Fighting for the next business model in the pets industry

January 30th, 2012 by Patrick Stähler

I had in the last months the chance to apply business model thinking & innovation on several, very diverse industries: the airline and travel industry, the pets industry and some time ago on the media industry, particularly newspaper.

In the upcoming three next posts, I will share some insights I gained from using the business model canvas on these industries. The series will start with the pets industry.

A word of warning to all industry experts: I am not an expert for these industries. I’m not a pet industry expert. I am an expert for the process of re-thinking and re-inventing business models.

Pets Industry – A revolution in the making

The following slide deck is my presentation, I gave on January 27th, 2012 in Berlin at the Pets International conference. Enjoy some insights in a very interesting industry where the core is all around living creatures and the close relation we have to them.

Enjoy also my new design of the business model canvas I have created together with Gottschalk & Ash, a designer with the support of the Wolfsburg AG, an innovation incubator in Germany. You will see more in the future.

 

Pets are man’s best and dear friends

Pets are highly emotional and men’s best friends. Pets are members of your family. Sometimes they are treated better then human beings. Pets are for companionship or pleasure and treated with care and affection. The pets industry is very different from the livestock industry where animals are seen as assets.

The pet food industry seems from the outside a cozy industry where a few big firms dominate the shelves for pet food at the largest retailers. Will this last or will we see changes to the current industry structure and the current dominant business models?

Looking as an outsider at the industry, the biggest innovation in pet food seemed to be quite far in history with the emergence of branded pet food like Pedigree, Frolic or Sheba. Pet food is branded and marketed in very similar ways as (human) consumer products. Brands are build and emotions are used to create customer awareness and loyalty. So by applying classical fast-mover-consumer-goods marketing on pet food made pet food a consumer good even when the consumer is only the buyer but not the user. The extreme form is e.g. Sheba where humanisation of pets food is at its extreme. Sheba is made for humans (smell is specially designed for the human nose) and special edition like the Chrismas edition with porcini mushroom address humans not the needs of cats.

The giants of P&G, Mars, Colgate and Nestlé control the market

So it is not a big surprise that the classical consumer goods companies like Procter & Gamble, Mars, Colgate or Nestlé excel in the market for pet food as well. According to Wikipedia, these 4 firms control 80% of the pet food industry. They transferred their marketing know-how to the pet food market. Besides their strength in production and mass marketing, their core strength lies in the power play and negotiation with the large retailers like Carefour, Sainsbury or REWE in order to obtain sufficient shelf space to present their goods.

With their large advertising budgets, the large pet food firms are able to generate the necessary pull in the channels. The large retailers prefer to work together only with a small number of supplier in order to simplify their supply chains. And only the large consumer goods companies can withstand the enormous negotiation power of the retailers since they have must-have products in their large range of products. So large retailers require and cause large pet food firms and vice versa.

This business system is well entrenched in the industry for a long time. However, one can be much smaller than the current biggies to be an efficient pet food manufacturer, so the current industry structure is the result of channel economics and not production economics. Besides the four big ones, hundreds of smaller firms deliver 1000plus varieties of accessories and specialized foods and additives.

A very innovative firm, Royal Canin, was acquired in 2002 bei Mars. Royal Canin concentrates on specialized food for different life stages (puppets, adults, senior), sizes (mini toy, mini, medium, maxi, giant) to breeds (Yorkshire Terrier, Pug, English Bulldog, Cocker Spaniel….)

Fressnapf or Qualipet: Mega stores as game changers

Innovation in the pet food industry came in the last years from the distribution side. On the one hand, retailers like Aldi or Lidl moved into their own pet food via trade brands. On the other hand, new channels emerged with mega stores like Fressnapf or Qualipet. Fressnapf alone has 1.146 shops in 12 European countries.

These mega pet stores are large enough to build their own trade brand into a trusted brand. It is not the privilege of fast-moving-consumer-goods companies anymore to have access to customers and to knowhow to build a trusted brand. The trade brands of Fressnapf or Qualipet are trusted brands in their own rights today.

The Internet as the next game changer

The mega store concept was a typically game changer in many other retail category like books, consumer electronics or sports. However, the next game changer is already well known but less understood, the Internet.

The current industry structure of the pet food industry is the result of the (physical) channels economics and not of production requirements, and the internet is changing the economics of distribution again as did the mega stores. And the changing economics demand and enables different business models.

Often, it is believed that online will be just another channel and that it will help the incumbents to optimize their business model. Of course, the Internet can help the incumbents to optimize their current business model but it also allows new business models as we have seen in the case of Amazon. Amazon started as an online book retailer and industry experts expected that Amazon would be crashed by book mega stores like Barnes & Nobel or Borders. The opposite is true. Actually, Borders is now bankrupt, not Amazon.

Where is the next Fressnapf with the right choice of my pet?

Amazon is not just another distribution channel but also ventured into book publishing and reading devices. Amazon understood early that the Internet is not just another channel but can also change the production of goods as well. You might think that is only true for information goods like books that can easily be sold digitally, but think about the production economics of pet food.

Do you have to be as big as Mars to be an efficient producer? Do you have to be a bulk producer where all dogs get the same food in the same big bags and cans? Isn’t it possible to mix efficiently an individually designed dog food in production? Can you not offer MyDog Food in a similar way as MyMuesli or MyChocolate are doing?

People want the right choice, not more choice!

Yes, the Internet allows to bring individual blended and produced pet food together with a distribution system that allows such an individual distribution and that will, over the long haul, change fundamentally the business models in the pet food industry.

Royal Canin offers today all the different kinds of pet food, but the current physical distribution system is made to handle such a choice. The broad choice in the retail outlets is a tyranny. People want the right choice not more choice.

To make a prediction, which business models will prevail, would be like looking into a crystal ball but you can prepare by understanding your current business model and by understanding where change will happen. And change will happen.

4 Responses to “Fighting for the next business model in the pets industry”

  1. Fighting for the next business model in the pets industry | Business … | franchising Says:

    […] Tags: business model innovation, canin royal, changing competitive landscape, Colgate, dominant logic, frolic, Mars, Nestle, pedigree, pets food, pets industry, Procter & Gamble, sheba, time for change, unlearning Posted in business model innovation, case study | No Comments […]

  2. Karl Burrow Says:

    Interesting topic.

    I have already done some analysis on patterns
    and prototype business models on the Pharma
    Animal health industry in Japan .. Which can be
    reused for other markets as well.

    What is key is there are multiple customer segments
    which continuously rely on product innovation
    frequently.

  3. Patrick Stähler Says:

    @Karl Interesting that you work on this subject. The Pharma health industry can profit very much from a more personalized or better “animalized” pet food. Additives will not be marketed via different channels (in your case vets) but via the individual pets food. So if the dog has joint problems, why not mix the drugs into the daily diet.

  4. Pet Food Ratings Says:

    Hi Karl, I work in the pet food industry and the marketing clout of the big 4 is incredible (P&G, Mars, Nestle, & Colgate). Every day I hear people say “I feed my dog the best”, and then mention a food that’s pretty much diabolical (produced by one of those four). I have to groan, but you just can’t beat those cute commercials and mega advertising campaigns. It’s a shame, as most of the high quality food products are in the remaining 20%.

    My website says it all, if you care to read – http://www.petfoodratings.org

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