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Barking Up the Right Tree

July 16, 2009
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There might be no such thing as a truly “recession-proof” category. But pet food comes pretty close.

Rockville, Md.-based Packaged Facts estimates that U.S. sales of pet food across formats totaled nearly $17 billion in 2008, a 5.5 percent increase over the previous year. In fact, the company notes, the pet food market expanded 20.9 percent between 2004 and 2009 - a compound annual growth rate (CAGR) of 4.9 percent.

“Rather than dampening sales,” Packaged Facts explains in a January 2009 report, “the spring 2007 [pet food] recalls actually boosted sales a bit, by causing consumers to convert to higher-priced foods perceived to be safer, a trend felt in both mass market and pet specialty channels. This trend continued into 2008, albeit mitigated somewhat by high gas prices and the shaky U.S. economy.”

Though still committed to choosing better-quality foods for their pets, many of which have become “members of the family,” the report continues, some cash-strapped consumers switched to lower-priced private label alternatives when the recession kicked into high gear late last year, creating a spike in store brand pet food sales.

“Consumers are rethinking their budgets,” agrees Tina Garcia, exclusive brand marketing director at Franklin, Tenn.-based Mars Petcare U.S. “Even though they’re still choosing to feed their pets [quality foods] ... they’re looking for options that represent a better value.” Enter private label.

Figures supplied by Chicago-based Information Resources Inc. (IRI) reveal that, although dollar sales of dry dog food in U.S. food, drug and mass merchandise outlets (excluding Walmart) increased 14.8 percent over the 52 weeks ending April 19, private label sales during the same period jumped 29.9 percent. And while overall sales of wet dog food edged up 5.9 percent, store brand sales shot up a whopping 48 percent. A similar scenario played out on the cat food side of the segment where total dry food sales expanded 8.5 percent compared to a 16.1 percent gain for private label, and total wet food sales increased 6.0 percent vs. 34.7 percent for private label.

Although the economy clearly acted as the catalyst for private label’s strong performance over the past several months, industry insiders say store brands owe their success to more than just low prices.

“Private label [pet food] has come a long way,” says Colette Dahl, private label manager/marketing specialist at Springville, Utah-based HBH Pet Products. Especially since the advent of premium store brands, “The average consumer isn’t always even aware that a particular brand is a private label.”

Tedd Ellis, vice president of marketing and sales at Londonderry, N.H.-based Blue Seal Feed adds, “There’s also a better understanding on the part of consumers that what’s inside the private label product is often the same as what’s in the national brand.”

PL Share Remains Low

But according to data supplied by The Nielsen Co., New York, private label’s dollar share of pet food sales in food, drug and mass merchandise outlets, excluding Walmart, stood at only 9.2 percent at the end of 2008. Though that figure represents a gain of 1.3 share points over the same period a year earlier, it falls short of the 1.5-point gain registered by private label as a whole over the same 52 weeks and is less than half of store brands’ 23.4 percent dollar share across departments.

One explanation for private label’s underwhelming performance in the pet food category might lie in the dearth of promotional activity and new product introductions in recent months. According to reports, industry behemoth Mars Petcare shuttered seven plants acquired from the former Doane Pet Food Co. last year and plans to shut down three more this year, taking an estimated 750,000 tons of dry pet food capacity out of the system and creating an acute shortage of private label supply. As a result, most retailers held off on private label promotions, fearing supply wouldn’t be able to keep up with demand.

Other chains experienced significant disruptions in supply as they scrambled to find a new private label vendor. In the interim, regular buyers of the company’s store brand pet food were forced to choose another brand, with which they might have opted to stay even after the return of a private label alternative.

“We’ve never seen anything like this,” said one private label supplier, who wondered whether the shutdowns were actually an attempt by Mars to protect its national brand business from a perceived threat from private label when retail prices began to escalate at the same time the economy started to go south in 2008. Demand has become so strong, “We actually had to drop customers,” the vendor, who preferred to remain anonymous, adds. “We literally can’t make one more bag.”

