But that's just marketing, isn't it?

This is what you sometimes hear when you have a chat with people from our industry;  the more so when those that represent the “scientific conscience” are around. However, if the questions is:

“Is pet food about marketing or nutrition?” the clear answer must be: both! More intriguing might it be to ask: Is marketing about nutrition as far as pet food is concerned? I think that the only possible answer to that question is: certainly not always!

In very mature markets marketers have to struggle to have their product and brand stand out; to give it a reason to buy or rather a reason for being. Old truths such as quality and price have an eroding value. People want more, other, without precisely knowing what this should be. In total desperation these marketers therefore become creative beyond belief. Once super premium got a foothold in the European market – and thus saw a plethora of suppliers of products with a super premium positioning* – people became inventive and brought out hyper premium and even ultra premium ranges of product. Was the food (or the nutrition) essentially different compared to the super premium products then on the market? No, it was not!

But the intention was to be PERCEIVED as being different; thus implying superiority.

*: after the launch of Eukanuba Premium for dogs in Spain with 30% protein and 20% fat, the Spanish definition for super premium became 30/20!

Another example is grain-free. There seems to be a hot debate in the scientific world about the use of cereals in dog and cat food, whereas if taken from a nutritional point of view grain-free products are as good as products containing cereals. But grain-free is positioned as being closer to the animals “original” diet; this perceived superiority or pseudo-authenticity can demand a higher price. And not only because animal proteins are mostly more expensive than vegetable ones.

Probably 10 years ago we saw so-called holistic pet food coming to market; a trend that has gradually become mainstream. The real boom seems to have passed already. But what is it, holistic? I recently asked manufacturers of holistic pet food at Interzoo. And I got an avalanche of different answers.

Philosophically speaking (w)holism is defined (Concise Oxford Dictionary) as follows: “the theory that certain wholes are to be regarded as greater than the sum of their parts”. Can this apply to pet food and if so, how exactly? Are the ingredients reinforcing one another, providing beneficial nutritional synergies? Is it more than complete? Medically speaking (w)holism is defined (same dictionary) as: “the treating of the whole person (read pet) including mental and social factors rather than just the symptoms of a disease”. Just with a food?

Does this mean that holistic products are  curative (=treatment) beyond being “just” food? If this is so, we’re looking at a highly potent claim that craves for further explanation; and hopefully scientific substantiation. Or, is that why holistic has not yet been defined as a regulated category by the regulatory bodies?

What to think of “human grade”. Another one of those claims that imply that food containing ingredients of another grade is inferior. But this is questionable. Is there proof that dogs and cats that are fed non-human grade foods have their health jeopardised? And is it ethical to use human grade ingredients for our pets in a world where still one-sixth of its population is mal-nourished?  And around at least 120 million people are constantly on the brink of starvation.

The humanisation of pets which is at least partly the reason for propagating human grade runs the risk of leading us all astray: dog and cats are no humans. Of course our industry has an extremely good reason to use the humanisation-phenomenon:  it’s emotion, so it sells! My conviction is that we do not need human grade ingredients for that.

I think it is fair to say that marketers play a huge role in communicating about pet food and its properties & features; they are on the brink of overstepping a line however when they imply inferiority of other product-offers without proving their own superiority. Particularly when this implication put the end-buyer on the wrong foot and is getting scared for no reason. That is when people say “but that’s just marketing, isn’t it?”

Marcel Blok

Change Stranamics BV/The Netherlands

 

(Appeared earlier in Petfood Industry’s E-Newsletter)

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If only fair trade

If only …………

Like most of us, I sometimes wonder what the future has in store for our industry. And to which extent we can and do influence what’s in store. This inevitably leads to – at least for me – thoughts or maybe even dreams about the ideal conditions for our industry to prepare itself for the next generation. The “If only…..” dreams. The wishes we hope will come true.

Of course we have lots of different wishes; collectively, individually. Practical ones and utopian ones. But wishes all the same.

