Pet Parents: Sticky R Services
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Spending on animal companions could total $52.84 billion this year, up about 4% from last, estimates the American Pet Products Association. The industry continues to prove itself recession resistant. “Pet parents,” the way some owners prefer to identity themselves, will cut back on themselves before denying their children. But not every dollar spent is equally attractive to investors. Too much of the pet dollar represents discounted purchases at the low end. Given the growth in the sector, there’s also a dog fight among competitors, at least in products ranging from food to medications. Wal-Mart and Dollar General are aggressively increasing their presence in value brand food. According to Dillon Media, the biggest bump in pet food spending has been by households making between $15,000 to $39,000. Another growth area at the low end is medications. Kroger now fills prescriptions in its 1900 pharmacies through its $4 generic program. Target is running a pilot program in its 670 pharmacies.
On the other hand, retailers are exiting the pricing pressure and some of the glut. In addition, providing services in the store creates a theatrical element. Shoppers get pulled into the experience and tend to get chatty with each other and clerks. Services are exactly where PetSmart (NASDAQ: PETM) has focused for a while and is currently increasing its menu of offerings. Over the past five years its services have grown an average rate of 12%. According to Dillon Media, over 50% of the pet services spending is by households making over $100,000. Also, services are sticky. Those coming into retail to have the dog groomed will likely also purchase products and shop there more often. PetSmart’s stock is at 56.72, with a 52-week range of 37.76 to 59.08. Its earnings for fiscal 2011 jumped to $2.55 a share, a 27% increase. Its gross margin showed a 40 basis point improvement to 29.5% and ROE is at 25% versus the average of other industry leaders of 17%.
Right in 65% of its stores, PetSmart provides vet services through its partnership with Banfield Pet Hospital. Instead of functioning on an insurance model, the approach is through plans in which payment is only made for services used. Wellness programs, ranging from preventive medicine to routine vaccines, are the gateway service. Get the pet parent in for those shots and the odds are there’s a customer for the life of the animal. In the North Haven, Connecticut shopping complex which has a PetSmart, clerks and shoppers in one of the two dollar stores were talking about the high quality and affordability of that care. That’s how I first learned about it. Of course, this model, along with selling medications in retail, could upend traditional vet hospitals such as those owned by the corporate chain VCA Antech (NASDAQ: WOOF).
Other services provided include grooming, training, day care, and hotels for boarding. Linking bricks with clicks seamlessly, PetSmart is encouraging reservations to be made online. A new promotion, found in the stores and online, is the Puppy Starter Kit for $19.99. It contains vouchers and coupons for mostly the services. For example, the purchase comes with two daycare sessions and a vet consultation.
Of course, the service piece within the pet parent segment has competition. In the very same North Haven, CT complex with PetSmart is PETCO, a private company. It offers many similar services. Also, it creates goodwill with animal lovers, just as PetSmart does, through high profile ongoing adoption programs.
A source of competition for both PetSmart and PETCO is the traditional vet hospital. Some of them have been adding on other services, ranging from grooming to boarding. Their busy clients prefer this kind of one-stop shopping. Most are sticking with the stand-alone vet model because they can't yet consider making a shift to having their children attended to in a store in a shopping center. What has been enhancing the traditional vet branding has been that same kind of adoption outreach which PetSmart and PETCO leverage. The message communicated is: We care about all animals.
Given the newly competitive arena, it's no surprise that vet practices, such as the VCA Hospital in East Haven, CT, are also introducing special events. Retail, of course, is built on that kind of theatre. Just think about the Macy's Thanksgiving parade. Among the special events VCA stages is a costume party for cats and dogs and their parents on Halloween. A competitive advantage vet hospitals might have over retailers is the lower turnover in staff. In the five years I have been bringing my children to VCA, about 80% of the techs and clerks have been constants. That particular branch of VCA is growing which is obvious by the added number of vets, who also stay put, and the more crowded waiting room.
With services the sticky part of the pet sector, this is where there will likely be the most innovations in how those are packaged, priced, and delivered. Regarding the latter, expect to see more mobile vans providing well care and grooming as extensions of the store and traditional vet practice. They're the ones investors should bet on.
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