Retailers battle for pet food market share

The next time you need pet food, retailers know there is a good chance you’ll turn to your iPhone or laptop instead of grabbing your car keys. This has led big box retailers like Wal-Mart Stores Inc. and PetSmart to beef up their websites and online product offerings to take advantage.

Pet food is big business. Combined with pet services, this burgeoning industry rakes in an estimated $52 billion annually, according to the American Pet Products Association.

Pet consumables account for about half of the sector’s total revenue and dry dog food alone garnered $8 billion in sales last year, according to The Pet Food Institute.

One growing segment is online pet food sales which totaled $666 million in 2011, according to a report by IBISWorld. The food and treat category comprised roughly 33% of the $2 billion online pet-related sales in 2011.

The report indicates retailers see better profits in online sales which have been possible in part by innovative improvements in the supply chain and lower overhead costs.

According to IBISWorld analyst Kevin Culbert, premium pet food and supplies have boosted profitability because they typically have higher markups.

“Niche players like 1-800-PetMeds and discount retailers like Wal-Mart have rapidly gained market share within the industry,” Culbert noted in the report.

So it comes as no surprise Wal-Mart wants a larger slice of the pie.

Earlier this month Wal-Mart Stores Inc. unveiled its first premium quality private label dry dog food under the brand Pure Balance. It’s an effort give shoppers another option for a higher quality food at lower prices than major brands with similar ingredients.

“Wal-Mart customers, including me, consider our dogs family members so when it comes to their food we want the very best for them,” said Jody Pinson, vice president of pets at Wal-Mart. “Our customers told us they wanted to be able to feed their dogs a dry food made with pure ingredients without having to make a special trip to the pet store. We listened and are excited to offer Pure Balance, an ultra premium dog food, at a price our customers can afford.”

Offering it in the store is not enough as Wal-Mart faces increased competition from online sites of virtual stores like PetMeds and PetFlow. Specialty retailers such as Petco and PetSmart also run active online businesses. PetSmart recently revamped its website and offers 8,000 products which are not found in its stores.

IBISWorld estimates virtual retailers like PetMeds Express, the parent company of 1800PetMeds.com, garner the biggest online market share in the industry. PetMeds Express has about 8.3% of the total share. The specialty retailer offers about 1,200 products online and through direct mail — 71% of its sales are derived via the Internet.

Consumers also favor Petco over PetSmart and Wal-Mart.com when ordering pet food and other supplies, according to IBISWorld.

Petco has an estimated 1.7% share of the online market and Wal-Mart has about 1%, according to the report. PetSmart ranks just below Wal-Mart with 0.9% as of 2011. When consumers think of Wal-Mart shopping, online options are not the first thing that comes to mind for many.

Consumers who earn more than $70,000 per year represent the largest market segment for online pet supply retailers, according to Culbert’s report. This income demographic is not generally deemed Wal-Mart’s core customer, but the retailer is still vying to get this business, and with good reason,.

In 2011, IBISWorld estimates that this income segment accounts for 53% of total industry revenue. According to the Bureau of Labor Statistics, on average, these consumers spend nearly $700 a year on pets and supplies. Because they have higher disposable incomes, they can buy more pets, supplies, food and medication.

So it’s no surprise Wal-Mart offers pet food and supplies online. Consumers can order the new premium dog food online along with dozens of other brands and ask for (site-to-store) delivery and pay no shipping costs. Orders valued above $45 can be shipped directly to the consumer with no additional charges.

Wal-Mart does not break-out its online pet sales for the public, but the retailer clearly knows a growing number of consumers want that option, which is why there are signs posted throughout the pet food section of brick and mortar stores that read “free site-to-store delivery”.

Wal-Mart also goes head-to-head with other specialty stores like Phoenix-based PetSmart. That posted comparable-store sales up 7% in the recent quarter, driven by a 2.9% growth in comparable transactions. The company’s top line increased 9% year over year to $1.619. million. Net profits rose 31% from the prior year, according to the PetSmart’s second quarter results released Aug. 16.

PetSmart said during its recent earnings call more shoppers are purchasing online which prompted the retailer to revamp its website that added 3,500 products this year, which are not sold in its stores.

Another competitor nipping away at market share is New York-based PetFlow.com. The online company says it shipped more than $2.5 million to online customers in July and is on track to post annual sales of $30 million this year. The company is just two years old and attributes its success to a subscription business model that automatically delivers the pet food to a customer’s front door.

“Since our inception a little more than two years ago, PetFlow.com has experienced extreme growth, but the statistic we’re most proud of is the very high return rate of our pet-owning customers,” said Alex Zhardanovsky, co-founder of PetFlow.com. “The company’s growth demonstrates that our customers see their pet as a true family member and they profoundly prefer PetFlow.com’s subscription approach to purchasing pet food and supplies when compared to the traditional, big box retailer approach to shopping.”

PetFlow.com says it stocks more than 100 premium brands, more than three times the amount of its traditional retail competitors. The company also actively uses social media channels to create an ongoing dialog with its customers, introduce new products and the engage the “Pet Parent” demographic.

PetFlow.com’s founders Zhardanovky and Joe Speiser, both former online advertising entrepreneurs, have helped engineer the company’s popularity by combining a unique retail concept with a keen understanding of how to create a meaningful dialog with customers through Facebook and other social media channels.

PetFlow.com claims more than 530,000 active fans on Facebook.