To mention one that is in the top-5 of my list: trading fairly. Although only slow progress seems to be made on a global scale, the thoughts and ideas behind it are getting a foothold in among others the human food industry. Certainly the multinational operators start to pay (more) attention to this phenomenon. With Nestlé and Unilever taking a leading role.

Fair TradeNot only for altruistic reasons; there are strong economic ones as well. Because after all, shareholders need to be pleased. So if Fair Trade (or any other initiative that provides a better livelihood for those at the start of the food chain) finds its adherence in the human food industry, can it do the same in the pet food industry? Or is this too far-fetched? Because the effects are too minimalistic; because the sourcing for the our industry is totally different from the one for the human food industry; because Fair Trade cannot apply to the kind of ingredients that are commonly used for pet foods?

All questions to which I cannot even pretend to have the answer. Maybe somebody else does. But the fact remains that it is my dream to not only contribute to what is best for the animal, but simultaneously improve the fragile balance between people, planet and profit. And trading fairly looks to me to be one of the ways, but certainly not the only one, to achieve this.


SLOW GROWTH: A SELF-INFLICTED WOUND?

The European petfood industry is suffering from slow volume-growth if any.

The analysis is simple: dog and cat populations don't show any sign of significant increase (the dog population is stable at best), the fast growth markets of the recent past have reached their maturity stage, dog-owners change their feeding-regime from wet to dry and – on top of that - the spectacular increase of superpremium in the last decade, implying less food-intake in grams because of its high nutritional density.

Overall the European market (if there is such a phenomenon) has definitely not yet reached its genuine saturation. In virtually all geographic markets we're still far away – in comparative terms – from the N.American situation. In other words, if we should reach the levels of calories provided by industrially prepared that the N.American market has been accustomed to over the last years, there is still attractive room for growth.

But the European petfood industry seems to be failing in this respect.

Key contributors to this trend are an increasingly strong internal focus in most companies (caused by a drive for further cost-effectiveness/reduction and absorbing the effects of mergers and/or takeovers), the evident lack of genuine new product development, a focus on competition leading to marginal improvements of own products for the sake of gaining a few sharepoints, but not for the sake of growing the market.

These are evidently business factors that are in the control of the manufacturers.

Another clear influence for slow growth is the changing make-up of retail-distribution. Chains and groups gain in influence very rapidly in an increasing number of countries in Europe. They gradually start to define the retailing-landscape, but more importantly, the retailing culture. More particularly on the specialty retail side, where a "grocery mentality" starts to emerge. Chains and groups don't have the objective to grow the market (that would be tooaltruistic); their goal is to take marketshare, make a handsome profit and be done with it. In fact, by being – sometimes outrageously – demanding (service, terms etc.) in relation to the performance they offer, the chains and groups deliberately lower the total value of the market; to the detriment of the manufacturers' financial performances, who can thus spend less on a.o. new product development, which is vital for further market-growth.

If all parties involved continue to behave as if the petfood market in Europe is totally saturated ( i.e. offers no more scope for growth as a market), we will soon see this self-fulfilling prophesy culminating in less manufacturers that can survive, thus a less attractive and diverse product-offer, thus less interest in the products , thus lower values, thus ....... etc.

A bleak prognosis, but certainly a realistic one if manufacturers and retailers alike keep inflicting wounds upon themselves.


THE IAMS – P&G DEAL

The end of an era!

Rumours had been in the market for quite some time: The Iams Company is for sale.

But, if one pays attention to all the rumours one hears, M&A appear to be daily routine in the petfood industry.

However, few would have expected that The Iams Company would be sold to an outsider (i.e. a company not already in the industry); and even fewer would have predicted that P&G would value The Iams Company at nearly 3 times its turnover.

This clearly indicates that P&G wishes to establish itself as a serious player in the global petfood market. But the size of the acquisition of The Iams Company is not enough anymore to achieve this objective.

Most likely P&G will continue its acquisition-strategy, to buy itself a decent place in the market. After all, they're accustomed to being # 1 or 2 in the categories in which they operate.

What is likely to happen with the Iams and Eukanuba brands; rather sooner than later?

