Dog Owners Seeking Discounts as PetSmart Confronts Bite: Retail
Stock Chart for PetSmart Inc (PETM)
Liz Harper’s dog once dined on bowls of Mars Inc.’s Royal Canin tailored to the Boxer breed and packed with the heart-healthy amino acid L-carnitine. She’d wash it down with Bowser Beer, a dog drink brewed from malt barley and salt-free chicken stock. Today, Billie Holiday has to settle for kibble from the local Target Corp. (TGT) store.
“It’s probably worse than toxic waste, but she loves it,” said Harper, a 36-year-old attorney from Pelham, New York. “It’s cheap and way easier to buy than anything else. She’s a dog -- she eats out of the garbage can and drinks out of the sewer. She doesn’t need organic dog food.”
Harper is among a growing proportion of pet owners who are seeking bargains and shunning more opulent items such as $600 Swarovski crystal dog collars, according to researchers Packaged Facts and Mintel. The $87 billion pet-product market, once deemed recession-proof, is starting to show cracks as owners struggle to make ends meet.
Nearly four out of 10 U.S. pet owners in a September Packaged Facts survey said they’re spending less on pet products, up from 27 percent in February 2010. Three-quarters of them are looking for deals, particularly on non-food items like apparel and toys. The U.S. is the world’s largest pet product market, according to researcher Euromonitor International.
“The totally discretionary stuff is increasingly being cast aside,” said Lee Linthicum, head of food research at Euromonitor. “People still want to spend a fair bit of money on their pets, but they are reevaluating their priorities.”
That has led pet retailers such as PetSmart Inc. (PETM) to offer promotions to keep customers from defecting to Target, Wal-Mart Stores Inc. (WMT) or specialty websites like www.wag.com, part of Amazon.com Inc. (AMZN) Discounts caused PetSmart’s profit margins on merchandise to narrow last quarter for the first time in two years, according to David Strasser, an analyst at Janney Montgomery Scott LLC in New York.
Michelle Friedman, a spokeswoman for PetSmart of Phoenix, declined to comment on the company’s discounting practices. Strasser has a “neutral” recommendation on PetSmart, which offers a Martha Stewart-branded line of toys, apparel, and $120 dog beds. The company plans to report full-year results Feb. 29.
Closely held Petco Animal Supplies Inc., (PETC) PetSmart’s main competitor, now offers to give $5 back to owners for every $100 they spend under its Pals Rewards loyalty program.
“In America, you have to push harder to get people to spend,” Euromonitor’s Linthicum said. “There are similar factors in Europe as well.”
Smaller Pack Sizes
To cater to frugal consumers, some pet-food producers have borrowed tactics from human food-makers like Kraft Foods Inc., (KFT) reducing pack sizes to minimize the impact of rising ingredient costs, according to London-based Mintel. Prices for dog and cat food have increased nearly 10 percent since 2006, excluding currency fluctuations and inflation, Linthicum said. Americans’ disposable income has declined in each of the past five months.
Closely held Mars leads the $71.8 billion global pet food market with a 24.8 percent share, according to Euromonitor, followed by Purina maker Nestle SA, (NESN) with 23.9 percent. Nestle’s pet-care unit had organic sales growth of 4.3 percent last year, the slowest of the Swiss company’s five product groups.
Suppliers of pet services are also doling out deals. Leo Sanders, the owner of a grooming and boarding business in Corning, New York, offers one free day of pet daycare for customers purchasing a full week. Dogs under Sanders’ care romp around five acres of outdoor play space and relax to the strains of classical music.
“Our industry is not recession-proof -- we’re recession flexible,” Sanders said. “People will still spend, but instead of frivolous spending on squeakers and rawhide bones, now they are reading labels and making sure it’s a quality product. And they’re asking for discounts more.”
Sanders, whose pet bulldog has its own Facebook page, said services like day care, boarding and grooming are now 75 percent of his total revenue, compared with several years ago when the majority of sales came from food, dog collars and apparel.
“Customers are going away from some of the pricier accessories and more to the services you can provide,” he said. “They are more willing to purchase a spa treatment than a leather collar studded with Swarovski crystals.”
Joanne Mahon, managing director of Diamond Dogs in the U.K., supplies just those collars to luxury department stores such as London-based Harrods Ltd. and pet boutiques in Manhattan and Laguna Beach, California, whose customers include Jennifer Lopez and actress Jessica Alba.
Sales of Mahon’s items, which include a Swarovski-laden collar and leash pairing for $1,135, fell as much as 25 percent last year, she said in an interview conducted over the din of 10 new Saluki puppies. Buyers in Asia have helped pick up the slack, she said.
“The saving grace for pet products is emerging markets,” Euromonitor’s Linthicum said.
Mahon said some customers save all year to buy her products, which include bespoke beds that start at $3,100. One- in-six pet owners has cut back on other household expenses so as not to skimp on pets, Mintel has found.
Tighter household budgets have also had a “sobering effect” on pricey pet apparel, according to Joan Volpe, managing coordinator at the Center for Professional Studies at New York’s Fashion Institute of Technology. FIT sponsors a pet apparel fashion show, where this year 14 dogs will model nearly 30 outfits, from casual sportswear to evening ensembles.
“There has been a turn to practicality,” Volpe said by e- mail. “The seemingly frivolous items of just a few years ago like net tutus are no longer in demand.”
Pet Food Spending
Food, which makes up the biggest slice of pet expenditures, is the last thing that owners skimp on, according to Packaged Facts analyst David Lummis., who is based in New Orleans. A 2007 recall, when tainted ingredients were found in dozens of brands of Chinese-made pet food, sent panicked owners flocking to more- expensive suppliers. U.S. sales of pet food should reach $20.8 billion by 2016, up from $18.1 billion, Mintel estimates.
Andre Marin, a recruiter based in Arlington, Virginia, hasn’t changed the brand of dog food he feeds his mutt Rupert, who is sensitive to other foods, he said in an interview. He doesn’t bother with fancy collars or sweaters, though.
“Rupert is part Huskie,” Marin said. “These are dog’s dogs -- they chase deer. They’re not into the sweater thing.”
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