This article first appeared on LinkedIn
Back in 1911, a mining tradition began that lasted 75 years. Workers would bring caged canaries with them into the mines to serve as an early warning system against rising methane and carbon monoxide levels (lethal to humans). All the canaries had to do was die!
The pet care industry has its own rising levels of methane and carbon monoxide; I'm not just talking about the hot air of marketing BS...Non-compliance by manufacturers to regulatory requirements and poor enforcement by the agencies; unchecked marketing "puffery"; the lack of innovation, transparency and real science.
Yes, the toxicity in the pet care industry is rising and if you want proof, all you have to do is look at our canaries - the independent pet specialty retailers!
“Basically one of every four [independent retailers] that were open in 2009 no longer exist.”
In 2019, there were an estimated 13,400 independent pet stores in the US and they accounted for roughly 15% of TOTAL pet food sales. Despite incredible growth in the industry, there has been a net loss of almost 5,000 independent retailers over the last decade! That means that 27% of retailers (basically 1 of every 4) that were open in 2009 no longer exist. What is even more frightening is that another "net 1,000" retailers may be lost by 2021.
Some will point to the Darwinian "survival of the fittest" mantra, others will point the finger at the changing demographics of pet owners and the subsequent rise of online retailers. Hell, some manufacturers and distributors have even blamed it on the retailers themselves saying they have an "image" issue that is damaging to the industry as a whole.
The truth of the matter is the industry isn't "recession proof" for many of its members. We have been on a march headed towards commodity status for quite some time now. With very little variation between brands (i.e. brown & round kibble, canned foods, etc.), product use without processing and price fluctuations, the industry already meets the classic definition of a commodity. The current pandemic exposed the actions of the industry for what they truly are…a problem for independent retailers. No innovation, no new items and no direction! These actions are quickening the demise of the independents.
THE BIRTH OF INDEPENDENT PET SPECIALTY RETAILERS
In order to understand the problems of independent retailers, let's look at their history and the groups that influence them. While pet stores have been around for a while, their current format was born in the 1970's. Before then, pet stores usually specialized in aquatics; fish, aquariums and associated supplies. Some even offered birds, reptiles and "exotics" but no dogs and certainly not cats. While canine food had been commercially available since 1860 (Spratt's Patent Meat Fibrine Dog Cakes), it was sold primarily in agricultural stores. It wasn't until 1931 after Nabisco started selling the Dog Cakes (now named MilkBone) that dog food was sold in more mainstream outlets along with a canned diet that promised better nutrition (Kal Kan). By 1941, canned dog food had a 90% share of the market and was relatively unchallenged until 1957 when Purina introduced extruded, dry kibble (the similar round, brown balls you still serve today).
It was about this time that several new companies, focused and dedicated to a pet's nutritional needs, started to appear and gain traction. Nutro, Royal Canin, Iams/Eukanuba, Hills and others all started selling their "specialty" foods outside of feed and grocery stores. By differentiating WHERE they sold their foods, these manufacturers were able to focus solely on the needs of the pet while charging a "premium" for their diets. Ironically, all of these brands today are available across multiple channels of trade.
For the independent retailers, not having to compete with high volume, low priced value brands, retailing pet food became a lucrative business model. For the consumer, they were able to get, from a dedicated retailer, real nutritional information on what they fed their dogs and why it was important for their overall wellness. A new channel was born out of the need to provide quality nutrition that was not mass produced and sold "everywhere".
THE LOOMING DEMISE OF THE INDEPENDENT PET SPECIALTY RETAILERS
So now with an understanding of how the channel was formed and an awareness of the current state of affairs, it is time to look at who is (knowingly or unknowingly) assisting in the demise of the independent pet specialty retailers.
CONSUMER BEHAVIOR & THE IMPACT ON INDEPENDENT RETAILERS
Consumers will talk about "Small business Saturday", "shop local" and "Indie first" but at the end of the day, a dollar saved in their pocket is more desirable than a dollar that supports their neighbors. I don't blame consumers, but if they continue to shop based on lowest cost, that's all they will get. A recent "survey" of customer attitudes stated that, "[consumers] perceive big-box retail holds the high ground in knowledge and quality". The survey size (1,381 households of the 84.6 million pet owning households = 0.0016%) and the number of questions asked (60+) makes the survey dubious at best. Go visit an independent and a big-box retailer and ask them questions...not about what is on the label, but actual questions related to nutrition. Just like when you’re buying a car, you want to know more than the price and the gas mileage. While there are exceptions, person for person, you will find that independents are much more aware of, and involved with, the brands they carry than the sales associates at National retailers.
