Updated: Jun 16, 2020
The COVID-19 crisis has highlighted the fragility of many industries and impacted every aspect of our lives. The outlook for the post-pandemic world remains uncertain, and the fear for another market correction looms over us. However, not all sectors are hit severely by COVID-19: the pet care market stands to seek new opportunities from the global crisis.
The pet vertical is a recession-proof and fast-growing industry. As testified from the past two recessions, pet-care spending grew 29% during the 2001 recession and 17% during the 2008-09 recession, when most other industries experienced steep drops in consumer spending. The fact implies that pet-care companies enjoy predictable cash flows and sales growth, even during a recession. Overall, spending on pets in the U.S. has gone up every year since 1994 and it has grown 4.6% annually over the past 10 years - three times faster than overall consumer spending.
Major Industry Trends
Recent legislation in MI & IL treats Vet visits as a non-essential service, forcing Veterinarians to adopt the telemedicine platform to stay in business and treat pets remotely.
Millennials are working from home and indulging their pets. Tele-health is a critical conduit provided by companies like BabelBark (www.babelbark.com) to help veterinarians to better serve Pet Parents, especially Millennials and Gen Z’s who contribute over 69% of Pet spending today. On average, all-age pet parents spend over 1,500 dollars per pet per year (FY 2017-18), while Millennials and Gen Z pet parents alone spend 2-3x of that.
E-commerce is surging, with 54% of Millennials purchasing food and supplies for their dogs online in the past year, and 45% of Millennials doing so for their cats. However, the pet care industry’s online penetration stays at a low point of 9%, so it will be interesting to see whether COVID-19 has an impact on these numbers in the coming year(1).
We conducted a brief market analysis to see how investor sentiment related to COVID has impacted some known pet care stocks like Chewy, Petmed Express and a pet care ETF (PAWZ, Proshares Pet Care ETD). The results below indicate a negative correlation of investor sentiment as the S&P 500 plummets -13.92 %. Market Performance of Pet Care in current environment (as of 04/24/2020)
Stocks like Chewy and Pet Med Express clearly outperformed the S&P 500. The Proshares Pet Care ETF outperformed the S&P500 by ~8%, showcasing the robustness of the Pet Care Industry in an Economic Downturn. It also reaffirms many of the sentiments presented above about pet care spending especially now they we are locked up at home with our pets and pets gain more of our undivided attention.
A number of reasons influence the pet industry’s annual growth, including an increase of pet ownership, the humanization of pets and pet parents demanding premium products and better-quality food. This year, those factors continue to gain ground along with the following anticipated pet spending trends. Pet ownership is bullish and spending on pets is up. In fact, we actually spend more on our pets during a recession.
Major trends in the industry will include alternative vet visits, more adoption of pets as people work from home, and a potential boost in pet care e-commerce.
There have been substantial declines in the number of vets visits due to the DIY nature of millennials (the dominant new player in the pet ownership sector), which has become the biggest pain point for veterinarians. VHMA data shows a 21% decline in new client acquisition over the past 3 years, in contrast with a 12% growth in total number of pets – a scary swing for the veterinarian clinics. The COVID-19 now will force vets to embrace the disruptive technology as vet visits in most states are deemed non-essential service. Not only will this promote an increase in Vet Visits, eventually Veterinarians will be able to scale their businesses to keep up with the 12% growth of pet ownership.
“The report also looks at pet ownership and pet care from a generational standpoint. The top reasons for Millennials to change where they shop for their pets include convenience (49%), price (31%) and assortment (17%).”- Acosta's "Pets Are Big Business". The future generations rely more on e-commerce for their transactions due to convenience and optionality. The ability to transact easily and compare brands will therefore lead to greater competition for pet care retailers. With better product offerings and greater care given to the health of a pet the increased lifespan of a dog will be key in increasing life time value of each pet in terms of pet care spending. The current era that we live in will catalyze the penetration of pet care spending online and transform the manner in which current pet care retailers compete.
According to Matt Bershadker, president and CEO of the American Society for the Prevention of Cruelty to Animals (ASPCA), since March 15, applications to foster pets are up 400 percent compared to the previous year. “While the ASPCA’s adoption and foster rates vary based on factors including the population of animals in our care and feline breeding season, there has been an incredible response from people looking to temporarily foster animals during this difficult time," Bershadker said. With this temporary spike in adoption it will be interesting to see retention of the fostered pets post the COVID situation. Assuming a high retention rate these will act like bullish sentiments towards the Pet care Industry.
This COVID-19 environment has disrupted our economy in major ways and we still remain cautious as we aim to understand its complete impact. However, the resilient nature of the pet industry still seems to be proving its mettle. Although like any industry it will take time to adjust to the changing landscape, we believe that this disruption will force the industry to digitize in order to remain functional in an era of social distancing. This will be key and will allow the analog veterinarians, pet insurers, and other key pet-care service providers to scale up faster and optimize their current operations. At Bridge Point Capital, we remain bullish about pet care industry and pet care spending, because everyone enjoys taking care of fluffy.