The writing is on the wall. Online pet product sales are here to stay, and they will almost certainly continue stealing market share from brick-and-mortar stores. But will the competitive threat from online outlets overwhelm and ultimately sink the traditional pet stores that have long been the backbone of the pet care industry? It all depends on how well they can leverage their own competitive strengths to respond to those of their counterparts in cyberspace.
While online sales still represent a relatively modest portion of the overall pet care market—most industry experts estimate that they account for about five percent of pet product sales—they are expected to grow to comprise 20 percent or more of the market within the next several years. That could potentially spell big trouble for pet specialty stores, which are already battling competition from other retail channels such as food, drug and mass.
Among those top companies, says Nelson, are Amazon, PetSmart.com and Petco.com, as well as web-only pet specialty retailers like Chewy.com and PetFlow.com.
Interestingly, despite their success in the brick-and-mortar world, PetSmart and Petco have been somewhat behind the curve when it comes to capturing a share of online pet product sales. According to IBISWorld, a New York-based global market research firm, PetSmart earned an estimated $45.1 million through online sales in 2014, compared to Petco’s estimated $76 million during the same period.
Both companies’ online divisions performed significantly below some of the other major Internet players. For example, IBISWorld estimates that Rhinelander, Wis.-based Foster & Smith, Inc.—which operates several pet product retail websites, including DrsFosterSmith.com—earned approximately $222.8 million on the web in 2014. Meanwhile, Pompano Beach, Fla.-based PetMed Express Inc.—which also operates several retail websites, including 1800PetMeds.com—reported $184.4 million in online sales. While it should be noted that prescription medications account for a significant portion of both companies’ online sales (PetMed Express reports that these products represented about 44 percent of sales in FY2014), they still outpaced Petco and PetSmart even without accounting for that segment.
Tired of playing second fiddle to other Internet players, last year, the big-box pet specialty retailers set out to change that dynamic with strategic acquisitions. Petco bought Foster & Smith, and PetSmart gobbled up Plymouth Meeting, Pa.-based online retailer Pet360 (which operates several retail websites, including PetFoodDirect.com) for a reported $130 million. These moves are obviously indicative of the importance that both pet specialty superstores place on the future of online pet product sales.
Having an Internet presence is particularly important, as the Millennial generation has become a force in consumer spending. “Millennials are now the largest pet-owning population, and they are a generation that has grown up on the Internet, so the trend [toward online shopping] is just going to grow,” says Maria Lange, senior product manager for GfK, a New York-based market-research firm that specializes in the pet specialty channel.
Of course, it is not just the big-box pet specialty retailers that need to be mindful of the growing impact of online sales. Small, independent pet specialty stores are also subject to encroachment from cyberspace; and what makes this form of competition particularly dangerous is that, unlike more traditional competitors, online retailers often have access to brands that were—and often still profess to be—exclusive to the independent channel.
“[Manufacturers are] looking at how they can maintain strong growth rates, but for some of them, that growth has slowed down a bit, so they’re looking for alternative channels,” says Korngiebel. “It is opening up a lot of gray areas in what it means to be exclusive to the pet specialty channel, and, in some cases, what makes independent pet stores different [in terms of product selection] is starting to go away.
Puntillo goes on to note that if a supplier fails to enforce its MAP policy, it is not immediately grounds for removing that brand from Mud Bay’s stores. However, “If keeping our pricing comparable means bringing our margins down too low, it becomes harder and harder to justify shelf space for those items or the introduction of new items within that brand,” he says.
While pricing is often a big competitive advantage for online retailers, it is not their only weapon in stealing share from brick-and-mortar pet stores. In fact, Vito M. Mileo, brand- and vendor-relations manager for PetFlow.com, a New York-based online pet product retailer, says that pricing is not even his company’s biggest selling point for pet owners. “We are very competitively priced, but we’re not looking to be the low-cost provider online—it has never been a priority for us,” he says.
While the ability to offer a broader and deeper selection of products is a big advantage for online retailers, which often operate out of large warehouses or have suppliers drop-ship orders to customers, brick-and-mortar stores can approximate this breadth and depth by working closely with their vendor partners—particularly the pet specialty distributors that focus on servicing independent retailers.
Mud Bay is a great example of how retailers can extend their product selection beyond what can reasonably be stocked in a brick-and-mortar store. While the chain typically carries anywhere from 3,500 to 4,200 SKUs in its outlets, it also offers customers a robust selection of about 2,500 special-order items. “These are items—mostly consumables—that are extensions of product lines that we are already carrying in the store, but maybe it’s a particular size or variety that we don’t regularly stock,” says Puntillo, noting that the chain’s special-order items are limited to products that are sold through one of its distributor partners. And given the fact that these suppliers often make deliveries to Mud Bay stores up to three times a week, it is not usually difficult to fill special orders expeditiously.
However, Nelson says that stealing a page out of online retailers’ playbook shouldn’t begin and end with special orders. “Leverage the power of location as a competitive advantage, but also do as the online retailers do, and track your customers’ behavior to make better decisions about products and inventory,” he says.
Korngiebel agrees that this type of data collection is essential for competing in the digital age, but notes that it is not a particular strength of independent pet retailers. “They should be collecting more data about their customers and their purchasing habits, and they should be more creative in how they use that data,” she says, pointing to category management and customer engagement as areas in which such information can be an invaluable resource.