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How Long Will Pet Retailers Remain in the Doghouse?
Shares of Chewy and Petco are down by around 49% and 64%, respectively, in 2023 as pet adoptions have declined and the pet category has proven to be less resistant to macroeconomic pressures than predicted.
“Whether economies are up or down, the pet market tends to be pretty recession-proof,” Petco CEO and Chairman Ron Coughlin told Fox Business in March 2022.
Coughlin’s comments came as the pandemic drove a surge in pet adoptions and the “humanization” of pets, which has seen owners increasingly treat their “fur-babies” similar to or even better than their children when it comes to spending. However, with inflation on pet food in the early summer soaring two times higher than human “food at home” coupled with economic pressures, pet spending has surprisingly slowed.
“In times of recession or economic stress, first you trade down on your own food, then your kid’s food and then your dog’s food. That’s what history would suggest,” Max Gumport, a U.S. packaged foods analyst at BNP Paribas, told the Wall Street Journal. “This time is appearing to be different.”
A 16% decline in pet adoptions this year is also weighing on spending, according to Chewy CEO Sumit Singh. He said last week on the retailer’s third-quarter analyst call, “Right now, pet household formation is muted, and it’s muted because of the high kind of pressures that consumers are seeing from every direction.”
Petco’s third-quarter results underperformed expectations as pressures on discretionary spending continued from the second quarter. In response, Petco recently added the pet category’s “largest nationally available value brands” in food and treats for dogs and cats — including Friskies, Pedigree, Purina 1, Beneful, Temptations, and Milkbone — to help drive traffic.
“While we remain committed to being a leader in the still rapidly growing premium, super premium, and fresh frozen categories, this is about choice. Bringing as many pets as possible into our health and wellness ecosystem,” Coughlin said on Petco’s third-quarter analyst call. “Whether chosen because of price sensitivity, brand preference, a picky eater, or a combination of these, we believe in the current environment it’s important that no pet is excluded.”
He also said Petco has taken “targeted pricing actions to address competitive gaps in key traffic driving brands” that helped the chain return to customer growth in the quarter.
Chewy reported that its active customer count slipped for the second straight quarter and lowered its revenue outlook for the year, but Singh still believes Chewy is set to gain share in the current environment. Chewy’s sales in Q3 grew 8% against industry growth in the low single digits, helped by strong demand for its autoship subscription program and strong pricing across non-discretionary food and healthcare items.
Singh said, “While consumer spending behavior remains opportunistic in the current environment, our results illustrate that Chewy’s value proposition continues to resonate loudly and will prevail when consumer demand and industry inputs improve.”
Discussion Questions
What does the pet category’s sales slowdown reveal about the discretionary spending pressures facing the category and the opportunity for premium pet food and care? Do you applaud Petco’s move to bring in more value-driven brands, and do you think Chewy is set to gain market share?
Poll
Loading …BrainTrust
Ken Morris
Managing Partner Cambridge Retail Advisors
Gene Detroyer
Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
The pet category may not be growing as fast as it was, but it’s hardly in the doldrums. In its latest quarter, Chewy’s sales grew by 8.2%; on a two-year basis, sales are up by 23.8%. Petco’s sales are a bit more sluggish but are still up 3.5% on a two-year basis.
If the share prices are down, it is because investors were too optimistic in their assumptions. It was always fairly obvious that spending growth would not continue on a steep upward trajectory especially as the pandemic-induced pet boom faded.
We have also seen more churn in where people are shopping for pet products this year, with some migration to price-focused retailers such as Walmart. In this basis, it is sensible for Petco to ensure it has a value tier to its offering.
“In times of recession or economic stress, first you trade down on your own food, then your kid’s food, and then your dog’s food.” I suspect that is still true if one is a traditional pet owner.
However, the spectacular growth in pet ownership during the pandemic was induced by reasons other than that of pre-pandemic owners. For whatever reasons, the pandemic-induced owners now find the pet is no longer primary to the individual’s or family’s lifestyle and not part of the family. Pets are being returned to shelters in record bulging numbers.
Perhaps the softness in the business is a result of owners not being fully committed.
These major pet brands are spot-on in bringing value into the mix. Today, pets are family members. They are increasingly more central to our lives and will remain so.
As for the overall pet category, I think we are seeing more of a market adjustment after the pet-crazy pandemic. There is clearly increased competition now, and the expected downward slope of adoptions after the pandemic is panning out as predicted.
But most other retail categories would love to be in the pet category’s shoes—or paws. Some pet owners might switch to less expensive options, just as they’ve been doing for their own grocery and restaurant shopping. But that doesn’t mean they’ll stop pampering their pets as much as they can. That’s why I believe that this category will snap back with steady growth.
I think Petco is taking the right approach bringing in more value brands to the assortment. People still like their pets and certainly will feed them. Will they feed them fresh ground refrigerated food for $10.00 a day, or will they switch to discount dry food for .25 a day?
The stock price of Chewy and Petco was artificially inflated by the pandemic-era surge in demand. Many families are back in the office or back at school, and finding that pets require a commitment they are not prepared to make. Inflationary pressures haven’t helped, either, but I expect the demand for premium pet products to rebound as other household costs (gas and food) continue to ease.
