Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
Executive summary: The $210bn pet economy is growing at a high single-digit rate annually, meaning it could be worth over $350bn by the end of this decade. Animals have their own dietary, healthcare and other supply needs distinct from humans, but the demand drivers are consistent: health and wellness, convenience and personalisation. The industry is also increasingly digitalising, with everything from product purchasing to virtual visits via remote monitoring now being conducted online. With a ‘long tail’ of predictable demand and economically resilient income streams, not to mention the clear scope to offer premium high-margin products and services, the industry is attracting the interest of investors. There are multiple listed ways to gain exposure to the sector, although we currently see most logic in integrated business-to-business players such as Covetrus.
Last November, your author joined the legion of 10m other UK adults and got a pet dog. To say that the experience has been life-altering might almost be an understatement. There have been inevitable highs and lows (early morning toilet trips with a small puppy will never be glamorous), but the unconditional love that pets can offer is quite remarkable, and helped many – ourselves included – through the darker days of lockdown. It’s almost hard to remember what family life was like in a pre-pet era. Further, unlike children – who will, at some stage, move out – our pet will be with us for all her life.
Does any of the above sound familiar? It should do to many readers of this piece, since globally, 38% of households have dogs and 31% cats (based on a 17-country survey by GFK). In the United States, the world’s largest market for pets, household ownership reaches 67%, with dogs outpacing cats (32% vs 21%, per the American Pet Products Association, or APPA). The Argentineans are the world’s biggest lovers of dogs – they inhabit 66% of households – while the Russians favour cats most highly (present in 57% of households, per the GFK survey).
Unsurprisingly, then, the pet economy is a large market, worth $210bn (per Global Market Insights). The US market alone is worth ~$100bn (per the APPA). In the past decade, the market globally has expanded at a faster pace than world GDP (66% vs 43%, per another study, by Euromonitor) and is set to experience high single-digit growth over the medium-term, based on most consultants’ forecasts. Anyone who owns a new cat or dog can expect to have that animal for at least ten years, implying a ‘long-tail’ of predictable demand.
Think of the pet economy as being the ecosystem that embraces the well-being of companion animals. Pets clearly have their own dietary, healthcare and other supply needs, distinct from humans. At the same time, many of the same drivers that support (human) consumer discretionary behaviour also play to the world of pets: wellness, convenience and personalisation. The digitalisation of all the above provides an additional demand driver.
Pet owners clearly want to give their pets the best life possible. 75% of those interviewed said that taking care of their pet’s health was as important as their own, a conviction reinforced by the fact that 90% of dog owners and 86% of cat owners consider their animals as part of the family (data from IDEXX and Packaged Facts respectively). The reason why is simple: pets are credited with helping humans with everything from mood to security to exercise and more. The term ‘zooeyia’ exists to characterise the positive benefits to human health from interacting with animals. Various studies suggest that interacting regularly with animals can help reduce anxiety, depression, fatigue and physical pain. One recent report from the University of York found that over 90% of pet owners believed that owning a pet helped them cope emotionally through the first lockdown of 2020.
An important consideration here is that pets offer companionship. This matters since the number of one-person households is increasing globally, partly as a function of demographics. The UK’s Office for National Statistics forecasts a 25% increase in people living alone between 2016 and 2041. Pets are a powerful antidote to loneliness. In China, pets have become a substitute for children, particularly in larger cities. In a country with 240m single adults (or 17% of the population), the pet economy is predicted to expand at a 25% compound annual growth rate over the next five years (per PwC).
The corollary of the above is that the disposable income owners are willing to allocate to their pets is increasing. Longer pet lives also imply more product innovation, primarily to address hitherto unmet needs (not to mention illnesses). 69% of pet parents say that they are now spending more on pet products than they used to, while 85% stated that they were willing to pay more for pet foods that were healthier for their animals (per Packaged Facts). A separate study highlighted that 69% of Millennials give their pets natural or organic food, with a similar percentage also purchasing products that had a low carbon footprint and/or sustainable packaging (per First Insight Research).
The market for pet indulgences also continues to expand apace, with product innovation in this segment both delighting and bewildering your author (as well as occasionally lightening his wallet). Dog yoga, or doga, is apparently a big thing now. Should owners wish to take their dogs to stay at a Hilton hotel, there is a dedicated dog menu (‘Bone Appétit’) available, offering the likes of ‘Beef Doguinon’ and ‘Earl Greyhound’ tea. Next time you’re celebrating a special occasion and want to involve your pet, why not consider ‘Pawsecco’ freeze pops? The list goes on, but it is worth noting that over 50% of cat and dog owners gave their pet a Christmas treat, while around a third mark their animal’s birthday (per Petpedia).
