With the deepening recession, credit crunch, and with consumers becoming frugal, the retail channels are responding to the new realities. With unemployment reaching double digits and fewer jobs being created consumers have changed their shopping habits. Value and convenience have become very important. Discretionary spending is reduced , consumers are making fewer trips to stores, savings have reached an all time high of 4% of income ( from negative savings rate a few years ago), consumers are getting smarter, buy local movement is getting stronger, consumers are adopting healthier life styles ( healthy foods, exercises). Consumer spending accounts for 2/3rd of US economy. If they cut back it will have tremendous impact on not just the US economy but global economy. The changing consumer habits are here to stay for a long time.

The retail formats such as grocers (Kroger, Safeway, Supervalu), Mass Merchandisers including Supercenters (Wal-Mart, Meijer), Drug Stores (Walgreens, CVS, Rite Aid), Specialty (Petsmart, Petco), Dollar Stores, Club (Sams, Costco etc) are responding to the new realities.

The changing retail landscape will have a significant impact on small and mid size pet food companies. Larger companies will be able to weather the storm better than small and mid size companies.

Changing Retail Landscape

A. Market growth is stagnating
The current pet population remains steady and is not increasing any time soon. There are 74.8 Million dogs and 88.3 MM cats in the US. 39% of households had a dog, the breakup of which is as follows: (63% had 1 dog, 25% had two dogs, 12% had three or more dogs ). 38.4 million house-holds (34% households) had at-least one cat, 56% owned more than one cat. On an average households had 2 dogs or 2 cats on an average. The overall number of households in the US that had pets is around 58 million and this number will remain stagnant in the foreseeable future. This means every retailer is competing for the same customer in a stagnant market where pet ownership is steady.

B. Consolidation among the players will continue and smaller players will shut down for good
Market growth is stagnating for most if not for all goods. Retailers have to compete against each other to offer lower price, higher value. Most goods become a commodity as prices keep falling. Deflation is still an issue with the current economy. For retailers, size is the key to survival in such a scenario. Larger national players will acquire smaller regional players for survival. The number of retailers will decline this means fewer stores that will carry pet food and pet care items. The competition for shelf space will be fierce.

C. Credit Crunch will lead to increase in retail bankruptcies
As credit dries up retailers will have difficulty raising capital. Cash flow will be an important issue for many retailers. There will be increased retail bankruptcies. As store closing become increasingly a common thing pet food manufacturers will have to find different avenues to sell product.

D. Some Bigger Retailers going with smaller store format 
Wal-Mart has smaller store format marketside, Giant Eagle has GetGo, Jewel has URBAN fresh. These are smaller compact stores that carry fewer SKUs and fewer choices. This will have a major impact on larger pet food manufacturers who will have to rationalize the SKU. Retailers will want to eliminate slower moving SKUs

E. Buy Local save the local economy 
Be local, buy local save the local jobs will become a powerful grass root level movement. This movement should help smaller manufacturers of pet foods.

F. Value discounters, Super Centers and Club will be major players
Consumers have become frugal and avoid unnecessary spending this trend will continue. They are constantly looking for price, values and convenience. Wal-Mart Supercenters, Club stores (SAMS club, Costco) and Value discounters (Aldi) will become stronger players. Wal-Mart's new slogan save more, live better fits the consumer psyche. Larger pet food manufacturers are better positioned to provide value discounters with low cost items.

G. Retailers operating in a zero sum game where every winner is offset by someone losing 
Stagnant markets, lack of growth leads to situation in retail where some retailers will lose at the cost of some clear winners. Retailers are shifting from growth agenda to optimization agenda. In this scenario many regional players may lose to larger retailers such as Wal-Mart, Kroger and Club Stores. This will have an impact on regional pet food manufacturers who are dependent on regional retailers

H. Growth of Private label 
Private label brands are growing and are offered at 5-10% cheaper than branded products. The quality of private label brands have improved significantly over the years as the retailers demand high quality products as the branded cousins. This may exert pressure on manufacturer to reduce the cost of branded products as well. Private label brands will grow and this may help smaller manufacturers who are in survival mode.

I. Alternatives to currently existing retail channels
Whole Food (organic, no preservatives) Trader Joes ( small store format, private label, organic offerings) offer alternate retail formats. The alternate channels will remain small in the current environment unless the prices come down. Consumers definitely want healthy products to feed themselves or their pets but cannot afford the price at this time. Organic pet food growth will be slow to stagnant. If the manufacturers can reduce the price differences between organic and non-organic products substantially it will be hard for organic brands to grow. Organic will remain a niche market in pet foods. Whole Foods encourages local manufacturers and this may help small pet food companies.

J. Shopper insights and shopper marketing are being recognized as a priority area for retailers 
Retailers are spending on understanding shopper insights and shopper marketing instead of getting the information from manufacturer. This way retailers are in a position to demand the right product at the right price for the consumers without compromising on their own margin structure. This will exert more pressure on pet food manufacturers to reduce costs. Actionable shopper data is creating leadership opportunities for retailers and retailers are in a better position to dictate to manufacturers on the kind of product to be stocked at retail shelves and at a saleable price. Many larger retailers may be willing to work with mid size and smaller pet food companies by sharing consumer insight data.

K. Pressure on cost containment and margin enhancement 
Retailers are under tremendous pressure to reduce costs and enhance the margins. Wal-Mart seems to be doing a nice job in this area compared to its competition. Wal-Mart will continue to be courted by both large and small companies for placement of their products. Smaller and midsize pet food manufacturers may have difficult time satisfying Wal-Mart's strict requirements on sustainability

L. Retailers offering more services which will drive traffic, profits and differentiation 
Retailers are offering various other services to drive traffic into the store. They are offering services such as paying utility bills, buying stamps and wine tasting classes and cooking classes. Petsmart offers several pet related services such as grooming and vet clinics.

M. Sustainability is a big theme among retailers 
Wal-Mart is leading the way in sustainability. LEED certification, packaging and waste reduction will figure prominently in all major retailers blue-print for success. Pet food manufacturers may have to show their commitment to sustainability programs to large retailers.

N. Retailers want to simplify so fewer brands and fewer customers may carry 90% of the volume.
Retailers look for velocity and high margin items. They are buying what they need and not what they want. They are optimizing on shelf space, labor and experimenting with multiple formats. Fewer brands with
high velocity and high margin will do well. Retailers will expect SKU rationalization from manufacturers, slow moving items will be eliminated from stores to make space for new items with sustainability, growth and profitability.

O. Everyday low pricing(EDLP) will be the theme at retailers
Wal-Mart's theme will be ringing across all retailers. Coupons may eventually go away and give way to EDLP. Retailers would put pressure on pet food manufacturers to reduce prices

Innovation as a Means to Generate Sustainable Revenue Growth

Given the changing retail landscape and changing consumer habits due to economic crisis innovation is the way to generate sustainable demand by providing meaningful benefits to consumer and thereby forging path for incremental revenue. For small and mid size manufacturers innovation is the key to survive. Innovation is not restricted to just creation of new products or processes. The beauty of innovation is that it has no boundaries it can be in any part of an organization (marketing, research, accounting, transportation and logistics, operations, business development, sales, market development organization, Quality assurance, customer development group etc) that adds value in the supply chain. If the innovation does not add value to the customer (price, value, quality, service) or solve a problem, it is meaningless to the retailer and to the customer.

A clear vision supported by well thought out strategies and action plans to execute the key objectives are essential for smaller manufacturers. Smaller players are nimble, agile and can come up unique products fairly quickly to the market.