How Pet Stores Can withstand Online Competition
As online competition looms, pet stores must adapt. Here’s how.
Rick Maicki, Michael Foster, Eugene Kim, Keith Jelinek and Rich Vitaro
Looking for a retail sector that hasn’t been upended by online shopping? Stop by the pet store.
Rising pet ownership rates and Americans’ growing willingness to embrace pets as family members have created a “pet parenting” culture where animal owners spend freely on their furry companions. Pet parents demand higher-quality products and enhanced service offerings. They believe their furry friends are entitled to all-natural foods, advanced medical care, trendy outfits, frequent grooming, tasty treats and even the occasional trip to the doggy (or kitty) day spa.
But pet supplies retailers can’t rest easy. Recent signs, demographic trends and a particularly ominous development at Amazon clearly indicate that the pet sector will soon experience the same e-commerce incursion that has swept through consumer electronics, apparel, sporting goods and other categories.
Put simply, pet stores should brace for a dogfight.
An Industry in Flux
Americans spent more than $69 billion on their pets in 2017, up from $41.2 billion in 2007, according to the American Pet Products Association (APPA). Those totals are expected to rise to nearly $100 billion by the end of this decade, according to market research company Packaged Facts.
Yet e-commerce represents the fastest-growing pet-retail channel, as consumers rapidly adopt online purchasing of pet supplies, food and medications. And the pet category has demonstrated attributes of convenience and repeatability that point to much higher online channel penetration. Some estimates have sales in this channel growing from $5 billion to approximately $8 billion this year.
The pet sector is also deeply fragmented. Estimates count more than 13,000 independent pet stores—mostly single-shingle local operations. However, consolidation has been brisk, with mergers and acquisitions announced nearly every week.
Millennials Prompt Need to Diversify
For years, the cornerstone product for pet retailers has been the 20-pound bag of dog food—a bulky armload of an item that has proved a reliable stronghold against online competitors. But the 20-pound bag may not remain a mainstay at pet stores for long, as Amazon has developed specific automation to handle these bags.
At the same time, increased pet ownership among millennials, coupled with younger consumers’ propensity to shop online, has driven and will continue to drive growth. Millennial pet owners represent the single largest demographic of pet owners at 35 percent, making their shopping preferences extremely important.
Amazon and online pet store Chewy.com lead the pack online, where 40 percent of consumers have bought pet supplies in the last year, according to the APPA. Chewy.com commands a roughly 50 percent share of online sales, while Amazon, with a 35 percent share, recently announced an increased focus and expanded pet offerings.
As if contending with Amazon weren’t enough, grocery stores and mass merchandisers like Target are eyeing the pet sector. These merchants, which have long been battling online sales across retail categories, have pushed to further diversify inventory and embraced specialty high-end pet foods, migrating away from economy lines.
Call to Action
If the last 20 years have taught us anything, it’s that, to avoid the carnage we have witnessed in segments that were slow to react to online threats, old dogs must learn new tricks.
To remain competitive as digital challengers encroach, brick-and-mortar pet retailers must find ways to get “sticky”—pushing consumers along a continuum from trial (or occasional) shoppers to loyal repeat customers. One way to get there is to take a page from Amazon’s book, using personalization—Amazon includes pets in a family’s online profile—to drive customers to ancillary services like grooming, vaccinations, medications, subscriptions or even play dates and boarding.
Traditional retailers must also optimize the digital touchpoints and omni-channel capabilities that consumers have come to expect—even if that means heavy catch-up investments. They must connect with value-focused millennial customers who are less brand loyal and are willing to search for high-quality, low-cost food alternatives.
Capitalizing on the competitive advantages derived from their brick-and-mortar assets, pet stores must accelerate in-store service offerings—grooming, training, boarding, etc.—to create new revenue channels, drive store traffic and open new consumer touchpoints. But delivering services requires new processes for a new operating model and gaining consumers’ permission to care for their four-legged children.
Finally, calls for consolidation may prompt players to vertically integrate in manufacturing or partner with an established veterinary-services company. Veterinary services account for more than half of annual pet spending, and younger pet owners are more willing to treat costly ailments. This should make veterinary facilities attractive partners for retailers seeking a real-world redoubt. We saw this percolating last year, with the acquisition of VCA, a veterinary-center operator with more than 800 locations, by leading pet food maker Mars, bringing its portfolio of veterinary sites to more than 1,000.
Reaching the final round of the dog show will require a retailer to evolve beyond being a pet food store. What breed will it be—value and convenience, integrated services, vertical integration or a blend of old and new?
Sleep with one eye open, Fido.
BRG Managing Directors Rick Maicki and Keith Jelinek, Director Michael Foster and Managing Consultant Eugene Kim work extensively advising clients on strategy in the corporate finance and retail spaces.