Ron Couglin, CEO, Petco (and friend) – Photos: Petco
Petco CEO isn’t losing sleep over inflation
Americans may be concerned about rising food and fuel prices, but Petco Health + Wellness Company CEO Ron Coughlin isn’t expecting that worry to have a negative effect on his company’s business.
Mr. Coughlin, speaking yesterday at the company’s first investor day since returning to the public market last year, said the market for pet products and services is “resilient” in the face of inflation and economic downturns.
Petco’s CEO, CNBC reports, pointed to a number of factors that will likely serve to cushion the impact should changes in consumer purchasing behavior take place in other categories. Americans in large numbers during the pandemic went out and got themselves pets, and care for these furry and feathered family members with product purchases and veterinary care.
Spending on pets is expected to grow by seven percent over the next three years, and companies such as Petco are benefiting from double-digit gains in premium product sales.
Jungle Scout’s Q1 2022 Consumer Trends Report shows pet supplies topping the list of categories experiencing sales gains. Eighteen percent of those surveyed said they are spending more on the category this quarter versus last. Eleven percent are spending less.
To put the numbers in context, the survey found 38 percent of consumers are spending less overall this quarter as a result of rising prices.
Petco believes that it has a number of competitive strengths that will help it differentiate from a long list of rivals that includes Amazon.com, Chewy, PetSmart and Walmart. The chain relies heavily on its micro distribution network (aka stores) that provide it with more than 1,400 fulfillment points.
Stores fill over 83 percent of all online orders placed on petco.com using ship-from-store, in-store/curbside pickup and same-day delivery.
Petco is also testing new formats including a “Small Town Rural” store, a Reddy boutique featuring the chain’s popular private label and store-within-a-store sections at Lowe’s.
The retailer is also expanding its veterinary services with plans to have pet hospitals on-premises in 900 stores.
Further, Petco is looking to bundle its pet products, grooming services and veterinary care into subscription revenues with Vital Care, a program that offers unlimited vet visits plus discounts on food and grooming for $19.99 a month.
- Petco Health + Wellness Company, Inc. Announces Long-Term Strategic Priorities as it Shapes the Future of Pet Health and Wellness – Petco Health + Wellness Company, Inc.
- Petco CEO says company’s growth is inflation-proof, as Americans splurge on pets and bigger homes – CNBC
- Consumer Trends Report Q1 2022 – Jungle Scout
- Do micro distribution points (AKA stores) give Petco an edge over Chewy and Amazon? – RetailWire
- Will Americans go to Lowe’s to buy dog food? – RetailWire
- Petco’s new boutique concept is a private label experience – RetailWire
- Is Petco really a health and wellness retailer? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Do you agree that pet products are highly resistant to inflation and an economic downturn? Is Petco taking the right steps to differentiate itself from its competitors?
Poll
Loading …BrainTrust
Dr. Stephen Needel
Managing Partner, Advanced Simulations
Ken Morris
Managing Partner Cambridge Retail Advisors
Yes, this category is a highly resilient category and, while inflation may curb some spending, overall the category will remain healthy. Petco is well positioned and the steps they’re taking make good sense. The move to rural stores is especially interesting since this has been a stronghold for Tractor Supply stores.
Exactly!
Pet foods have always been inflation/economic insensitive products. We can deny ourselves something as “too expensive,” but my dogs eat well and get their treats. So no worries there.
Yes, I agree. I am completely price insensitive. The BIGGER issue is, why are there days when the only place you can find cat food is Chewy? And Petco has even been out of my brand of kitty litter.
So let’s get back to root cause. The supply chain is STILL, two years later, messed up and allows for the kind of inflation and out-of-stocks we are seeing across all categories. Ironically private label, which solves some of the problem for grocery shoppers is not useful in the pet food space. Pets are generally picky. But regardless, there have been days when I’ve had to give a bunch of food to a friend because she could find none. In the small town of Miami.
