With the recession, credit crunch and consumers becoming more 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 in the US have reached an all-time high of 4% of income;
• Consumers are getting smarter;
• Buy-local movements are getting stronger; and
• Consumers are adopting healthier lifestyles.

The retail formats such as grocers, mass merchandisers (including supercenters like Walmart), drug stores, specialty, dollar stores and club/co-ops are responding to the new realities. The changing retail landscape will have a significant impact on small and mid-size petfood companies. Larger companies will be able to weather the storm better. The changing consumer habits are here to stay for a long time, so you better ready your products to meet these developing needs.

Though the current  pet population remains steady in developed markets like the US market growth is stagnating for most if not for all goods, though petfood is still growing modestly. Retailers have to compete against each other to offer lower price and higher value. For them, size is the key to survival. Larger national players will acquire smaller regional players. The number of retailers will decline--this means fewer stores that will carry petfood and pet care items. The competition for shelf space will be fierce.

Until credit opens up, retailers will have difficulty raising capital. Cash flow will be an important issue for many of them. There will be increased retail bankruptcies. As store closings become increasingly common, petfood manufacturers will have to find different avenues to sell their product.

Retailers look for velocity and high margin items. They are optimizing on shelf space and labor and experimenting with multiple formats. Walmart has a smaller store format; Marketside and other retailers (Giant Eagle, Jewel) are following suit. These are smaller compact stores that carry fewer SKUs and fewer choices. This will have a major impact on larger petfood manufacturers who will have to rationalize each SKU since retailers will want to eliminate slower moving ones.

Consumers have become  more frugal and are avoiding unnecessary spending. They are constantly looking for price, values and convenience. Walmart, club/co-op stores and value discounters (Aldi) are becoming stronger players. Larger petfood manufacturers are better positioned to provide value discounters with low cost items. Smaller manufacturers can gain momentum in the market with grassroot level movements like "Be local! Buy local!"

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 retailers demand products as high in quality as their branded cousins. This may exert pressure on manufacturers to reduce the cost of branded products as well. As private label brands grow, it may actually help smaller manufacturers who are in survival mode.

Whole Foods and Trader Joes are examples of alternate retail formats, another area where small to mid-size manufacturers may find a niche. The alternative channels will remain small in the current environment unless the prices come down, however. Consumers definitely want healthy products to feed themselves and their pets but currently cannot afford or may not be willing to pay the high prices. But, if the manufacturers can reduce the price differences between organic and non-organic products substantially, organic brands can grow.

Retailers are spending  on understanding shopper insights and shopper marketing instead of getting the information from manufacturers. 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 petfood manufacturers to reduce costs.

Actionable shopper data is creating leadership opportunities for retailers, who are in a better position to dictate to manufacturers the kind of product to be stocked on retail shelves and at a saleable price. Many larger retailers may be willing to work with mid-size and smaller petfood companies by sharing consumer insight data.

Sustainability is also  a big theme among retailers, and the largest among them--Walmart--is leading the way. Leadership in Energy and Environmental Design certification, packaging and waste reduction will figure prominently in all major retailers' blueprint for success. Petfood manufacturers may have to show their commitment to sustainability programs to large retailers.

Given the changing retail landscape and changing consumer habits, innovation is the way to generate sustainable demand by providing meaningful benefits to consumers and thereby forging a path for incremental revenue. For small and mid-size manufacturers, innovation is the key to survival.

The beauty of innovation is that it has no boundaries and can be implemented in any part of an organization (marketing, research, accounting, transportation and logistics, operations, business development, sales, market development organization, QA, customer development groups) that adds value in the supply chain. If the innovation does not add value to the customer or solve a problem, it is meaningless to the retailer and to the customer.