Wednesday, May 14, 2008

Business Week: Inflation Gnaws at Pet Food Companies

Inflationary Pressure

Inflation has been in the news a lot lately. Most of the talk has centered on gasoline and food prices. Pets eat too and feeding them is going to cost more even if prices stay the same.

You say 'How is THAT possible'?

The folks that sell pet food to your local supermarket will soon be selling less product for the same price. You will have to buy more packages in a given year. Continue reading and see Math Analysis below.

You may have to make extra trips if the food doesn't last as long as before. In the past you might have been able to go two weeks between purchases. With the smaller packages you might run out a few days early and have to drive to the store to purchase more.

What Might Consumers Do?
  • They may buy an extra bag when purchasing. This may lead to increased out-of-stocks. [lost sales to the brand?] [store reputation is damaged by out-of-stocks leading to channel, chain or store switching]
  • They may buy a bag of store brand as a hedge against running out. [Big Brand sales decline] [Store brand and retailer gain margin points and dollar profits]
  • They may switch to the next size up [Big Brand volume, market share and dollar share increase] [Store gets bigger basket size / register ring].
  • They may move category purchases to Wal-Mart, Costco or specialty pet stores to take advantage of larger package sizes and lower cost per unit. [Big Brands lose pricing power as buyers gain more market share] [Supermarkets lose as high dollar item purchases move to other sales channels]
  • They may try another brand [Big Brand A loses sales to Big Brand B,C, D, E or F]
There are certainly other consumer behavior possibilities.

Math Analysis

If the consumer makes no changes in purchase behavior and buys the Big Brand they will buy a few extra packages per year. An example is as follows. Before the cost/size changes the customer buys a 4lb bag at $5.89, lets call that $6. We will also assume that this amount lasts two weeks [14 days]. In a year they will buy 26 packages at $6. Total yearly spending is $156.
With the package size reduction perhaps the consumer can only get 13 days out of it. With a 13 cycle per package the consumer will need to buy 28 packages in the same 52 weeks. This means this consumer will be spending about $12 more per year for pet food.

What Are Your Thoughts?


Matt said...

The good news for consumers is that there are lots of brands on the market. More and more smaller, specialty manufacturers are making "Holistic" foods ever since the pet food recall crisis over a year ago. There are also plenty of pet expos and trade shows where the average consumer can get food samples and even find a new retailer from which to purchase food.

David Damore said...

Thanks you for the comments.

Some of the new 'natural and organic' brands are owned by the Big Brands or will be if they are more profitable.

Note: Del Monte markets the Cycle Natural brand of cat and dog food.

Input costs will effect all brands. Small brands have less leverage in negotiating raw material prices. They may have a tougher time coping with cost increases.