The COVID-19 pandemic changed our lives in many ways. Over the last year, we learned to cook,聽learned to teach, became amateur epidemiologists, and 鈥 in many cases 鈥 welcomed new, furry聽family members, making the most of the unexpected time at home.
A recent Oliver Wyman US pet foods survey conducted in September 2020 found a quarter of pet聽owners reported getting a furry companion over the past six months (post-COVID), with these new聽pet owners heavily skewed towards the younger Gen Z and millennial cohort, who tend to spend聽more on pet care and are more digitally focused.
The pandemic has demonstrated that shoppers are highly brand loyal and that pet food is resilient to聽downturns. Around 70 percent of pet owners say that they do not plan to make any changes to their聽pets鈥 diet regardless of the economy or their finances, according to the American Pet Product聽Association COVID-19 study. Furthermore, the pandemic appears to have underscored the focus on聽health and functional benefits in pet food. 鈥淨uality,鈥 鈥淗ealth & Nutrition,鈥 and 鈥淚ngredients鈥 are the聽three most important purchasing criteria for premium pet food purchasers, well ahead of price,聽according to our survey. While in the sales data, we have seen several health and functional-focused聽growth vectors in limited ingredient diets, raw, freeze-dried, treats, and supplements/calming聽additives.
As was the case with many other industries, the pet food category saw an accelerated shift to聽digitization. Prior to the pandemic, many neighborhood pet stores could focus on offline operations,聽providing services and high levels of in-store interaction. But as consumers shifted to purchasing聽online, many neighborhood pet stores were forced to close due to short-term cash flow issues. This聽digital shift accelerated the adoption of sticky online subscription models, with one such service聽reporting subscription sales up 43 percent year-over-year in its third quarter 2020. Consumer buying聽habits also vary across channels, with greater price sensitivity seen in the food, drug, and mass聽(FDM) retail channel, and online channels. (See Exhibit 1.) This suggests brands and retailers will聽increasingly need to manage pricing and channel conflict.
The 鈥渇ur-baby boom鈥 and changes in shopping behavior in the wake of the pandemic are setting up聽the pet sector for a period of growth and change. How can pet food brands and retailers position聽themselves to win?
Pet Food Brands
Consumer acquisition聽is critical to drive long-term growth, requiring brands to capitalize on聽moments of new consideration that tend to be few and far between, given the stickiness of the聽category. We are currently experiencing a boom in key decision-making moments where pet owners聽are seeking information on what is best for their pet 鈥 such as when new parents first get their pet聽or when they switch from puppy to adult food 鈥 providing an opportunity for brands to become聽trusted partners in pet care, rather than just providers of products. Specifically, retailers and聽manufacturers should develop their online brand and marketing presence to aid in these critical聽decisions; they should also target key points of entry, such as breeders, shelters, and vets, through聽partnerships, targeted promotions, and marketing materials like new owner welcome kits. All these聽efforts will turn first-time pet parents into long-term customers post-pandemic, given the tendency聽of pet owners to return to tried and true foods (75 percent of respondents only purchase one brand)聽and the recurring and consistent nature of purchase (70 percent of respondents purchase on a聽monthly basis).
In view of the importance of health, ingredients, and quality to consumers, it is also important for聽brands to聽focus future innovation on health and functional benefits聽by fast following trends in聽human food, as shoppers project their own preferences onto their pets. Some of these new areas聽include limited ingredient diets, freeze-dried, personalized nutrition, and supplements such as聽immunity boosters and CBD. Additionally, ingredients and packaging can no longer rely simply on a聽clean ingredient label, but also must provide reassurance of the ingredients鈥 functional benefits.聽Brands can also rapidly accelerate innovation inorganically by identifying M&A opportunities,聽helping to realize economies of scale and gaining leverage to fight the growing tide of subscription聽services.
In an聽increasingly omni-channel environment, brands will be challenged to manage complexity and聽conflicts in their pricing and promotional programs across their online and offline channels where聽there are different consumer expectations and needs. A holistic channel strategy that manages聽price-list proliferation, together with a prudent price pack architecture strategy, will help to mitigate聽these channel conflicts to drive channel harmony.
Pet Food Retailers
Driving to the right product and services will be crucial. Developing a 鈥渇ast fail鈥 mindset is critical聽not only to fast follow trends, but also to manage SKU proliferation and complexity. To drive space聽productivity, retailers must develop the tools and metrics to rapidly test innovative products,聽identify underperformers, and push innovative products. One aspect of this assortment optimization聽equation will be the development of private brands, which represents a huge area of opportunity in聽the pet category, with strong margins and distinctiveness versus competitors.
Retailers will need to聽evaluate the unique experience they want to provide聽in store and online聽versus competitors. Online giants will win out for convenience as well as price, so retailers will need聽to think about the broader ways in which they can provide value through education, community,聽services, and entertainment. We believe that developing an integrated service offering and focusing聽on customer experience over the long term can help to fill a void left by the closure of neighborhood聽pet stores and will provide a competitive advantage over online-only players.
Pricing and promotions have also been shaken up聽during COVID, requiring fewer promotions in an聽already inelastic category. In the future, we believe pet food consumers will be even less price聽sensitive overall, but will shop in more omni-channel ways. Retailers will need to be vigilant in聽evaluating and managing a coherent omni-channel strategy, requiring complex analysis to evaluate聽the net impact of a product price and promotional move to the company as a whole.
Finally,聽offline retailers will need to review operating costs carefully,聽given the continued shift to聽online and bloated operating models due to COVID safety protocols. Transforming the cost base聽through a zero-based approach to cost and organizational redesign will be imperative in the rapidly聽changing pet landscape, especially with the shift to online.
2020 may have been a year for the dogs, but 2021 certainly looks bright for the pet sector.
