength.

On a final note, let’s put the $58B in perspective. In 2013, U.S. consumers spent $5 Trillion dollars at retail. Spending on Pets was about 1.2% of the total. We are definitely becoming a bigger “drop in the consumer spending bucket”. Take a look at how we compare to some other categories.

The CPI for September will be released later this month. In recent years, September has been the low point in Pet Prices for the year. I will post an update as soon as possible.

Pet Market Pricing Update – August CPI Drops!

September 29, 2014/in Pet Market/by John Gibbons

The latest CPI data for August is out. August is usually a fairly predictable and stable month. In over 70% of previous years…Vet & Non Vet Service prices usually take a little dip…and Food & Supplies go up. The overall Pet CPI has gone up in August 94% of the time.

However, as we have seen, this is not a “normal” year. Key 2014 August Facts:

The Pet Supplies Segment usually goes up in August. Not only did it not go up. It dropped almost a full percentage point from July.
The overall Pet CPI dropped in August. This has only happened 1 time in history and that was 15 years ago. This drop was largely driven by the Pet Supplies segment.

Here are the specifics:

Vet Service CPI – down 0.1% over July – As expected.
- Up 2.3% since Dec.
- Projected – Up 3.68% for 2014. (last month’s projection was 3.73%)
Pet Services – up 0.1% over July – Not normal; Usually drops in August.
- Up 1.5% since Dec
- Projected – up 3.36% for 2014 (last month’s projection was 3.23%)
Pet Supplies – down -0.9% from July – Not Normal; Usually goes up in August.
- Down -2.1% since Dec.
- Projected – down -1.56% for 2014 (last month’s projection was -1.47%)
Pet Food – up -0.3% from July – As expected, but smaller increase than normal.
- Down -0.1% since December
- Projected – down -0.47% for 2014 (last month projection was -0.48%)
Total Pet – down -0.1% from July – Not normal – Dip in August hasn’t occurred in 15 years.
- Up 0.1% since Dec
- Projection – up 0.55% for 2014 (last month’s projection was .58%)

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

For the balance of the year:

Service prices should continue steadily upward. The only break could be a possible dip in Veterinary prices in November. The peak month for pricing is invariably December.
Food has hopefully started the regular pricing climb which goes from August through November. Then comes a big drop in December. With the unusually low prices for the first 8 months, it appears very likely that the 2014 CPI will be less than 2013. An annual drop in prices for Pet Food has occurred only 1 other time – in 2010.
Pet Supplies prices continue to “plummet”. There is no other word for it. They are down 1.74% just since June. This is going into September which usually produces another drop and the price low point for the year. October and November generally bring CPI increases followed by the December Drop to close out the year.
Driven by ever increasing Service prices, Total Pet has never had a drop in annual prices. The smallest increase was 0.6% in 2010. This was driven by CPI decreases in both Food and Supplies. We have the same situation now and we are “on track” to meet or beat our record low.

The Pet Supply Segment is the ongoing concern. We saw that an unexpected big drop in Supplies prices pushed the whole Pet Market into negative numbers in August for only the second time in history and the first time in 15 years.

The Pet Supply Segment reached its all time pricing peak in May 2009. Since that time it has been working its way down – deflating. The price drop so far is 7.6%. How does that compare to other pet segments and key economic indicators. Take a look:

Somehow the 1% drops here and there and even the 7.6% drop over 5 years doesn’t seem like that much. Since Pet Supplies is going in the opposite direction from the other indicators, it’s hard to compare. Let’s use Pet Supplies as the “base” performance and compare these other categories to it to see what the overall differences are.

That looks like this:

Except for Pet Food, there is over a 20% difference in the pricing performance of Pet Supplies vs other economic indicators. The difference in the services is understandable as the price of basically all services has been growing faster than the National CPI.

However, 20+% differences in pricing performance from food and beverages and the overall CPI are significant. Remember, all these categories were operating in the very same economic conditions. If you “do the math”, it shows that the gap has widened at an average rate of 4% or more, in every year since 2009.

Will the deflation continue? In recent years, September has been the “bottom” month for pricing in the Supplies segment so it is possible, even likely that we will see another CPI drop in September. The big question is when will this segment “put on the brakes” and start a true change in direction? A deflating market grows increasingly difficult for manufacturers, distributors and retailers.

Building A Pet Business…like climbing a mountain!

September 12, 2014/in Pet Market/by John Gibbons

Building a Pet Business – Sometimes it’s like climbing a mountain.

In my consulting business, GPS For Pet Businesses, I have likened building a pet business to a road trip. You set a destination (your goal), plan a route, gather your resources…then you’re off. Delays and roadblocks occur – some expected, some not. You find the way – through or around – and continue on your journey – focused on the final goal.

