ROUGH!

RICHARD TURCSIK

Pet food is becoming a classic case of a supermarket category under attack by specialized retailers.

And as a result, sales and margins are in danger of going to the dogs.

Chains are now fighting back to head off the inroads being made by discounters, chain drug stores, membership warehouses and the pet food supermarkets mushrooming across the landscape.

The battle strategies are not unlike those mapped out for other supermarket segments under siege.

The plans include:

Carrying more high-margin treats.

Focusing on more upscale foods.

Broadening assortments of accessories.

Beefing up private-label programs.

Still, the pressure on margins is hard to resist. Heightened competition, coupled with already low margins and increased couponing and spending on advertising dollars, is prompting retailers to wonder if the profitability of the pet food aisle is in permanent decline.

Although the pressure is being applied throughout the aisle, the competitive dilemma may be most acute on the dog food side, retailers said, because dogs are less apt to be as brand-conscious as their finicky feline counterparts.

"We have seen an increase in competition from other sources in our market," said Chris Mintus, grocery product manager at Supervalu's Pittsburgh division, New Stanton, Pa.

"The biggest impact from the increased competition has been a reduction in sales. There has been a decline in the number of cases, bags and cans that are moved out of the stores."

Retailers are gearing up for a dogfight in the category.

"You fight the competition by maximizing your strengths. Our stores are easy to shop," said Richard Copeland, senior grocery buyer at Rainbow Foods, Hopkins, Minn.

"We have to constantly look at our selection and upgrade where necessary. We're carrying the more top-of-the-line foods. We're starting to promote the Purina O.N.E. and we're starting to carry some of the fancier treats," Copeland said.

"If they are undercutting you, you try to compete, but you have to realize that, no matter what you do, you're not going to have the volume that they have unless you decide to devote 12 gondolas in your store," he said.

Supermarket retailers have been re-examining their dog food offerings to shield them against the onslaught of competition. Many have been adjusting pricing and adding large club-pack sizes of dog food and profitable dog treats and private label to their mix in an effort to beef up declining sales.

"We have seen some increased competition from the wholesale clubs going into dog foods in the bulk sizes, and that has had a negative impact on our business. To combat that we are starting to carry bigger sizes and we have bulk sections in our stores," said Richard Byrns, head buyer for grocery at Harvest Foods, Little Rock, Ark.

"We've taken a lesser margin on most sizes. On the smaller sizes we're trying to keep our margins as close as we can. But if you keep cutting margins, you might cut yourself out of business, and that could cause problems. It just depends.

"We're fighting it as best we know how. Our ads seem to be doing a pretty good job and our business is being maintained," Byrns said.

"Many of our pet food items are now on [everyday low] pricing," said John Corcoran, category manager at Big Y Foods, Springfield, Mass. "It is something relatively new that has been evolving because of the club stores. The pet food supermarkets are not price-sensitive, so they have not been a problem. The discounters, Kmart, Wal-Mart, etc., are not really a problem. The club stores have more stuff that is price-sensitive. They are the real culprit."

Big Y is "carrying and selling more club items ourselves, such as the 50-pound bags of dog food and cat litter and the 5-pound boxes of dog biscuits that we merchandise in a special club section. Although the club stores have forced us to carry more of these items, we are also selling more of them. But the margins aren't great on them, and they are taking some sales away from some of the smaller items," Corcoran said.

"To further enhance sales, we are promoting treats more because they are more profitable and we have added the Kingston brand private label to our pet food line over the past year. "Private label has helped to change our profit level for the category, and as a result of our changes our sales are holding steady," Corcoran said.

He added that Big Y has adjusted its square footage to make way for its private label, as well as expanded cat food offerings, and noted that several leading manufacturers have downsized their products in an effort to keep retail prices down. But Corcoran didn't see heavier couponing from manufacturers as cutting into margins.

"Manufacturer coupons have not really affected the margins primarily because they are mostly for multi-item purchases, like buy-five-get-one-free. So they haven't been that deep a cut. Fifty cents off a 25-pound bag isn't a big deal, even if it is doubled," he said.

