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The COVID-19 pandemic caused widespread adoption of dogs and cats. Forced to work from home, many sought the companionship of a pet, causing the industry to grow.
To get a sense of the popularity of pets, look at the number of Google search queries for “How to get a dog” and “How to get a cat”. As you can tell, the interest in pets has gone up significantly in the past few years:
This growth offers opportunities. Pets are not cheap, and your money certainly ends somewhere along the supply chain.
In this post, I will try to understand the pet care industry, discuss some key trends and dig into the publicly traded companies in the sector.
Table of contents
1. Introduction to the pet care industry
2. Industry trends
2.1. Humanization of pets
2.2. Natural pet food
2.3. Health problems
2.4. Pet insurance
2.5. Pet tech
2.6. E-commerce
2.7. The COVID-19 pandemic
3. Investable universe of stocks
3.1. Pet retailers
3.2. Pet food companies
3.3. Pet health companies
3.4. Pet services
4. Conclusions
1. Introduction to the pet care industry
Humans have kept pets for thousands of years, but initially as hunting companions, for protection and for pest control.
Only by the 19th century did pets start to be valued for companionship and emotional support. For example, Queen Victoria was famously a dog lover and popularized the notion that pets should be seen as companions.
The “industry”, so to speak, grew from around the year 1900, when food companies started making specialized pet foods. Later on, we saw other services such as veterinary clinics, grooming services and, more recently, pet insurance.
In the United States, there are currently 180 million pets and in China around 100 million. The vast majority of them are either dogs or cats. Less popular choices include fishes, hamsters, birds and rodents.
The following chart gives you a sense of underlying growth in the industry:
As you can tell from the chart, the total number of dogs and cats worldwide is increasing at a rate of 2-3% per year. And growth is particularly strong for cats since they are more independent and require less attention.
Geographically, China has been the fastest-growing market, followed by Europe, the Middle East & Africa. This is due to the much lower penetration rates in China. In the United States, the number of pets per household is already 67% compared to just 26% in South Korea and 17% in China. Asia is where the growth opportunity is.
According to the following chart, China’s pet care industry grew by an astounding 31% per year in the 2010s, compared to low-single digits in the US and Europe.
So, what are the driving forces behind this newfound interest in pets? In my view, they include:
A later marriage age: This leads to fewer kids, more available space and more disposable income to spend on pets.
Single-person households: Singles are the largest pet-owner group in most countries, presumably because pets provide companionship.
Social media influence: this is subjective, but I believe that sharing images and videos of cute pets inspires people to adopt pets on their own.
Better support services: the ability to send your pet to short-term boarding services when you travel makes it easier to raise a pet on your own without the help of a larger family.
In any case, this is how I would categorise the industry: by dividing it into the five categories of food, accessories, services, medical and insurance.
If you look at the sales volumes for each category, food represents the majority of spending. It’s a US$140 billion market, with the United States being the single largest portion of it, followed by Europe, Japan and Brazil. And between dogs and cats, dog food represents roughly 2/3 of it, with cats the rest.
The second most important category is medical expenses, some of which tend to be paid for via insurance. But pet owners also spend money on grooming, clothing, toys, collars, boarding services, etc.
2. Industry trends
To understand “where the puck is going", I like to review the major trends in the industry. In short, these revolve around us increasingly treating pets as humans and tech such as e-commerce and smart collars.
2.1. Humanization of pets
According to a survey by YouGov, 88% of pet owners in America consider pets part of their families, and 66% let them sleep in their beds. This is part of a broader trend towards treating pets like humans, also known as “humanization”.
This has implications for the demand for premium pet food and services such as daycare, grooming, etc.
There’s also a broader shift in society. In most parts of Asia, pets are still not allowed on public transport, shopping malls or normal taxis, but this is improving. As ownership becomes simpler, I think the demand for pets will also increase.
2.2. Natural pet food
An extension of the humanization trend is the demand for premium pet foods.
In the past, dogs and cats primarily ate dry pet food known as “kibble”. These are typically coarsely ground meal or grain, often with meat and vegetables added on top of additives into pellet-sized pieces. Kibble is cheap and easy to store.
