We've spoken about how high grocery prices have taken a bite out of discretionary spending several times this year. This theme applies to pet retail as well, where we've seen a shift to more dry pet food versus higher-margin wet food (fresh, frozen, etc.) and fewer dog treats (the shift back to the office has also played a part in this trend). For Q3 2023, Petco’s consumables product comparable-store sales were up +1.8% (i.e., slower than the pace of inflation), whereas comparable-store sales in the Supplies & Companion Animal business declined -8.8%. To meet the needs of consumers that are seeking greater value, Petco stocked more value brands that are carried in mass and club (Friskies, Purina One, Beneful, etc.) and lowered prices where it was needed. To accommodate these brands, premium brands lost shelf space (i.e., less facings and fewer SKUs). To retain shelf space, the affected brands are having to lower their prices as well (the so-called “vendor collaboration”). It seems increasingly likely that deflation will happen with “human food” as well as volume declines by national brands have reached an alarming rate, see our review of October Personal Consumption Expenditures below.
In terms of whether consumers are noticing Petco’s value strategy, there doesn’t appear to be a change in trend in traffic versus its two closest competitors. The November spread between Petco, Pet Supplies Plus and PetSmart is similar to October (below). We would expect PetSmart to be following a similar strategy as Petco of lowering prices, as it would not want to be disadvantaged.
Of note, one of the larger contributors to the industry’s decline is that a large number of new pet owners that came during the pandemic were less affluent households that cannot afford to maintain their pets at “premium” standards/prices given the high cost of essentials (which crowd out other categories of spending) and the cost of care if they are at work (compared to working from home). Return-to-the-office also means less treats and toys from Rover to keep him quiet during Zoom calls. Rover is stuck at home with dry food, no treats, and old toys. It also means a lot of pets put up for adoption. And so, the industry is in a period of post-pandemic normalization. Unfortunately for the category, our analysis on personal consumption expenditures shows that spending in real terms at $92B is still 15% above its pre-pandemic level (as a % of PCE), where it should be at $80B. This implies a lot of normalization and mean-reversion to go, especially for Rover and the like.