THE BIG, THE BAD, THE NATIONAL ACCOUNTS
PetSmart and Petco, initially a "supermarket for pets", carried big company brands at lower prices. The shear economies of scale and lower distribution costs, along with hundreds of new sales outlets, allowed them to make money. Independent retailers, unable to compete on head to head pricing, sold smaller brands with little (if any) margin pressures. The brands offered innovations and “better nutrition” which required independent retailers to be better informed and more knowledgeable. It didn't take long for national accounts to realize that they were missing out on both margin and foot traffic, so they lured manufacturers away with the promise of increased sales! Once a manufacturer signed on, they inevitably would take a hit on sales at independent stores (and with distributors) but the volume (at lower margins) was worth it.
ONLINE RETAILERS: THE PERFECT EXCUSE?
Chewy and Amazon dominate the online world of pet food sales. They are the genies that have been released from their bottles, wreaking havoc on the industry. We know that Chewy has yet to turn a profit, even with nearly $5 billion in annual sales. Creating a wound for their salt, they ship for free and discount pricing anywhere from 5-20% EVERYDAY. Online pet food sales in the US (as of May) are now 28% of total...a level industry "experts" didn't think was attainable until 2024!!!
Do you know that the average independent retailer will field a half-dozen calls every day from consumers that are "checking” Chewy’s pricing? Too often, in pure survival mode, retailers offer to "match" online pricing, but it is a losing battle. Independents haven't reduced their operating costs, only their revenue from a fickle, price driven customer base. This isn't the target consumer for an Independent retailer; never has been and never will be. Your knowledge, customer service and the shopping experience you offer is what has value! Do not take the bait of trying to compete on price with a company that is not profitable...think about that for a minute. Even if you “win” that customer, you’ll lose!
STUCK IN THE MIDDLE – THE ROLE DISTRIBUTORS PLAY
Distributors consolidate thousands of products under one roof, lowering logistics costs for manufacturers. They also make ordering and invoicing easier for retailers. As you'd imagine, representing 1000's of similar food and hard good products is difficult, especially when you have limited time with each independent store. The ranking of items that get sales' attention: 1) high turn, high margin 2) manufacturer push/incentive 3) high margin, low turn items. As you would imagine, 20% of the SKUs account for 80% of the sales but an even smaller percentage accounts for the sales-person's time and efforts. The lifeblood of the independent store has always been (and will always be) new companies and new products.
The distributor's dilemma: how do you keep the flow of new companies coming, stem the bleeding from manufacturers that have jumped to a new sales channel and support the sales efforts of independent retailers, all without going bankrupt? Until Chewy gained enough critical mass to support a DC, distributors did it by taking very small margins to supply Chewy. These lower costs enabled Chewy to undercut pricing which, in turn, resulted in lost revenue/profits at the independents.
The other way distributors try to handle their own financial pressures and goals is to focus on a few select manufacturers and drive sales of those brands on every call. This is the “what sells is what sells” mentality. Now fast forward and imagine a brand that sells $50 million through distributors to the Independents "jumps" to sell in National accounts. The distributor is not needed as the National account now buys direct. The pricing of the brand comes down (see chart above) and many independents delist SKUs. During year one the manufacturer may lose $15 million through distributors but they will have picked up $22 million at National accounts (hypothetical example). For distributors, they now need to replace $3.15 million in gross margin. This margin helps pay for sales, distribution, systems as well as profitability.
Thinking about it differently...the distributor needs to find 15 companies with $1 million in sales each (at a 21% margin) to offset their losses! It takes a lot of effort and skill to make that pivot which is why you often see distributors holding on to larger manufacturers for as long as they can. Unfortunately, this just exacerbates the issues for themselves and the independents. Diversification, not only of brands but of food formats as well, is critically important.
“For each manufacturer that has sold out to other channels, reduced their exclusive product offerings and stopped innovating, your actions have negatively impacted independent retailers.”
