FUNDAMENTALS OF MICROECONOMICS
(EC4004)

CASE STUDY MICROECONOMICS
October, 10, 2010

List of Table and Contents
Introduction 2
Methodology 3
Determinants of Demand 3 1- Price 3

2- Marketing Activites 4

* Dog owner emotional engagement fuels potential market growth 4

* Awareness of Dog Food benefits 4

a) TV advertising campaign 4

b) Point of Purchase material 4

c) Consumer Promotions 5

d) Sponsorships 5

e) Product Innovation 5

Conclusions 5

References 6

Introduction
Nowadays, trends are changing and people are caring most of their pets and its health, nutrition, long and happy life. Dogs are probably the most common and numerous pet in World, and Mexico is not the exception for this rule. The purpose of this work is to analyze the characteristics of the demand for the dog food business in Mexico. This business has shown a CAGR of 3% during the last six years. Dog Food business is divided in three categories based on food type: Dry Dog Food, Wet Dog Food and Treats / Mixers. The most important category is Dry Dog Food with 89% far followed by Wet Dog Food with the 6%. There is another category division based on price: Super Premium, Premium and Standard. In terms of Market players there are 13 competitors in this category: The most important producers are EFFEM with 48% of market share and Nestle with 21%. Regarding brands, the most important are: Pedigree: 33%, Dog Chow 7%, Perfect Fit 5% and Eukanuba with the 5%.

DogFood Brand Shares % 2008

DogFoodCompanyShares % 2008

Methodology
For the analysis of the dog food market, it was necessary to do a research for the market trends (increase/decrease of dog population, education of the dog owners about benefits of dog food); the view of the dog owners about the dog food and its presentations, prices and quality. As well as the willingness of the dog owners to continue buying the dog food in the changing circumstances of the market (price raising, economic crisis, market substitutes, etc.).

The steps followed to achieve this objective are:

1. Bibliographic investigation of the market size for dog food in the Mexican market, the view of the dog owners, the companies producing dog food, price, substitutes. 2. Comparison of the indicated characteristics through and between years 3. Interpretation of the collected data to observe the market behavior for this particular industry, when faces changes in the dog owner view of the market, crisis or rising of prices. 4. Determination of the challenges faced by the industry. 5. Conclusions.

Determinants of Demand:

1.-Price

As up year 2008, the demand felt down 21% in comparison to previous year. Among the main reasons for this fall are: The row material cost of producers increased due to the Mexican currency devaluation. This fact “forced” the manufacturers to transfer the cost increase to the consumers. Since this market is considered an Oligopoly, the demand is elastic to the price changes. In addition, it is easy to find substitutes products; such as: Human food leftovers. The outcome of the described situation pushed the demand down.

The “Mon and Pop” distribution channel leveraged the circumstances and offered the market Dog food in bulk. This strategy allowed them to maintain their sales in spite of the reduced total market. As a result, the producers decided to launch smaller size presentations, which in the long run stopped the sales fall, reducing the sales fall from 21% in 2008, down to only 3% in 2009.

2.-Marketing Initiatives

-Dog owner emotional engagement fuels potential market growth

Manufactures realized that the ratio of dog per household was still low, making evidence that there was still a significant growth potential. As a consequence, dog food producers encouraged diverse nonprofit associations to promote emotional engagement to the dog wellness. Dog owners started to care more about: Nutrition, health care and dog pampering. Therefore, the manufacturers found new market niches for new products, such as super premium brands focused on health enhancement or treats to pamper the dog. The current dog owning households ratio in Mexico has grown from 38.3% in 2004 up to 40.5% into to 2009. In order to exploit this booming market, different efforts have been done by producers, launching marketing campaigns such as: “Adopta un perro”.

- Awareness of Dog Food benefits

In addition, manufacturers realized that the ratio of dog food prepared vs. none prepared was too low in Mexico. Therefore, manufacturers began to develop marketing strategies in order to create a higher awareness of dog food benefits. These strategies were mainly implemented through:

a) TV advertising campaigns
Emotional situations between owner and pet were exploited by producers to encourage pet care i.e. EFFEMS Perfect fit showing a situation suggesting that the dog wants a balance life, such as the owner enjoys.

b) Point of Purchase material.
Additional exhibition at key seller “hot spots” were implemented to promote the different products benefits i.e. Hill Pet Nutrition, which sells only through veterinary sale points, spread out brochures in the veterinary clinics and pet stores.

c) Consumer Promotions
Producers decided to increase sales volume in the short term by encourage the consumer through give away attractive items for each product bough i.e. Dog Chow promotion in which a dog bed was gave away when customer purchased a package of four kg and above; in a similar promotion, premium brand Beneful offered a free dog bowl.

d) Sponsorships
Producers developed different sponsorship programs to increment brand awareness i.e. “Incredible dog challenge”.

e) Product Innovation
In order to maintain, and even increase profit margin, producers improved the food formulations and packages. I-e.(Nestlé’s effort to re-launch Campeon brand with a different formula using the slogan of “looking similar to human food”.