P&G is primarily a branded goods, grocery oriented company. It cannot be doubted that they will launch the Iams brand in the US grocery outlets on a massive scale. In overseas markets such as Europe it is more than conceivable that the Iams brand will be extended with a range of superpremium dogfoods and be brought to the grocery trade. But probably this will take place after P&G have gathered the experiences of entering the grocery trade in the USA.

If one knows that the Iams brand was originally developed to counter the rapid growth of "commercial petfoods" in the grocery trade – to the detriment of the traditional business of the specialty trade - the historic paradox is evident.

What will happen to the Eukanuba brand?

It will make perfect sense if the Eukanuba brand would remain "specialty trade only"; it's the flagship that grew a.o. through trade-loyalty and bringing that brand to the grocery trade would almost certainly evoke massive negative reactions (read boycot) from the specialty trade, most certainly the independents.

It will be interesting to see how the Iams and the P&G cultures will be merged.

P&G, the highly successful stereotype of traditional marketing and Iams, the acclaimed stereotype of radical marketing!

Will P&G manage The Iams Company at arm's length or do they wish to control the vital areas of their investment such as marketing?

And what will be the effect on the industry of the Iams/P&G deal?

Company-owners wishing to sell their company will seek higher premiums when they sell; whether justified or not. The Iams' acquisition has put new rules to the game!

The big players will rapidly look for acquisition-opportunities to further build critical mass. Smaller, non-niche, operators will (have to) seek alliances with one another in order to stay alive. Capital goods manufacturers will deal with less companies in the future; and these companies will require less capital goods , because their very size will lead to increased manufacturing-efficiencies.

In summary one can say: the petfood industry will never be the same again!


LIMITATION TO IMITATION

Cynics will tell you that copying somebody else's ideas equals creativity.

As most other industries, the pet industry is prone to copying.

The question however is: "have the copiers been able to leave a lasting impression"?

More often then not the answer is: no!

Strategy ranks # 1 on the chart of abused words in management parlance; innovation is a close second!

Yet companies do maintain that they innovate; mainly because they take somebody else's concept, tweak it a little and bring out a "new and improved" product.

The apparent success of these tweaked propositions is caused by the good relationships that the copying manufacturers have with their trade-partners. So selling-in is not the toughest thing to do. And getting some product-rotation for first shipments isn't too difficult either; offer an introductionary-discount to the end-user and some will try the product.

The question is however: how sustainable is the product once it is left to live it's own life, i.e. without promotional support?

In the vast majority of cases copies undercut the prices of the original. Whereas total manufacturing-cost + the added general overheads are not necessarily lower for copies than for the original. The consequence is that copies sold cheaper than the original have less – if any – margin left to invest in the market, whereas the continuous investments in the market are required for sustainability of the brand and the product.

The paradox lies with the retail-trade


PRIVATE LABELS

Their relevance to the pet market.

Private labels seems to have different definitions. I've met manufacturers who define them as "everything other than my own brands", whereas others restrict it to brands belonging to retailers with contolled distribution. Everything in between these two appears to be valid as well.

Over the last 10 years private labels – in this case being defined as brands owned and controlled by retail – have taken (sometimes significant) shares of market, primarily to the detriment of local manufacturers' brands; certainly in the dog and catfood arena. And these shares continue to grow. As an example I can mention the development in grocery in Spain, where private labels represented around 5% of market-value 10 years ago – for dog and catfoods - whereas the figures for 2003 show that around 36% of market-value was represented by retail-owned brands.

Another example is Ol'Roy, the WalMart brand, which now takes 3rd place in the massive US market.

What drives this development?

To a great extent the development of retail itself. International consolidation and expansion leads to increasingly powerful retail-chains that have a vested interest in developing their own brand and its image. And petfoods fit perfectly well in this strategy. Because there are very strong manufacturers' brands that serve as the benchmark. And furthermore, petfoods are high-interest products for pet-owning consumers.

This probably explains why slower moving non-food items are still predominantly sold under manufacturers' brands.

