Petsmart & Petco Not Feeling the Heat from Discounters

The Wall Street Transcript, which publishes its Pets and Vets Report, recently interviewed Joan Storms, CFA.  She is a sell-side Equity Analyst with 16 years experience covering specialty hardline retail companies. She has been at Wedbush Securities since 1999.  During the interview she provided the following information.
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The industry is highly fragmented. You have PetSmart (PETM) and PETCO, the largest specialty retailers in the U.S., which combined are probably about 20% of the market. Those companies have very good returns, so it has been an attractive area for the discounters to want to try to exploit and expand the category because it is largely consumable and it is a traffic driver. There are a lot of players in the pet market, including specialty pet stores and mega retailers, and even grocery stores, who have different levels of participation in the pet sector. Overall, though, the big retail players are PetSmart and PETCO.


The real competition is from other specialty stores. It is a highly fragmented marketplace. The market share opportunity has really expanded for the larger retailers because a lot of the independents went out of business during the recession. 


It was a few years ago when there was a lot of talk about increased competition from mass merchants like Target (TGT), which announced they were going to expand their pet business. And Wal-Mart (WMT) was getting some access, but still very limited access, to some of the higher nutrition content food. People thought this was going to be a big deal, but it really has not had much of an impact on the specialty retail sector at all. If you look at Wal-Mart, most of the pet food is actually their own private label brands, although they do carry a very limited number of higher-nutrition-content SKUs that are gaining in popularity. Overall, they carry a very small assortment and there is no service. Pet owners want to know what kind of food to buy or what kind of medicines, which really requires knowledgeable customer service. And that's one thing that PetSmart has done a phenomenal job with. They train their associates about pet foods, medicines and other products.


The Wall Street Transcript Article