All these efforts helped to reduce the shortfall of 8 pps showed between 2007 and 2008 down to only 1 pps between 2008 and 2009.

Conclusions

The market of dog food has changed in last few years, due of the changes in the perception of the pets inside families, mostly in developed countries. Dogs are the most common and numerous pets, and nowadays are treated as another member inside the family. Dog owners pamper their dogs, and care about the nutrition and general wellbeing of their animals.
One of the findings about this market is that it has an elastic demand, strongly dependent of the income of the families in Mexico; as income decreases, the demand for dog food decreases as well. Besides, the dog food in Mexican market has one mayor (and almost free) substitute: the human food leftovers. Commonly, the families, mostly the low income ones, feed their dogs with the food they don’t use, or the parts of the meat markets that is not sold for human consumption.
Because of that elastic demand, the industry had the need to change the ways producers do business. First, market players need ongoing innovation to adapt themselves to the changing needs of the market, such as: New and smaller size presentations, sales and marketing promotions, effective campaigns of education on how to feeding dogs with specialized and prepared food. These initiatives, along with dog adoption programs were key elements to increase market penetration.
Currently, the industry of dog food is facing new challenges as low recovery of world economy, need of new formulation and customized and specialized products (aged dogs, puppies, small breeds, active dogs and sedentary dogs) demand from producers more effective sales promotions to change the mindset of the Mexican consumer about feeding dogs with the “leftovers”.

References

1. (2009). BRANDED PET FOOD CONTINUES TO BE RESILIENT. Checkout, 35(6), 93. Retrieved from Business Source Complete database. 2. Brady, D., &Berner, R. (2005). Pets Are People, Too, You Know. BusinessWeek, (3961), 114. Retrieved from Business Source Complete database. 3. Euromonitor. (March, 2002). Market growth for one man and his dog. Brand Strategy, March 2002, Issue 157, p 18-19. 4. Euromonitor International, (November, 02, 2009), Dog Food Mexico, Official statistics, trade associations, trade interviews, http://www.portal.euromonitor.com.ezproxy.t-bird.edu/Portal/ResultsList.aspx 5. Euromonitor International, (November, 02, 2009), Dog Food Mexico, Official, Trade associations, trade press, company research, trade interviews, http://www.portal.euromonitor.com.ezproxy.t-bird.edu/Portal/ResultsList.aspx 6. Euromonitor International, (November, 02, 2009), Dog Food Mexico, Official statistics, trade associations, trade press, company research, store checks, trade interviews, http://www.portal.euromonitor.com.ezproxy.t-bird.edu/Portal/ResultsList.aspx 7. Keenan Jr., W. (March, 2001). (PET) Food for Thought. Industry Week, Volume 250, Issue 3, p 23. 8. Parker, P. (2004). Global Trade Perspective 2005 - Dog & Cat Food for Retail Sale. Global Trade Perspective 2005 - Dog & Cat Food for Retail Sale, 1. Retrieved from Business Source Complete database. 9. Parker, P. (2005). 2006-2011 World Outlook for Dog Food. World Outlook Report 2006-2011: Dog Food, 1. Retrievedfrom Business Source Complete database. 10. Parker, P. (2005). 2006-2011 World Outlook for Complete Dry Dog Food. World Outlook Report 2006-2011: Complete Dry Dog Food, 1. Retrieved from Business Source Complete database. 11. Parker, P. (2005). 2006-2011 World Outlook for Manufacturing Dog & Cat Food. World Outlook Report 2006-2011: Manufacturing Dog & Cat Food, 1-187. Retrieved from Business Source Complete database. 12. Parker, P. (2005). 2006-2011 World Outlook for Semi-Moist Dog Food. World Outlook Report 2006-2011: Semi-Moist Dog Food, 1. Retrieved from Business Source Complete database. 13. Parker, P. (2009). The 2009 World Market Forecasts for Imported Dog and Cat Food for Retail Sale. Imported Trade Reports, 8-105. Retrieved from Business Source Complete database. 14. Raugust, K. (2006). PUTTING ON THE DOG. SN: Supermarket News, 54(36), 54-55. Retrieved from Business Source Complete database. 15. Tesform, G and Birch, N. (September, 2010). Do they buy for their dogs the way they buy for themselves? Psychology & Market, Volume 27, Issue 9, p 898-912. 16. Wood, L. (September, 2010). Research and Markets: The Dog and Cat Food Manufacturing Industry’s revenue for the year 2009 was approximately $16.2 billion USD. FT Intelligence Wire UK & Ireland. M2 Presswire. Retrieved October 5, 2010 from https://mintglobal-bvdep-com.ezproxy.t-bird.edu/version-2010917/Report.serv?seqnr=14&context=EKHVR5&databasecontext=News&_cid=59