Private labels are in essence the domaine of grocery retailers. Because of their widespread presence and the sheer number of end-buyers they serve. Specialty does not yet have those powerblocks and is therefore much less in a position to effectively deal with private labels. Of course you can occasionally see the odd "chain" of 10 shops in which one sees private labels, but the decision to go this route is more based on a strongly developed ego of the owners of the "chain" than on business relevance.

If private labels have grown exponentially in the last decade, is there an end to its growth?

Although one can never be in a position to forecast consumer-behavior over a very long period, I do believe that for petfoods continued growth will be shown, albeit that the growth-curve will flatten significantly.

For non-food items strong growth can be forecasted to the extent that it is expected that proper specialty chains will emerge and further develop and that it will be in the interest of these chains to enhance its specialist image by selling private labels.


THE CONSUMER: A MOST UNPREDICTABLE SPECIES!

For starters, isn't it relevant to remember that "our" consumer is a human being; and in being so is quite similar to you and me!

The human species tends to have a split personality; on the one hand the joyful and playful homo ludens takes decisions, whereas on the other hand the more severe and rational homo sapiens influences her or his own behavior.

What we do have to keep in mind however is that we are in an emotional industry; we talk about pets getting more and more integrated in the family. This justifies to look at our customers as homo sapiens, rather than homo ludens.

For the sake of clarity and (pseudo-)efficiency we put human beings in all sorts of boxes; we call these boxes target-groups. Of course the human beings = our customers fit in a huge number of boxes, but what we do not know is their set of priorities, i.e. which box comes first in their ranking, which second, etc. If the pet-keeping box ranks high on that list, fine for us in the industry; but if given a low priority, what do we do?

We try to influence the consumer as to her or his decision-making behavior!

And how do we do that?

By giving stimuli to try and stay loyal to the proposition we provide them with, whether that be product or service. We aim to create the satisfied customer.

In this respect the role of retail is increasingly important. Manufacturers can and do work out a wide array of stimuli, but if retail refuses to list and dedicate shelfspace to the proposition manufacturers'stimuli are an absolute waste of time and money.

So one might say that before we can even think about influencing the consumer it is paramount that the manufacturers influence the retailer. Who (re)acts much more as the homo ludens. But is otherwise sensitive to specials, i.e. a short-term offer like limited editions only available at a selected number or group of retailers. Reportedly, the Karl Lagerfeld collection especially designed for H&M boosted the latter's bottom-line with around 20%.

The clearest self-fulfilling prophesy in the industry is the following: for reasons of competition, retail started to use the price-weapon as a point of differentiation. Consumers bought products at a reduced price because they were given the opportunity; and therefore the conclusion seemed to be justified to say that consumers are price-conscious. I challenge that with the statement that if not having been given lower prices as a stimulus to buy, the consumer would still have continued to buy; at higher prices!

Of course discount is phenomenon that is here to stay. And in some countries (the perfect example would be grocery in Germany) so massive that one can ask oneself what they discount from.

Is discount of relevance to the pet industry? Once we look at product-categories that have reached their genuine point of saturation, price (which is not necessarily discount) becomes a more important weapon in the war with competition: but which product-categories have today genuinely reached that point? That is not to say that discount will not exist for the pet industry, but both manufacturer and (specialty) retailer are well advised to postpone the introduction of hard discount for pet related items for as long as possible!

After all, we are in an emotional industry supplying the homo ludens. Isn't it a bit too presumptuous that we put a price on our consumers emotions. And why should we give margin away to the benefit of the consumer, while the market still offers good opportunities for growth. Mustn't we (manufacturers and retailers alike) retain the potential margins to further grow the industry?

How! By offering stimuli to our consumers to change behavior, i.e. to buy more and better. Retail has a clear role to play in this process; it is closest to the final decision-maker, our consumer. And can react quickly to changing circumstances.

Turn the simple purchasing-process into an event. "Make me (the consumer) feel special and I will buy anything your recommend to me!" Puppy-corners that Fressnapf is currently testing in Germany and Austria are perfect examples of coming closer to the individual and emotional needs of their consumers.

One of the key objectives is to improve awareness. Not necessarily only brand, but explaining what your proposition genuinely means for the animal as a member of you consumer's family.

