Wal-Mart's recession-time pet project
Analysts say the retailer is cleverly pursuing the pet products market in an economic downcycle.
NEW YORK (CNNMoney.com) -- In this tough selling environment, Wal-Mart's business is quite literally going to the dogs. And to a few cats as well.
Eduardo Castro-Wright, CEO of Wal-Mart Stores U.S.A., recently told a gathering of analysts that the $43 billion pet products category was "going to be a big investment for us this year."
Castro-Wright proceeded to show a few slides illustrating how Wal-Mart (WMT, Fortune 500) is "redefining" the pets business in its stores, including repositioning pet food and supplies right in front of its other fast-growing business, baby products.
There lies the connection, according to retail industry experts, who point out that kids and pets tend to be fairly recession-resistant businesses.
Even in a recession, dogs will be fed and kids will get their toys, said Stevan Buxbaum, analyst with retail consulting firm Buxbaum Group.
Morningstar senior equity analyst John Owens agreed, adding that Wal-Mart could score a double-whammy with its intensified pets strategy.
For one thing, he said Wal-Mart is being smart by ratcheting up investment in a category that guarantees continued consumer spending regardless of how tight the household budget gets.
This could help offset softer sales in Wal-Mart's other businesses, including clothes and home-related goods.
Second, the world's largest discount retailer is well-positioned to grab a bigger piece of the pet products market that's growing about 8% a year, as cost-conscious consumers continue to "trade down" to less pricey alternatives in a difficult economy.
Owens said Wal-Mart's Ol' Roy line is the nation's No. 1 dog food brand, and that the retailer is aggressively competing in the premium pet food market with its Natural Life brand.
"Wal-Mart's a formidable competitor in pets, but there's still lots of growth left in this market," said Owens.
Analysts estimate that, in general, Wal-Mart saves consumers about 20%, either through brand switching or by shopping at its lower prices.
The latest pet ownership and expenditure numbers look promising for Wal-Mart.
About 63% of U.S. households own a pet, which equates to 71.1 million homes, according to the 2007-2008 National Pet Owners Survey from the American Pet Products Manufacturers Association (APPMA).
This includes about 45 million households with dogs and 39 million with cats.
What's more, the APPMA estimates that Americans will spend about $17 billion on pet food this year, another $10.3 billion on supplies and about $3.2 billion on pet grooming and boarding.
Although Wal-Mart doesn't break out product sales figures, David Lummis, pet industry analyst with market research firm Packaged Facts, estimates that Wal-Mart controls about 25% of the pet products market, making it the No. 1 seller of pet products.
"Wal-Mart said in 2005 that it wanted to own 30% of the market by 2010," Lummis said.
However, Owens maintained that Wal-Mart's size gives it an unfair advantage over its competitors in whatever category it enters. In terms of variety of products, Owens ranks PetSmart (PETM, Fortune 500) as the No.1 specialty seller of pet products, followed by Petco.
If Wal-Mart really wants to dominate the pets market, Lummis said the retailer will have to take a page out of PetSmart's book and expand beyond food and supplies.
For instance, he said pet grooming is one of the fastest-growth and highest-margin areas.
Additionally, pet insurance - health coverage for animals - "is going gangbusters," Lummis said. "This is still a tiny 1% of the market, but big brands like Purina and Kroger are moving in."
Both Owens and Lummis say that even with Wal-Mart's expanding footprint in pets, they aren't too worried about a big industry shakeout. And neither is PetSmart.
"We offer everything pet-related under one roof," said Jennifer Ericsson, spokeswoman for PetSmart. "Other companies can't offer this under one roof."
Ericsson said pet services continue to be an important competitive advantage for PetSmart.
"Once pet parents start grooming and training their pets, they tend to continue with it," she said. "So services are a stronghold for us."
Besides the absence of pet services in its stores, Lummis said Wal-Mart's growth in the pet market will likely also be challenged by having few stores in the middle of big cities.
"Wal-Mart can't yet offer the convenience of a corner pet store in your neighborhood," he said.