MANUFACTURERS – THE BULL IN THE CHINA SHOP
For manufacturers, the playbook is simple:
1) start selling into independent specialty retailers 2) get a following and some momentum and move on to regional chains 3) expand distribution but lose margin (and sales from independents) in order to sell at national accounts and then 4) cross channels and make yourself available anywhere and everywhere.
Part of the playbook during the last step for manufacturers is, in what can only be called a half-hearted attempt to keep themselves relevant in the independent channels, the introduction of a "channel exclusive" clone with a new name, new packaging and a higher dollar point (e.g. Blue Buffalo’s Baby BLUE, Jolly Joints and Carnivora). Don’t take my word for it, look at the labels of Baby BLUE and Life Protection Formula Puppy. If you don't have the time - spoiler - the Guaranteed Analysis, kcal and "First 5 Ingredients" are identical!
THOUGHTS FOR INDEPENDENT RETAILERS – Your predecessors created pet specialty and nurtured the beginnings of an entire industry. They did so by supporting new brands, and with the help of those new manufacturers, they continually educated themselves on pet nutrition and manufacturing processes. They didn’t chase a trend or try to compete on price. They flaunted their exclusive brands, their service and their knowledge. They made their stores and the brands they carried part of an exclusive club.
If you offer the same products that consumers can get on Chewy, Amazon or at Petco or PetSmart, YOU are NOT needed. How do you expect to compete with an online retailer that LOSES margin dollars EVERY day? You can’t "buy it for a dollar and sell it for $0.99 and make it up on volume." If you were expecting something more in line with a fortune cookie, I'm sorry to disappoint you.
“As a group, independents make up 15% of ALL pet food sales in the US. Realize the power in your position.”When you know what your customers want, it is up to you to find brands that meet those wants and are exclusive to the channel. You WILL meet your customer's demands and you will do so without watching your margins erode. As a group, independents make up 15% of ALL Pet food sales in the US. Realize the power in your position. You are the base of the pet industry pyramid and it is you that support distributors through your business, not the other way around. You provide manufacturers a venue to prove themselves and to test new concepts. You allow other retailers to pick low hanging fruit. While you may not feel it most days, YOU ARE the heart and soul of pet care. My advice to you is to DEMAND:
1) distributors that promote new companies 2) distributors that plan beyond the current quarter or year. This requires working with YOU specifically and not just a “cookie cutter” plan 3) manufacturers that educate you and your staff not only on their products but on animal nutrition and how they deliver something more and better. You need to “sell” something other than low cost products. 4) manufacturers that innovate. While line extensions and flavor enhancements can help (if they are exclusive) what is needed is true innovations that are good for dogs and cats and supported by science! Generally speaking, line extensions work for a while until they cannibalize within a manufacturers portfolio and more importantly, it limits shelf-space for new innovation. 5) manufacturers that are committed to doing what is right vs. what is easy or more profitable for just them. Is their plan for “image improvement” going to help you or them? Is their marketing plan aligned with your store goals or only their company objectives? Do they say they are doing it “another way” or the “right way”? 6) manufacturers that are transparent. The deafening silence during DCM had a devastating impact on sales and traffic which has led us to accounts payable issues and solvency concerns. Because of the silence from "specialty brands", retailers went BACK to Purina, Hills and Mars (a massive shift in dollars) to save face. Now, they are stuck with margin dilutive brands that are available everywhere and nothing to fill the void! If a manufacturer’s response is reformulating with “ancient grains” or the addition of taurine but they STILL don’t share their typical analysis or 3rd party digestibility results, they probably aren’t what you need.
I don't believe it is too late for Independent retailers IF they individually and collectively demand change. It won't be easy; nothing that is worth it ever is! There are hundreds (if not thousands) of independents that are making these changes and thriving today. All of us in the industry need to take a long hard look in the mirror and ask if we are in this for our own short term gains or if we are in this for the long term health of pet care. If it is the latter, then much like Mark Twain, the rumors of our demise will have been greatly exaggerated.
“At the end of the day…Pet specialty retailers shouldn’t expect [Chewy and Amazon] to change. What they should expect, and demand, is for the super-premium pet food marketers forging ever stronger e-tailer relationships to bolster with equal enthusiasm the pet specialty retailers who put them on the map.” (Pet Product News - David Lummis 4.28.20)