So inform your consumers, help them to become conscious, conscientious and responsable petowners; and continue with this process of informing, because after all, informing equals in our case influencing. Trigger their mind to trigger their purse! In the interest of both manufacturer and retailer.

A well-informed consumer is a loyal consumer and creating loyal consumers must be the objective of all of us in the industry. And above all, "our" loyal consumers become less unpredictable.


WHAT’S IN A NAME?

Super-, hyper-, ultra-premium; superlatives roll over each other to express difference and superiority. Superlatives that aim to express a high quality-standard, but seem to have created confusion in the end-buyers' minds, resulting in price being a key component for

decision-making.

When focusing on dog and catfood it can be said that in the Spanish market - that is more dry oriented than most of the bigger and more developped petfood markets in Europe; and where prepared petfood penetration is below the European average - this has led to a very peculiar situation: the position of superpremium is now threatened by premium in the specialty trade-channels, whereas premium is under heavy fire from private labels in mas distribution with its inherent huge number of frequent shoppers.

There doesn't seem to be any reason to believe that the Spanish dog and cat-owners wish to spend less on foods for their animals; but given the opportunity to buy – what appears to be a good offer – at lower prices than they were accustomed to, they will evidently chose the cheaper option. Are the distinghuising components of the foods strong and relevant enough?

By now, both manufacturers and retailers seem to suffer from the same self-inflicted wound: the price-weapon started to be used at a development-stage of the category where further healthy and beneficial growth could have been obtained by all serious players in the category.

What happened however was that the branded manufacturers left the doors of retail wide open for the private label operators, resulting in a private label share in Spain that is way above the European average. This is in no way in the interest of neither the manufacturers that offer branded products – nor of the specialty trade.

So what's in a name? The top-end of the market is under severe pressure. Manufacturers are fighting each other for short-term gain, specialty retail has grown into the habit of demanding increased margins (through discounts and rappels) for a flat performance.

Instead of this marketing myopia (failure to see down the road") manufacturers and retailers should together recreate the opportunity to expand the superpremium category, because the reward for their effort will be super premium!


LOOKING BACK AT THE FUTURE

As in any other industry, the ours on occasions looks into the crystal ball to try and see what the future will bring. Conferences look to be the most suitable platforms to radiate views and expectations in this respect.

It might be worth looking back at what the crystal ball told us in the past. But before doing so we must realise that if views about the future are expressed and subsequently not tried out and put in practise, any idea about future developments is doomed to fail; this is the self-fulling prophesy.

Also in our case, in essence all views expressed about the future had a few things in common: they were mostly optimistic, they were mostly growth-orientated and they were mostly evolutionary rather than revolutionary in character.

Have the ideas we collectively had about the influence of the internet in selling pet products really materialised. I tend to say: not by a long shot!

Have we forecasted the rapid growth of private labels/own brands in our industry. We knew that something would happen, but we underestimated the speed, the size and impact.

Did we foresee that one of the global leaders in petfoods, that has always been very adamant about it strategy of not selling private labels, would buy the biggest private label producer in petfoods?

I think it suffices to say that sometimes the crystal ball was right, but more frequently this ball was way of the mark or missed the subject completely.

Looking into the crystal ball is not a prerequisite for forecasting. If only it incites us to think about possibles that might influence our businesses, it serves its purpose.

So, what is likely to happen in my opinion?

Animal welfare issues get an increasingly higher position on an increasing number of political agendas because of consumer-interest and thus pressure. Regulations on selling life animals will become even more stringent than they are today. Retailers will therefore face requisites with which they find it almost impossible to cope and thus are forced to stop selling life animals. So where do people buy them? From breeders directly – chances are that malafide operators will therefore start a quantity-based breeder-business with the adverse effect as to animal welfare – or will we see the emerge of a new type of outlets that only sells life animals? The latter might prove to be a new – albeit strongly regulated - business opportunity.