The Shift to Premium Quality

With private label manufacturers so focused in recent months on simply meeting demand for existing items, new product development has taken a bit of a backseat, especially on the dry food side of category. But most suppliers were already on top of a long-term trend toward premium-quality pet foods.

While IRI figures confirm a slight shift from wet to dry food, which offers a lower cost per serving, manufacturers say many committed wet food users have upgraded to better-quality offerings - often on the private label side.

“In wet pet food,” reports William McKee, vice president of U.S. sales for Streetsville, Ontario-based Menu Foods, “we’re seeing a steep decline in [sales of ] traditional ‘ration-style’ products high in grain additives that were traditionally targeted at the ‘price only’ segment.”

Particularly in these difficult economic times, he continues, consumers remain very conscious of price, but they also want good value for their money, prompting the switch to store brands that offer better quality at a lower price than many national brands. The quest for value also is driving growth of variety packs, which typically offer a lower cost per unit, McKee adds.

Private label growth is especially strong in 3-ounce canned cat food and 3.5-ounce canned dog food, which serve as alternatives to national brand leaders Fancy Feast and Cesar, respectively. McKee adds that the smaller cans also tap into a growing trend toward more convenient single-serve products.

The high-end items have been so successful that both Menu Foods and Blue Seal Feeds recently began offering what they call “the next generation” of premium-quality private label wet dog food: “Trayed” meals similar to those offered by Cesar. According to McKee, the “crème de la crème” product fills a significant void in the wet dog food programs of many retailers, since trays already represent 17 percent of total wet dog food dollar sales, a figure that’s likely to continue to grow.

Blue Seal Feeds also introduced 3-ounce trayed cat food meals, similar to Fancy Feast Elegant Medleys, Ellis reports. He calls them “less icky” than traditional canned cat food.

It's All About the Ingredients

The shift toward better-quality pet foods also is reflected in rising demand for grain-free products, especially in the dog food segment.

“Most dog foods - and many treats - include a large amount of grains,” Dahl says. “They’re cheaper, so [manufacturers] can use less of the expensive ingredients that pets actually use and need.” But thanks in part to the 2007 recalls, “Consumers are learning a lot more about pet food ingredients ... and I think grain-free is going to become very popular.” She adds that HBH Pet Products recently introduced a grain-free treat with a comparatively low price point that makes it accessible to consumers typically unable to afford such healthy snacks.

Marie-Claude Dubuc, marketing and research and development manager at Saint-Hyacinth, Quebec-based Bio Biscuit, also reports continued interest in so-called “holistic” pet foods that contain multiple proteins, fruits and vegetables, and only clean carbs - no byproducts or cheap fillers.

But according to Ellis, the poorly defined holistic segment has evolved largely into natural and organic, which he estimates represents as much as 15 percent of total pet food dollar sales.

“Natural and organic pet food sales are way, way up,” he reports. “They’re really driving growth for the category as whole.”

However, Ellis continues, many well-known national brand manufacturers have introduced all-natural versions of their top-selling items, arousing some suspicion on the part of consumers, who wonder whether what’s inside the package is really any different (currently, there are no rules governing use of the term “natural”). As a result, retailers should be certain that any natural pet foods offered under their store brand meet consumer expectations for such a product.

For the same reasons more consumers are opting for organic and natural pet foods, Dahl says, many pet owners are looking for products that perform a specific function - strengthening joints, supporting healthy skin and coat, freshening breath, even preserving the owner’s lawn (by reducing the effects of urine damage).

Snacks represent another increasingly important part of the pet food category, notes a “Business Tip” from national brand leader Nestle Purina published on                                              RetailWire.com. “Snacks continue to drive margin and top-line growth with expandable consumption and impulse purchasing,” the company said. It also noted a trend toward “humanization,” with growing interest in fresher, more authentic human-type foods.

