The leftovers

The new normal

Premiumisation has been the signature trend of the North American dog and cat food market for at least a decade. Between 2011 and 2016, real value sales in this segment rose by 24%. Over the same period, real value sales of economy and mid-priced offerings declined by 6% and 2%, respectively. The JM Smucker company has been the most visible casualty of this trend, with its pet food sales – which are heavily overweight in the mid-price and economy segments – declining at an annual rate of 6% during the three months to June 2016. Unlike rivals Mars and Nestlé, The JM Smucker Co is significantly underweight in the premium dog and cat food segment, where its Natural Balance and Nature’s Recipe brands accounted for a cumulative 5% of value sales in 2016, compared with value shares of 13% and 16% in the mid-priced and economy segments, respectively.

‘The new normal’

With premium offerings now accounting for close to two-thirds of value sales in North American dog and cat food, excluding treats and mixers, it is not unreasonable to think of premium products as ‘the new normal’. For a large number of owners, it is now almost unthinkable to trade down to economy or even mid-priced offerings, which they consider to be of inferior quality or even – rightly or wrongly – unfit for their pets. As a result, cross-price elasticity of demand (the responsiveness of demand for one good to a change in the price of another) between three segments is diminishing. All the price cuts in the world are not going to tempt most premium consumers back to mid-priced and economy brands.

A relatively muted private-label threat

On the other hand, mid-priced and premium brands can take solace in two things. The first is that these segments have not been cannibalised by private label to the same extent as in Western Europe. In fact, the share of North American economy dog and cat food value sales accounted for private label actually declined significantly between 2011 and 2015, from 48% to 42%. In the North American mid-priced segment, this figure declined from 15% to 14% over the same period, compared with a 2015 figure of 18% in Western Europe.

The benefit of being off-trend 

The second is that the lack of dynamism in these segments means that they attract relatively little in the way of new product development. From the point of view of new entrants, the logic of such a strategy is iron-clad, but it is nonetheless a boon for ‘legacy’ brands, as they face relatively little threat to their market share from new entrants. 

In stark contrast to the premium segment, the cumulative share of mid-priced dog and cat food values sales accounted for by Mars and Nestlé actually rose slightly between 2011 and 2015, to 67%. In the economy segment, the cumulative share of market leaders Nestlé and JM Smucker increased from 50% to 55% over the same period.

Mid-priced segment set for a rebound?

While real value sales of economy dog and cat food in North America are forecast to decline by a further 6% between 2016 and 2021, sales of mid-priced offerings are forecast to recover, increasing by 4%. Some, such as less-affluent millennials with a commitment to quality but lacking the purchasing power to fully back it up, will trade up from economy but not make the full leap to premium and settle for mid-priced offerings. While these figures pale beside forecast growth in premium sales over the same period (18%), this should not disguise the fact that the economy and mid-priced segments remain robust revenue sources for Mars, Nestlé and JM Smucker.