Furthermore, just as consumers are increasingly digitally connected, so they are seeking similar smart devices for their pets. Pet safety and security are the two biggest concerns animal owners say they want to solve. Related is the deployment of pet-tech to ensure that animals feel less lonely when their owners are absent. Solutions include pet cameras, trackers and GPS collars as well as automated feeding devices. Perhaps the most novel idea is DOGTV, which does exactly what it says, creating “personalised patented programming that dogs can watch, learn from and be entertained.” Your author has not started a subscription (yet), but over 10% of US households have adopted some form of pet-tech.
As with most humankind use cases, digitalising the animal world shifts the industry paradigm from a reactive stance to a proactive stance with higher overall engagement levels. Pet owners naturally want to transact online, whether it is purchasing food or dealing with their vet. More broadly, the application of technology to the pet sector creates a scenario where everyone wins, particularly in the context of animal healthcare. Think of it as improving outcomes for all stakeholders: better business and clinical results for veterinarians, increased growth for product manufacturers and more convenience (as well as better care) for animal owners.
Against this background, many of the future trends we have written about elsewhere are now also gaining in prominence in the world of pets. Take telemedicine, the virtual vet increases convenience and efficiency for pet owners and can reduce the stress (for both animal and owner) of having to take a pet on a long journey for a real-world consultation. If offered as a subscription service (by the likes of Pawp, VirtuWoof, PetDesk, WhiskerDocs etc. in the US currently), then the recurring revenue stream also constitutes an attractive business model. Another example is the growth in animal DNA sequencing, which allows not only for the tracing of lineage – important for breeding purposes – but also to pre-empt future potential illnesses. The concept behind BorrowMyDoggy is also a good one: this app connects busy animal owners with those who want to spend some time with a dog but are unable to own one. It’s a great example of the sharing economy. Expect further use cases to emerge too.
With multiple demand drivers, it seems there is little not to like about the pet economy opportunity. One charge often levelled at the industry is that animal owners typically use discretionary income to purchase services or products for their pets and hence economic concerns may cause some owners to forgo or defer visits to veterinary practices or, in extreme cases, even cease to continue owning a pet. The good news is that data from previous recessions (particularly during the credit crisis – see information on the Bureau of Labour Statistics website) is that pet expenditure remains one of the most resilient categories across the economic cycle. A recent (July 2020) survey by IDEXX found that pet owners said that, were household income to decline, then they would forgo eating out (90% of respondents), personal grooming services (85%) and video streaming services (77%) in order to cover pet expenses. The other important consideration of which it is important not to lose sight is that, as the pet industry preimmunises, animal well-being remains the priority. Not all pampering services may suit all animals, while virtual pet care requires strict regulation. In the US, a pre-existing vet client-patient relationship already needs to be in place prior to any tele-vet services being offered.
From an investment perspective, the industry has undoubted attractions. The category has been stable and predictable, yet also expanding, revenue streams; there is high purchase frequency, low seasonality and resilience in economic downturns. Subscription-style business models abound and for active players within the space, the margin upside potential from premiumisation and/or digitalisation is significant. There is also ample scope for industry consolidation, given fragmentation, particularly in certain segments such as consumables. For businesses that are able to operate across multiple adjacent areas of the pet economy, the opportunity costs for suppliers/customers of switching are also significant.
Multiple ways of gaining exposure to the pet economy theme exist, from animal healthcare and diagnostics through to broad-based solutions via direct e-commerce plays as well as dedicated pet food and animal insurance specialists. Within the former category, US-listed Zoetis is the market leader, while IDEXX dominates the diagnostics space. Covetrus offers an interesting business model, as the global leader in the distribution of veterinary products as well as number-one positions in US prescription management and software solutions, including telemedicine. Even if Amazon has a significant presence in the companion animal e-commerce space, Chewy has established a strong presence in the US as has Zooplus in Europe. Several Chinese-listed plays such as PetPal Pet Nutrition Tech, Dogness International and Yantai China Pet Foods also exist. Expect more players to enter this market over time. The long tail is a large opportunity.
Alex Gunz, Fund Manager, Heptagon Capital
Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.
** All pet photos courtesy of the Heptagon team **
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