As you can tell from earlier posts, I am “into” analysis. Why? Because developing a business requires decision making and decisions are only as good as the information they are based on. However, analysis and good decisions are not enough.

“Strategy is grand. Execution is crucial.” – I heard this phrase countless times from Tom Leonard when he was the President of Aspen Pet. So what does it take to execute…? It takes the will to succeed. You must be motivated. So all the analysis and strategizing will come to naught without the emotional strength to carry it through. However, never forget that the time for emotion comes AFTER the decisions have been made, not during the process.

In the Pet industry we are always noting the ongoing humanization of our companion animals so we are sensitive to drawing parallels between human and animal behavior. Recently I visited the “high country” in Colorado including the summit of Mt. Evans at 14,240 ft. Literally 3,000 ft above the tree line, the world at 3 miles high is something to behold.

I was fortunate enough to witness a “family” making their way to the very peak of the mountain. I watched in awe at their progress. During their quest I was struck by the similarities between their journey and the one we take in trying to build a business. Building a business is like a journey but sometimes it can seem like you are climbing a mountain.

Take a look.

First, a group comes together and decides to follow a leader on a journey to a higher place.

The path can be rocky from the beginning but the way is clear.

The road can get incredibly tough but they find a way and persevere

It makes sense to pause and prepare themselves for the final push!

Suddenly they’ve made it…to the summit…together!

Ah…the view from the top! That’s why “you” made the trek!

Mt. Evans, Colorado – Approximately 14,240 ft. – 3000 ft. above the tree line. Echo Lake in the picture is at 8,000 ft. – over 6,000 below. In the initial “feature” picture, you were looking up to the summit from the lake.

Watching this family of mountain goats was truly inspiring and a living reminder. Business and life can get tough sometimes. Sit down. Figure it out. Then do it.

“Failure is not an option.”- Gene Kranz, mission director of Apollo 13.

In my next post, we’ll get back to the numbers as the August CPI update will be available from the USBLS. In a normal year the prices for services – Vet and Non-vet should be down in August. Both Food and supplies should be up. However, this is not a normal year.

Petflation Update – CPI in July

August 25, 2014/in Pet Market/by John Gibbons

The latest CPI data for July is out. Services prices are up. Food and Supplies prices are down. This is pretty normal for July. The details are:

Vet Service CPI – up 0.1% over June – no surprise.
- Up 2.3% since Dec
- Projected – Up 3.71% for year. (last month’s projection was 3.73%)
Pet Services – up 0.1% over June – as expected
- Up 1,5% since Dec
- Projected – up 2.39% for the year (last month’s projection was 2.23%)
Pet Supplies – down -0.9% from June – Normal to drop in July
- Down -1.2% since Dec
- Projected – down -1.47% for the year (last month’s projection was -1.55%)
Pet Food – down -0.6% from June – Normal for prices to drop in July but this is greater than usual.
- Down -0.4% since December
- Projected – down -0.48% for the year (note: last month projection was -0.39%)
Total Pet – down -0.5% from June – Not normal – If dip occurs, it usually comes in June
- Up 0.2% since Dec
- Projection – up 0.58% for the year (down about 0.2% from last month)

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

For the balance of the year:

All Service prices usually drop in August then turn upward for the balance of the year…with 1 slight dip in Veterinary prices, usually occurring in November.
Food prices should start back up every month until the annual December drop
Supplies should start a “roller coaster” ride. Prices should go up in August, then fall to the lowest level of the year in September. October and November should bring rising prices…with a big drop in December.

However, it’s not a normal year. As you can see August should be a pivotal month. That CPI will be issued when we’re at the Total Pet Expo. I’ll do an update shortly after that.

My biggest concern is what’s happening in supplies. It appears that the consumer may have significantly changed their buying view on supplies during and since the recession. Prices have fallen since late in 2009 and this may be an indication that the segment is being systematically commoditized – a category at a time.

The chart below shows the CPI history for human apparel and toys – two categories that have largely become commodities and have parallels to a lot of the Pet Supply categories.

The Human Toy segment has truly become a commodity. Prices have dropped precipitously since 1997…over 60%. In terms of National Pet Toy Specialty retailers, only Toys R Us still exists. The vast majority of the business is now in discount stores and the internet. Wal-Mart is the largest toy retailer, with a 30+% market share.

The CPI period from 2009 to 2013 in Pet Supplies closely resembles the period from 1992 to 2000 in Apparel. This Human category has been commoditized in the clothing segment. The effect on the overall Apparel CPI has been mitigated because pricing in the shoe segment held its ground through 1998. However, the pricing in the overall Apparel market is now still 4% below what it was in 1997.

I don’t know how you feel, but neither of these other category “models” seems very appealing to me.

In my next post, we’ll take a look at the overall consumer buying behavior today and how that relates to the Pet Supplies segment.