In certain sectors of the industry – petfoods being the prime example – ingredient-shortages (and thus high price-levels) continue to influence the execution of strategies on the short and medium term; say for the next 3-5 years. R&D will have to face the challenge of finding, testing and approving new ingredients, which – because they are not mainstream – will be difficult to procure in a consistent way. I am convinced that on the African continent there are ingredients that are "novel" to, but potentially highly useful for, the pet industry. The pet company that effectively deals with the procurement and quality-issues surrounding these ingredients very likely builds itself a sustainable competitive advantage.

The "divide" between product-supply and retail will shrink. The days that manufacturers could dictate the market because they owned the brands is long behind us. Retail now rules the waves and dicates the market. (Is that revenge vs. the manufacturers?). The stage has arrived where both product-supply – whether manufacturers or traders - and retail are starting to perceive that cooperation on the basis of mutually shared values and believes is the most sustainable way to progress in order to retain the end-user's – thus the key decision-maker's – continued trust and interest.

And, retail is consolidating, i.e. less retail-companies get a bigger slice of the pie. This not only applies to mass distribution; a similar trend is can be observed in specialty retail. To counter-balance this process of consolidation and its inherent increased power, manufacturers and distributors are compelled to follow a consolidation-strategy as well; to ensure to have a level playing field vis-à-vis their retail customers. It therefore seems natural to forecast intensified merger & acquisition activities with much more cross-border elements than we have seen sofar. This will apply to most categories in the industry and does in no way exclude the distributive trade, both at distributor and retail levels. The process of building the balance-sheet and the power-base is a continuous one for all involved in the industry!

There is something that cannot be forecasted: to which extent are the partners in the industry prepared to jointly promote the use of products and services of the categories in which they operate? I sometimes hear that to grow the market, pet-keeping must be further popularised; with the consequence of seeing increased pet populations! This may be true in some very specific cases, but on the whole I strongly believe that in most markets and categories growth – both in volume and in value – can be generated by promoting the category jointly – while emphasising the benefits of using the products or services that fit in the category. Obviously this process of popularisation is of greater importance to the health of the category than the individual manufacturer's/supplier's brand interests. The perceived conflict between joint and individual interests will prove to represent the biggest stumbling-block to come to a joint initiative!

Do I forget – in the above - essentials that will influence the market? I'm sure I do!

Do I under- or overestimate possible consequences and effects? Inevitably!

Did I incite you to look at the industry's future also from a different perspective? I genuinely hope so!


CHAIN REACTION

It's now about a year ago that the petfood industry faced – at least in certain parts of the world – massive recalls, probably unprecedented in the history of the industry.

Since then a lot of debate broke out with the aim to try and solve "the problem" for good.

Solutions brought to the table range from new committees, new regulations, additional ....... etc!

It looks as if the industry puts the blame of the disaster outside of its own court; is this justified?

Guided by some introspection the industry might come to the conclusion that it is not.

The chain reaction probably starts with somebody deciding what the end-buyer is prepared to pay for a product; whereas some consumer-research clearly indicates that price is not the key decisive factor for choice. Provided that the end-buyer perceives an added value relevant to her/him. Do 2 dollar-cents really make the difference?

Because the distributive trade is becoming more demanding re. margins (stockbrokers' analysts are watching over their shoulders), manufacturers are forced in a situation of extreme cost-diligence; they also have their stockbrokers' analysts who need to say some wise things each and every 3 months.

And, because manufacturers outsource, where can they put the burden of cost? Exactly!

After all, bonusses and careers dictate that the performance of the companies must be better than last year and taking market-circumstances into account would therefore be a silly thing to do.

So in a situation of – probably structurally – rising ingredient prices where can the compensation be found? Upstream?

Without wishing to imply that this has been the case with last year's recalls, I ask myself this:

"is the industry prepared to sacrifice the love for the animals - to which everybody in the industry pays at least lip-service - for just that little bit of extra profit?"

If so, we need only wait for the next disaster to hit us; it's consequence being diminishing consumer-confidence in industrially prepared petfoods: our business!

If players in the industry are prepared to shoot themselves in the foot for the sake of the quick buck, they will thus have lost the right to complain about being crippled.


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