This isn’t the only reason for slowdowns in the pet market, but the many people who rushed to adopt pets during lockdowns but are now giving up their pets are certainly a big part of the issue. Shelters here in SoCal are bursting at the seams, and my NextDoor feed is full of people looking to “rehome” their pandemic companions. Add in the dramatic price increases, and you have a recipe for sales declines combined with a growth in value brands. I expect things will level off soon, but it may still be a few more quarters.
People turning their pandemic adopted pets in to the shelter generates a lot of sad news however that is the exception not the rule. While we may not see the growth investors are accustomed to here, the category will remain strong.
As a recent first time dog owner (only waited 78 years), I can resonate with the family member model. Having said that, I believe the major players are experiencing the same channel shift as non-pet owners have experienced during the run up of grocery prices created by inflation. While the shift to Walmart has been noted, dog food presence in the value channel cannot be understated. Consided the Pedigree SKUs in Dollar General alone. Wall Street focuses on expectations, while Main Street focuses on reality. No “Chicken Little” panic necessary at this time.
One shouldn’t make too much out of the so-called “slow down” since it follows on the heels of an artificial spike in pet adoption and overindulgence. This tells us a lot more about feckless pet ownership than it does about commercial economics. As to Petco, the old “Good, better, best” pricing and merchandising rule applies to the pet category as well. Lots of inflation-strained households have pets. As to Chewy, who knows? Many of its target customers are probably turning those pandemic puppies over to shelters now that they are to busy to take care of them.
I have to wonder if the decline in pet adoptions is a true decline or is it returning to normal after the spike during covid? Judging from the attendance at SuperZoo (North America’s largest marketplace for the pet industry) the pet category is still growing, especially among independents that specialize in specific areas.
It’s interesting that the article states people trade down on their own food, then their kid’s food, and then their dog’s food. Pets really are family members!
Perhaps the pet category is no longer the cat’s meow, but it is still a growth driver. For pet parents, they will continue to purchase food, toys, treats, grooming aids, and other products to keep their pet healthy and happy.
Assortment, innovation, value, and experience will continue to be the category drivers. Having recently conducted research in collaboration with Food Industry Association (fmi.org) to review trends, opportunities, and challenges that exist specifically across the grocery channel, I remain quite optimistic.
Having overseen the pet category as a Divisional Merchandise Manager at a prominent retailer, I know that Pets are indeed a more resilient category than most. The COVID pandemic saw an unnatural spurt in growth in the category that has now waned in a way that is putting pressure on year-over-year sales comparisons. At the same time, Pets is in many cases a part of the weekly Grocery shopping list, and thus Grocers and Mass Merchants are likely picking up some of that volume as consumers seek value during inflationary times.
As inflation begins to wane, Pet Specialty may begin to benefit as will online Pet Specialty retailers like Chewy. I can think of some other consumer categories that would love to have the challenges of the Pets category, such as Consumer Electronics and other durable goods product categories. Pets will level out its sales performance in due course, and remain a large and viable category moving forward.
The pet supply and pet food categories are long term growth categories. What appears to be happening is a temporary adjustment period as more people go back to work and the negative effects of inflation. This seems to be a temporary adjustment as consumer readjust after pandemic and work from home highs.
Pet retailers and manufacturers need to adapt to the economic realities of their pet parent customers, so I applaud Petco for ensuring that all customers have a trusted source for pet food regardless of budget.
Owning a pet is now part of the process of household formation in the US. Furthermore, the number of people living alone remains high which means that a reliable loving furry companion will be a need in the future. The opportunities in the future for these categories remain bright.
Pet food prices have indeed surged faster than inflation overall. This article from NielsenIQ digs into several driving forces and behavioral changes by pet owners:
https://nielseniq.com/global/en/insights/education/2023/pet-food-trends-2023/
The decline in share prices at major pet specialty retailers seems to reflect dashed investor hopes for another leap forward in earnings. But the business seems healthy overall, even if new pet adoptions have slowed since people returned to their offices.
As happy owners of a new puppy (#7 spanning our lives), my mate and I have certainly noticed both the unit-cost increases on mainstream food brands and the proliferation of higher-end refrigerated brands that have raised the price point ceiling.
Against that price backdrop, it is important for pet specialty retailers not to ignore the value segment of their assortments.
Demand is simply returning to the pre-pandemic levels, reverting to the mean. In that environment, players in the pet category must focus on creating and delivering personalized value aimed at both the pet and their human companions while scanning their supply chain and operations for cost-reduction opportunities.
As much as people love their pets, current inflation and economic concerns have many consumers curbing their discretionary spending. Unfortunately for pets, this can mean fewer new toys or treats – and sometimes a change in food brands to help fit within their owner’s budgets. Petco’s move to bring in more value-driven brands acknowledges that they’re watching the marketplace and understand the constraints their customers are feeling. It’s a clever move to diversify their product offering in a way that helps to meet their consumers how they’re trying to shop: often with less money but no less love for their pets. No owner wants to cut corners when spoiling their pet(s) just to stay within budget. This move will help them find a happy middle.
The difference between Petco and Chewy, and where the latter has a competitive advantage, is that many pet owners think of Chewy as the convenient option. It’s a bit like the Amazon of pet supplies. If Chewy offers the right deals, combined with the convenience of shopping through their platform, there’s a big opportunity for them to gain significant market share within pet owners who prefer to shop online.