Counteracting the appeal of pet food specialty supermarkets is a more complex matter, retailers said. As Copeland of Rainbow Foods explained, "I don't think the pet food warehouses are necessarily getting any better deals, and I don't think they even have a better way of distributing it. "The big thing they have there is that we have underestimated the pet lover. They are a special store for the pet lover, where they can buy their food in 100-pound bags if they want it, then walk around and see what they can buy for their 'Charlie.'

"Margins on pet food are already pretty low; I think the appeal of the pet food stores has nothing to do with pricing. Their appeal is that they offer variety and lines of items that we don't even carry. Although there is no question that pet food stores loss-leader a certain amount of stuff, most of the people going there are not going to save money," he explained.

Peter Jost, head buyer at Harp's Food Stores, Springdale, Ark., said he is seeing an erosion of high-priced lines and more prepriced items.

"Penny profits in dog food are diminishing because you are getting a lot of trade-offs and trade-downs to the prepriced and popular-type dog foods. To stabilize margins we're trying to get a little better mix in the department, like carrying more high-margin pet supplies," Jost said.

Mintus of Supervalu's Pittsburgh division also has been seeking to broaden the mix of pet supplies offered in the Shop 'n Save stores and other supermarkets the wholesaler supplies.

"We are carrying a little more variety to compete with all of the formats that are available. We're looking to improve our distribution in the profitable things like treats, and increase sales of items moved through our general merchandise warehouse," he said.

"We have looked at other opportunities to increase retail profit. We're looking to sell more snacks to make up for the stuff that is sold at cost everyday. Snacks are really impulse items. You can advertise them, but nobody knows what they are until they see them.

"We use displays and shippers, get them out in front of the customer, especially at Christmas when they treat the pets like their children. There are pet stockings and things that have a good gross margin at retail, and they are an advantage for the retailer to sell. So we get them out early so that we get that sale," Mintus said.

Mintus has noticed a shift in dog food to name brands. The Supervalu division's best-selling dog food is Purina Mainstay, followed by Dad's, a regional brand based in Meadville, Pa.

"We used to have a lot of generics, substantially more than we do now. Generics used to be the best-selling thing in the warehouse, but not any longer. Just as people have become value-conscious for themselves, they also have for their pets. If they have a particular variety of dog food, they pretty much are brand-loyal," he said.

Dick Salmon, senior vice president at Melmarkets Foodtown, Garden City, N.Y., said his chain features dog and cat food on a weekly basis. Melmarkets devotes two 72-foot gondolas to pet foods, with about 70% being devoted to dog food.

"We have put in a lot of higher-margin items to upscale life for the animal. It is another way to make money because margins on dog food have eroded. Where you used to work with 28% to 30%, you are working today at a lot closer to 18% to 20% because of the discount," Salmon said.

Salmon said there has been a proliferation of pet food supermarkets on his Long Island, N.Y., operating area. Nonetheless, dog food sales at his chain have remained strong.

"Sales of dog food are very good no matter what. On bad weeks of business you still sell tons of dog food. It is the third-best aisle in the store, behind household products and canned veggies," he said.

Terry Ryan, category manager at Food Barn Stores, Kansas City, Mo., said pet food supermarkets have been cropping up in his market. "I have no idea what percent of business we're losing, but I'm sure it must be some," he said.

Still, Ryan said he does not see the pet supermarkets having a bright future. "I can't imagine that an outlet that just specializes in dog food and dog treats can make it for very long, because the margins are so low," he said.

Mintus of Supervalu also sees a shakeout in the pet food supercenter industry.

"There are only 'X' number of dollars, and only so many cats and dogs who can only eat so much. Some day I think you'll see the same shakeout that you're seeing in the warehouse club stores and the deep-discount stores. Initially these stores have an attractiveness, but long-term I think you'll see the same thing.

"The pet supermarkets by us really do not do much advertising. They are more of a word-of-mouth thing and people shop there because they think they are getting a better value. Whether they do or not is questionable," he said.