Pampering Our Pets

Americans have long led the world when it comes to spending money on pets.  A recently released survey by the American Pet Products Association shows that this position remains secure with overall pet-related spending reaching a record $60.3 billion in 2015. As the chart below shows, this total represents a 25% increase from just five years ago. While the largest amount of money is spent on pet food, pet services which include things like grooming, boarding, and pet sitting is experiencing the largest growth - up 11.8% over the last year. 

A number of factors are driving the increased spending. First, the U.S. consumer is in relatively good shape; employment levels are high and debt burdens relatively low. Expanded insurance coverage is allowing many individuals to spend more on their furry friends.

But as anyone with a pet knows, there is more than just finance going on here. Increasingly, pet owners are viewing their pets as extensions of their families. Consider a recent Harris poll which found that 71% of pet owners reported allowing their pets to sleep in their bed and 45% reported buying them birthday presents. If this sounds all too familiar, clearly you are not alone. A variety of societal changes are likely contributing to our increasing tendency to “humanize” pets. In most of the developed world, couples are delaying childbirth and having fewer children. Pets too provide a unique form of companionship to aging baby boomers who are now enjoying longer and healthier retirements. Finally, the move toward urbanization evident across much of the globe seems to be causing a surge in demand for smaller pets rather than the absolute decline in pet ownership that was anticipated.

A wide range of new services is springing up to help pet owners provide their furry “dependents” with the best experience possible. On the technology front, activity tracker Whistle helps keep pets in shape by logging their location and every step. iFetch automatically throws a ball so owners don’t have to and ICPooch, using a digital camera and remote treat dispenser, allows owners to video “chat” with their pets. The food industry is also innovating. Today 17% of all pet food sold is considered organic, up from just 11% in 2011. Enterprising estate tax lawyers now offer planning to ensure that pets are cared for after the owner’s death and high end pet “hotels” can be found in most cities.

While the boom in pet care spending has always been considered a “rich world” phenomenon, this too is changing. Rising income levels are supporting growing pet ownership rates in most emerging markets. Consider that this year Brazil is expected to surpass Japan as the world’s second largest pet care market behind only the U.S. Most countries still have a long way to go before reaching the $1,151 Americans spend annually on their pets but they are heading in that direction.

Investors interested in the pet care industry can select from a number of public companies including manufacturers and distributors of veterinary drugs, diagnostic testing firms, pet product suppliers and retailers. The industry’s high growth rate and somewhat recession-resilient quality has attracted a lot of investor interest. Many of the world’s leading pharmaceutical companies and private equity firms are also investing in the sector by buying up existing players or funding start-ups.  As a result, the shares of many established pet care firms today trade at frothy levels. Rather than chase the opportunity and risk overpaying for growth, we are comfortable keeping an eye on the sector and waiting for a more favorable entry point.