To my mind, everything is secondary to that. What the heck is it going to take to fix our supply chains?
Petco is not afraid to test several different formats to see what works for them – as we all know in retail, one size does not fit all.
I am most curious to see the Lowe’s collaboration and the rural format which I am guessing will compete with farm and ranch stores.
Yes, the pet industry is one of the more resilient in inflationary times. Pets are an emotional expenditure and no one in his right mind will stop feeding an existing pet because of higher prices. Petco understands this business and will make the right decisions. There is room for competition in this segment.
It sounds like Petco is introducing some really great strategies to reach pet owners. The bundling of services for a monthly subscription I think will be a hit. Even in challenging times, pet owners are going to spend on their pets. I also believe that some customers will switch to less expensive options when household budgets are stretched, They’ll look for private label food may be more inclined to skip vet and grooming appointments. Petco is well positioned with their assortments and discounted services to continue to be their customers choice, even when they look for ways to save some money.
Spending on pets and children has always withstood economic downturns. U.S. census data shows that spending on our pets still grew 29 percent during the 2001 recession and 17 percent during the 2008 recession. During hard times, people will deprive themselves of almost anything before they deprive their pets.
While pet products, in general, are resistant to inflation, that doesn’t mean that industry players can simply go about business as usual. They’ll have to invest in continuously improving their customer experience to ensure consumers remain loyal during any economic impacts. Thankfully, Petco is making those investments.
Pets are part of people’s families. People may buy less expensive products for them, but they will continue to buy them. Like many supermarkets and other retailers have discovered, the sales of private label Petco products will increase. The steps Petco is taking will further help differentiate them from others who sell similar products.
Many pet owners care more about their pets than the cost associated with making them happy. I’ve always said that if I died and came back to earth, I’d like to be a pet in my mother’s house. We always joked that she treated her dogs better than her children! Seriously, pet owners see their pets as their family. While everyone is price sensitive to a degree, it’s not the same when you’re buying something for your family. That doesn’t mean pet owners won’t look for discounts and deals. They will. But they won’t look at the price of making their pet happy like they would a price of a new pair of shoes.
I remember a survey a long time ago that found women spend more time choosing a gift for their pet than they do for their spouse or significant other. If that’s still the case, Petco will be just fine.
The pet industry is insulated much in the same way as the food industry, but nothing is inflation proof. When the family is cutting back Fido will be well fed but he may not enjoy all the treats and accessories he enjoyed pre-recession. But he is still part of the family and Petco is positioned to help pet parents with whatever they need.
As a dog dad of three, I’m guilty of spending whatever is necessary on my fur babies, and most pet owners likely are as well. Personal matters aside, pet products are typically pretty margin rich as customers are willing to pay for more than basics. This makes them more inflation resistant. Petco is doing some amazing things to diversify itself while also reaping benefits of increased pet ownership from the pandemic. The partnership with Lowe’s is a model they can take to other retail formats, like a Kohl’s or Macy’s that continues to test new formats.
Yes, people will keep spending their money on their pets even if they are bargain hunting in the grocery store or cutting back on discretionary driving; plenty of historical data supports this.
But pet retailers like Petco, PetSmart and others are subject to inflationary pressures on their margins, too, whether from payrolls, inventory costs or supply chain expenses. (And, working backward, so are their suppliers.) Will shoppers start to absorb “hidden inflation” by paying the same price for 10 pounds instead of 11 pounds of dog food? This wouldn’t surprise me.
I believe Petco is creating a unique experience with its laser focus on pet wellness and by leveraging micro-fulfillment centers (stores). I visited a store on Sunday to help alleviate the “zoomies” my new puppy is having. The staff was knowledgeable and the selection of products was wide. Crisis averted. That was an outstanding customer moment and I will be a loyal customer going forward.