Pet Supplies – What is driving the consumer – now?

August 25, 2014/in Pet Market/by John Gibbons

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let’s sum it up:

American Consumers are looking for:

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

What do we need to do?

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

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

What’s the “best” month to buy Pet Products?

August 12, 2014/in Pet Market/by John Gibbons

What’s the best month or worst month to buy Pet Products and Services…in terms of price?

In consumer product categories, prices often go up and down from month to month. On a graph, it looks a lot like a roller coaster. The USBLS has been tracking the monthly CPI for the Pet Market and its segments since 1997. I decided to take a look and see if any patterns emerged…

There was a lot of detail…to say the least – 198 months of data for 4 segments, 2 combined groups and the total market. When you take a step back, the whole record seems to basically be divided into 3 eras:

From 1998 to 2006 – This was a strong growth era of our industry and a gentle roller coaster of gradually rising prices. Prices went up a total of 29.5% in 9 years. An average year had 9 months with increases and 3 months with drops.
From 2007 to 2009 – This was a time of steeply rising prices. There was an overall increase of 19.5 % in prices in just 35 months – without a single monthly drop. Coinciding with an economic recession, we saw the consumer impact of this. Our retail sales still went up – but consumers bought less and less in terms of the amount of goods and services.
From 2010 to 2013 – In general, we have moved back to the gentle rollercoaster with overall prices moving up slowly again – 6.5% in 4 years – with an average year having 9 months with increases and 3 months with drops. However, there may be lingering effects in this recovery as supply prices continue to drop in a roller coaster ride which is generally headed downhill.

Based upon this overview, I decided to take a detailed look at the years from 2010 to 2013. This seems to provide the most relevant period to answer the current question, “Which is the best or worst month to buy Pet Products?”

As you might imagine, the “right” month to buy depends on what you are in the market for. Let’s take a look first at Services – Veterinary and Non-Veterinary. Here’s how the months ranked:

Service Segments – The prices in both these segments have gone up unchecked at a high rate since they were first measured in 1997. Veterinary Services have actually had only 13 monthly CPI decreases in 198 months of measurement. With only dips in 2 months during the year, the flippant answer to “When is the best month to buy any Pet Services?.. is…last month.” The actual answer is… January has the lowest prices and December has the highest in an average calendar year.

Now let’s take a look at the product segments – Pet Food and Pet Supplies. Here’s how the months ranked:

Pet Food and Pets & Supplies – This is a bit more interesting.

Pet Food prices generally rise through the first half of the year, drop in July, start to rise again, peaking in November…then fall radically in December. Of course, Food is an absolute necessity so the consumer must buy according to need. However, prices are lowest in the winter months – December through February. Officially, the cheapest month in the calendar year is January and the priciest is November.

Pets and Supplies – Now you can see a “roller coaster. In general, prices are higher from February through May. They generally are lowest in the late Spring through the Summer months, hitting bottom in September. They start to build again as the Holiday season approaches, peaking in November. Then like food prices, they drop like a rock in December. So much for “black Friday”. Consumers should hang on. The odds are that the prices will drop as Christmas nears. The most expensive month is February and the cheapest is September…followed closely by December. The Holiday lift is of paramount importance in this segment. From the consumer’s view, they should buy early or buy late.

Here’s what the Total Pet Market looks like:

Total Pet Market – This looks pretty boring and there is no “roller coaster”! How come?

The 4 year average gets flattened out by several factors. Three of the 4 segments, all but supplies, are generally moving upward in price as the calendar year progresses. While the years all have an average of 3 months with price dips they are almost always in different months. The Total CPI increase in 4 years was only 6.5% so the monthly changes are usually small. In general, the Total Pet market is similar in pattern to the largest segment – Pet Food.

The overall best (cheapest) month to buy Pet Goods and Services in our analysis is the first month of the year – January. The worst is November – not December, thanks to annual price drops in both Food and Supplies. The Supply segment has the biggest monthly variation and the highest percentage of discretionary spending. It also traditionally has a large Fall/Holiday lift. The most important consumer “take away” from this analysis is probably – “Buy early (September) or buy late (December)”.

Will prices peak again in November? It seems likely as a December drop in Food & Supplies prices has occurred 5 years in a row. November has also been the priciest month 4 years in a row and finished no worse than second in this dubious contest for 14 out of 16 years. However, it is an unusual year as both Food and Supply Prices are down for the YTD for the first time since 2010 and…prices in the Total Pet Market actually dropped in January for the first time ever.

Pet CPI Update – Eh, What’s up Doc?…or down?

August 5, 2014/in Pet Market/by John Gibbons

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

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

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

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

Here is the math:

Here is the visual representation:

OBSERVATIONS & RECAP BY MARKET SEGMENT

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

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

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

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

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

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

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

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

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

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

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

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

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