But in the past few decades, more attention has been paid to healthier pet foods, typically raw meat with bones or vegetarian food that isn’t as processed. A compromise option is what’s known as “kibble plus” - a mixture of kibble and pieces of freeze-dried meat and vegetables.
From what I can tell, the natural pet food market is growing fast, easily in the double digits for the major markets except the United States, where penetration rates are already high.
2.3. Health problems
Due to processed food, pet obesity has become a real problem. It’s led to health problems that are very similar to what humans are encountering: diabetes, gastrointestinal issues, urinary tract problems, issues with the bladder, etc. For example, in China, roughly half of all dogs and cats have at least one health problem. And that number keeps rising every year.
For that reason, the veterinary clinic market is now flourishing. They’ll do preventative screenings, undergo surgeries, and even prescribe food plans for specific conditions.
2.4. Pet insurance
Pet insurance is a relatively new phenomenon. It’s taken off in the past few decades, but it remains rare in most parts of the world.
Sweden leads with about 40% of pets insured, followed by the UK at 25% and the US at only 3%. In Asia, Japan leads with 12%, while China’s pet insurance penetration is said to be around 1%.
This disparity is because the cost of care and the attractiveness of individual plans vary drastically. From what I can tell, pet owners typically don’t see the value of pet insurance until disaster strikes, and they’re presented with large bills from veterinarians. So, the attitude towards pet insurance may change slowly as pet owners realize the risks involved.
On the surface, pet insurance is attractive, with loss ratios typically below 55% vs the property & casual industry’s typical 60%. But the problem is acquiring customers, which can be costly. In some markets, pet insurers have solved the problem by building relationships with veterinarians and pet shops and, in others, through online advertising.
2.5. Pet tech
Much of the innovation in pet technology has been driven by smartphone connectivity. For example, companies such as Dogness produce cameras that allow you to watch your pet on your smartphone and communicate with it.
A similar product is a smart feeding system that dispenses food or water at scheduled times or through a smartphone app. These systems ensure that pets don’t overeat and that owners do not need to be physically present to attend to their pets.
When it comes to trackers, Apple AirTags are by far the most popular. GPS connectivity also enables virtual fences, making sure dogs are kept within a certain area, such as your backyard.
2.6. E-commerce
While not necessarily regarded as pet tech, e-commerce has been another major trend.
It’s more convenient to deliver heavy bags of pet foods straight to the door rather than carrying them alone.
The selection of products is greater online than in a typical offline retail store.
But there’s a generational gap in purchasing habits. Studies show that older people tend to buy pet supplies in stores, while younger individuals default to buying online.
Somewhat related to this is the online veterinary services. For example, in China, JD.com has set up a scheme to train and certify veterinarians for a service called Ringpai. This service enables users to call veterinarians for advice about their pets. And the veterinarian can then prescribe OTC medicine that the users can then buy on JD’s platform.
2.7. The COVID-19 pandemic
COVID-19 caused the overall demand for pets to rise. People sought companionship during the lockdown periods as pet ownership is associated with better mental health.
But another pandemic effect was decreased demand for pet bathing, grooming, training and daycare services. The number of pet stores also dropped drastically as leases expired and retail chains restructured their businesses. That means the supply of offline retail stores is tighter than it used to be.
While COVID-19 seems to be a one-off event, the fact is that we now have a much larger number of pets being taken care of, and that has permanent implications for the demand for recurring services such as pet food, services and insurance.
But then again, consumer habits may have permanently shifted during the pandemic towards online purchases.
3. Investable universe of stocks
When I dug into the industry over the past few days, I realized that most listed companies are based in the United States or Europe. But I’ve also found several pet-related companies in Asia, for example, pet food producers in Thailand and a pet insurance company in Japan. So let’s dig into it.
3.1. Pet retailers
In the United States, Chewy is the biggest e-commerce seller focused on pet products. But the major retail giants such as Amazon, Walmart and Target also have a large presence in the category. Rural retailer Tractor Supply also sells food, supplies and accessories for pets. Petco operates specialist offline pet stores selling pet food, grooming supplies, and even the ability to acquire pets directly from them. Central Garden & Pet sells various lawn & garden products and pet supplies such as pet food, treats, bedding, grooming supplies, etc.
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