At $19.99 a month for a bundle of products and services, its Vital Care subscription will have room to grow with inflation. Amazon pushed up its Prime price recently. These days, it’s to be expected. As far as inflation’s impact on pet costs, I compare it with its effect on feeding kids. With kids, you can save by switching mac and cheese brands and maybe get away with it. With pets, not so much. Pets are pampered children with basically unchangeable diets.
That infamous Bloomberg article on how to mitigate inflation may have suggested curtailing pet health care as one of the options, but the reality is that owners are extremely reluctant to do anything that worsens the quality of life of their pets. As such, the pet sector is less impacted by inflation than other categories. Petco is in a good postion, but it should not underestimate the power of Chewy, which has a very loyal and growing customer base. The Petco point of differentiation isn’t necessarily using stores as distribution centers – because a lot of pet products are bought regularly which means they are ideal for subscriptions and are not impulse buys – but by using stores to deliver services and advice which cannot be easily replicated online.
That Bloomberg article struck me as incredibly tone deaf to pet owners. Shockingly out of touch, really.
Agreed! It was appalling. Basically, let your pet die to save money. I’m surprised they didn’t suggest selling organs to fund grocery purchases!
Pet wellness is a brilliant positioning. As an owner you do not scrimp and save on your pet’s health. Likewise, I am skeptical about those surveyed that spend less on pet care or food, etc. because of inflation. What if you’re feeding your dog or cat less often to get more meals out of your Science Diet product? Petco is doing everything right. From the new logo/subheading to store design, merchandising and website experience. That’s why the CEO isn’t worried, because he’s got brilliant, invested employees that love being a part of an awesome culture in a high growth category.
Pet supply is in a solid strategic place. While COVID-19 had a different effect on every retail vertical, it remains a fact that the pet parent craze brought on by more remote workers is a trend that will last for a long-time. People with new puppies in 2020 and 2021 will still have a dog 10 to 15 years from now and will still need to buy them food. On top of that, people love their dogs and I must personally admit that I am quite the inelastic shopper when it comes to giving my sweet cavapoo a new toy or treat. Petco, however, is still not immune to inflation. PetSmart, Chewy’s, Target, Walmart and Amazon all offer alternatives – not to mention the plethora of small, local pet stores which offer fantastic customer experiences. Petco still would benefit from following all of the right best practices and analytics – if not, they may continue to grow sales, but lose share in the end. A pet parent is a very loyal shopper if you offer them the right price on the right products – but they will definitely shift once they realize that saving $2 on a bag of dog food over the next 10 years can add up to some serious cash.
I feel that pet products won’t be affected much by inflationary pressures. Pets helped people to cope with the pandemic stress. They have a special place and immeasurable value in their owner’s life. Pets are given equal priority (in fact, prioritized more than everything else). Therefore pet owners are not going to compromise on the quality of food or supplements for their pets and will purchase those products irrespective of price hikes or discounts.
I also think that Petco is taking the right steps to differentiate itself from competitors. To serve their niche better, Petco would need to understand the changing needs of their customers and grow vertically within that niche market. However they would have to ensure that they are not overdoing it, or else the initiative might collapse.
I worked in the pet space for years. It’s actually not recession proof, but it is recession resistant. People will trade down brands and products and reduce spending on highly sticky services like grooming and boarding, but absolutely won’t stop spending on their pets.
I think the subscription service is a great idea. I also agree that the pet industry is very resilient. I recently read that the average age of a pet owner is 43 years. By then, most people have a steady career, so I’m sure people will do what they can to keep their pets happy. However, I do think they will experience some revenue decline. With inflation and gas prices hitting everyone, there will be choices made for many, if not most people, to cut back.
My daughter’s dog has a sensitive stomach, and she has a good income, so she will not be switching to a less expensive food. But my niece’s dog does not have a sensitive stomach. She has a couple jobs, but she lives pay check to pay check and with gas prices costing her an extra $20/week and food costing her another $20/week, she says she simply has to cut back. She says no new dog toys for her pup and she’s just made the switch to cheap dog food for her dog. There is a huge segment of the population in her situation.