Today is the first edition of a new segment in the newsletter where I will be exploring market research related to investing trends.
Change is the only constant in our world. It brings risks and opportunities and can be disruptive. Trends are profound changes in secular or economic conditions that occur over the long term. Analysing investing trends does not simply mean following short-term hypes. Instead, it relies on fundamental tools with longer time horizons.
The Covid-19 pandemic has had a profound impact on all of our lives. Lockdowns resulted in many people feeling lonely and isolated. To counteract this, households adopted animals in record numbers. The shift to remote work means that even after the pandemic ends these pets are now here to stay.
What implications does this have for investors and how can you position your portfolio to benefit from this trend?
The Statistics
67% of US households own at least one pet, representing 85 million households across the country, according to the American Pet Products Association. The breakdown of pet ownership is as follows:
Dog 63.4 million
Cat 42.7 million
Fish 13.1 million
Bird 5.7 million
Small animal 5.4 million
Reptile 4.5 million
Horse 1.6 million
85 million households in Europe own a pet, representing 38% of all households across the continent, according to European Pet Food Federation.
Over one third (35%) of young adults (age 24-35) have already embarked on lives as new pet owners in the UK, according to the Pet Food Manufacturers Association
One in eight people, or 12% of those polled got a new pet during the sequence of national lockdowns in Ireland, according to the Irish Times.
18% of current pet owners have taken in an animal since March 2020 in Canada, according to Narrative Research.
The above data indicates that pet ownership is on the rise globally and not just isolated to one geographical region.
The Economics
In 2020, US pet industry expenditure amounted to $103.6 billion. The breakdown in spending was as follows:
Pet food and treats $42 billion
Supplies, live animals and OTC medicine $22.1 billion
Vet care and product sales $31.4 billion
Other services $8.1 billion
(Other Services include boarding, grooming, insurance, training, pet sitting and walking and all services outside of veterinary care)
Total pet industry expenditures in the US is expected to increase to $109.6 billion in 2021.
In Europe, annual pet industry expenditure exceeded €40 billion. Pet food products accounted for €21 billion of this amount whilst pet related services and products accounted for the remaining €19.7 billion.
Global pet industry expenditure is expected to reach $369 billion by 2027. This would represent a compounded annual growth rate of 6% between 2020 and 2027.
Forward Looking
1. Pets will have rights
A proposed reform of Spain's legal system seeks to recognise animals as "sensitive living beings" instead of mere objects as has been the case until now. This would pave the way for judges to declare joint custody of pets in divorce hearings just as they do with children and give pet owners the right to compensation for "moral injury" if their animal is hurt by another person amongst other things. Spain follows several other European nations including France, Germany and Switzerland that have already changed their legal code to recognise domestic animals as living beings.
2. Pet supplements will take off
The pet supplement industry is set to hit $1 billion by 2027, according to an analysis by Grand View Research. Examples of trending pet supplements include dog vitamins, cat fish oil and dog probiotics.
Modern pet owners are more concerned about the health and well-being of their pets. Supplements improve the immune system, reduce the risk of heart problems, digestion problems, and cancer, and enhance the skin and coat health.
Layered on top, human vegetarian and vegan diets have been increasing in popularity in recent years. With owners increasingly treating their pets as a part of the family, it is unsurprising that such trends are also making their way into the animal realm.
3. New product categories will emerge
The pet industry has historically been made up of a small number of product categories including:
Food
Toys
Beds
Hygiene
Grooming
However, we are now starting to see a significant amount of innovation in pet product development. Rather than simply launching variations of existing products, entrepreneurs are creating entirely new pet care product categories. While oral hygiene products for pets are nothing new, products like cat toothpaste are coming out for owners that want to ensure that their pet's teeth and gums are in pristine condition.
4. Pet owners will opt for Direct-to-Consumer (DTC)
Driven largely by the pandemic, online sales of pet products increased 51% in March 2020 alone. Like e-commerce in general, pet owners have turned to online retailers for selection, convenience and price.
Online sales of pet products achieved a 24% compound annual growth rate from 2014 to 2019, according to Packaged Facts. That growth rate is likely to only increase as e-commerce growth is expected to continue post-pandemic, possibly at even higher rates.
5. Pet health insurance uptake will increase
Globally, the pet insurance industry reached $4.4 billion in 2020 and is expected to grow at a compound annual growth rate of 16.3% through 2028 reaching $14.9 according to Grand View Research.
One of the key factors that is driving the pet insurance market growth is rising demand for pet insurance to help limit out-of-pocket expenditure and an increase in awareness related to pet insurance.
Just over 1% of U.S. dogs and cats are insured. That number pales in comparison to the UK, where an estimated 25% of pets are covered, and Sweden, where the total is said to be as high as 40%. In my opinion, the pet insurance market is one of the highest growth areas within the overall pet market.
Stocks to Benefit
Chewy (Ticker: $CHWY)
Chewy provides pet food and treats, pet supplies and pet medications, and other pet-health products, as well as pet services through its chewy.com website, as well as its mobile applications. Their mission is “to be the most trusted and convenient online destination for pet parents (and partners) everywhere”.
During the fiscal year 2020, Chewy reported net sales of $7.15 billion, an increase of 47% year-over-year. This was not a once off as the company achieved net sales growth of 37% in fiscal year 2019. Chewy is becoming a clear leader in the DTC pet space.
Freshpet (Ticker: $FRPT)
Freshpet manufactures and markets natural fresh meals and treats for dogs and cats in the United States, Canada, and the United Kingdom. The company sells its products under the Freshpet brand and Dognation and Dog Joy labels. Their mission is “to improve the lives of dogs and cats everywhere through the power of fresh, natural food”.
During the financial year 2020, Freshpet reported net sales of $318.8 million, an increase of 30% year-over-year. Freshpet should benefit from consumers being more aware of what they feed their pets and the health implications.
Lemonade (Ticker: $LMND)
Lemonade offers renters, homeowners, pet, and life insurance. Powered by artificial intelligence and behavioral economics, Lemonade is working to replace brokers and bureaucracy with bots and machine learning, aiming for zero paperwork and instant everything.
The company launched its pets insurance product in July 2020, offering pet insurance from as little as $10 a month. Whilst the company does not disclose pet insurance premiums separately, the company did disclose that homeowners and pet insurance represented more than 40% of new business in Q4 2020. During the financial year 2020, Lemonade reported total revenue of $94.4 million, an increase of 40% year-over-year.
As discussed earlier, over one third of young adults have already embarked on lives as new pet owners in the UK. This age cohort are tech savvy and in my opinion are far more likely to insure their pet using a fintech company rather than through one of the legacy insurance companies.
Apple (Ticker: $AAPL)
Apple is a company that doesn’t require any introduction and one that you are probably all familiar with. You might be wondering why I am suggesting that Apple will benefit from the boom in pets? Hear me out, I am not suggesting that your dog will be going around with an iPhone and AirPods.
Last month, Apple launched the AirTags, adding to the company’s Find My ecosystem, and providing Apple users with a more convenient way of keeping tabs on their keys, bag, dog or even small children. I believe that these are going to sell like hot cakes. Lots of millennials who treat their dogs like an only child mean that the AirTag could dominate the dog collar market.
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Happy investing
Wolf of Harcourt Street
Disclaimer: I am not a financial adviser and I am not here to give specific financial advice. The opinions expressed are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The information is based on personal opinion and experience, it should not be considered professional financial investment advice. There is no substitute for doing your own due diligence and building your own conviction when it comes to investing.
Great piece! I would add barkbox too.