To meet demand for such products, McKee reports, Menu Foods introduced “humanized” flavors such as “Porterhouse Steak” and “Filet Mignon” to target some of the new branded flavors. He adds that a few retailers have even developed their own unique human-type varieties such as “Chicken Cacciatore,” “Barbecue Beef” and “Turkey & Dressing,” as well as some dessert flavors.

Commit to High-End Products

Despite the nation’s current economic woes, the private label segment definitely is trending up, McKee says. He advises retailers to “resist the temptation to introduce lower-quality or price-focused wet pet food products that do nothing to promote customer loyalty.”

Whether natural/organic, grain-free or function-specific, “I see premium store brands really growing,” Dahl agrees. “Those retailers that don’t already have a premium brand want one or are developing one.”

Unfortunately, Ellis says, many of the premium private label pet food programs already out there aren’t selling particularly well because retailers haven’t really committed to making them a success.

For example, a lot of retailers are just kind of “dabbling” in the natural segment - putting in a couple of SKUs that aren’t doing very well because they’re not given enough space, he explains.

“Retailers really have to get behind their premium programs and promote them because most consumers aren’t aware that such high-end products are even available in private label,” Ellis says, “so they’re certainly not going to seek them out on the shelf.”

Retailers also must make their private label visible, Dubuc continues.

“Use end caps, place the product beside the best sellers, give it as much space as possible on the shelves, make a nice display that will catch the eye of the consumer, put brochures beside the cash register, give out samples, etc.,” she says.

In sum, she says, treat your store brand like a national brand.

According to McKee, another key private label strategy is offering consistently lower prices versus comparable national brand products - even when they’re on sale. He also advocates a “brand-matching” strategy whereby the private label mimics the national brand target in every respect - container, package, format and flavor.

But what about innovation?

“There’s a fine line between staying relevant without going too far on innovation, which raises challenges with consumer credibility and awareness,” Garcia answers, although she identifies some opportunity for private label innovation in the more variety-driven snacks and treats segment.

But Dahl says retailers shouldn’t shy away from pet food innovation.

“If you have something that a national brand doesn’t, you have an advantage in that you’re not competing with a company that’s been making, say, dog biscuits for 100 years.” PLB

Sidebar: Pet Care Goes All-Natural

Thanks primarily to the trend toward “humanization,” sales of non-food pet care products continued to expand over the past 52 weeks, despite the poor economy.

According to figures provided by Chicago-based Information Resources Inc. (IRI), dollar sales of dog/cat needs in food, drug and mass merchandise outlets (excluding Walmart) jumped 16.3 percent during the year ending April 19 - a bigger gain than that posted by any other dog or cat food category.

“Unlike years ago when a pet was just a pet, today they’re a full-fledged member of the family and are treated as such.” explains David Brinker-Wessel, national sales manager for private label at Fort Lauderdale, Fla.-based Synergy Labs, “If you look at some of the pet grooming products out today, you’ll think you’re at the beauty counter of an upscale retailer.”

Unfortunately, the category’s strong performance didn’t carry over onto the private label side, where dollar sales increased only 5.1 percent, cutting store brand share more than 1.5 points to 14.8 percent - still better than its share of the pet food segment. Despite the loss of share, however, private label remains the best-selling “brand” in the dog/cat needs category, which is still very fragmented and consisting mostly of lesser-known brands.

So why didn’t store brands do better over the past 52 weeks? One possible answer is retailers’ failure to jump on the all-natural bandwagon as quickly as many national brands.

According to a report from Rockville, Md.-based Packaged Facts, “natural” was the number-one marketing claim made by new pet care products in 2008.

“It’s definitely the biggest trend in the category,” Brinker-Wessel agrees. His company recently introduced a line of all-natural grooming products, including natural flea and tick preventatives - the product he says is currently most sought-after by private label buyers.

To help boost store brand sales, Brinker-Wessel suggests chains place private label pet care products alongside competing national brands so consumers understand that the two items are equal in terms of quality and so they can clearly see the value offered by the retailer’s brand. Point of sale materials designed to educate shoppers about the private label items also go a long way toward spurring trial, he adds.

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