Why Changes in Pet Retail Should Be Terrifying Pet Manufacturers

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Quick pantry check today and we’re down to 6 cans of cat food.  The need to feed my darling is practically the only thing that gets me to the mall anymore.  Or at least it used to.  Today I went to Chewy.com and bought my usual two cases for about half the price I normally pay at PetSmart.  Shipping was free and I saved even more because I signed up for auto ship.  Pet retail is changing and it’s not going back.

Where I buy my cat food shouldn’t matter to PetSmart because they now own Chewy.com right?  Not so fast.  Every pet retail purchase that migrates to Chewy.com (from in store) most cost PetSmart significant cash.  Chewy.com offered a lower price, free shipping and I wasn’t tempted to throw any impulse extras into my online shopping cart.

E-commerce has been relatively slow to come to the pet retail industry but it is here and growing.

Recent estimates from Euromonitor are that 5% of all pet food will be purchased online in 2017.  Amazon is the market leader in pet e-commerce (56%) followed by Chewy.com (25%).  Given how inherently attractive it is to purchase heavy bags of food on a subscription basis, one has to wonder why PetSmart.com or Petco.com don’t dominate this e-commerce space?

The answer most likely lies with economics. To compete with Amazon and Chewy.com is not for the timid.  Amazon’s business model purposely lost $7.2b on shipping last year alone.  To be a contender, Pet Specialty.com would have had to allow web sales to cannibalize in-store sales with lower margins.  Lower margins mean more aggressively scaling back their physical retail presence to cut costs.  Evidently, these were moves that the leaders in pet specialty weren’t prepared to make.

PetSmart’s bold purchase of Chewy.com for a rich price signals an important “wake up” on the part of a pressured retailer.

That 5% share of pet products purchased online can be expected to more than quadruple in coming years.  This pet e-commerce growth will have a ripple effect in the industry.  Presuming that PetSmart is ready to do what it takes to compete online, their margins will be eroded.  As we have witnessed with Walmart and Amazon, PetSmart will make this up by pressuring their suppliers.  Walmart demanded an across the board 15% price reduction at wholesale from the likes of Procter & Gamble, Johnson & Johnson and Mars.  Presumably, the consumer packaged goods companies complied but also had considerable leverage given the strength and number of their brands.  Things are different in the pet industry.  The Purina’s and the Mars exist but many brands are owned by smaller companies that presumably will have less negotiating power.  Hence, it seems more likely that pet food manufacturers, and other smaller players, can expect new pricing pressure as a result of this deal.

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