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Why the pet-pampering market has investors panting

Nathan Field

Written by Nathan Field

Portfolio Manager Global Thematic at Kiwi Invest

Monday 24 June, 2019

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Pet pampering takes the investment world by storm

Pet pampering used to be the domain of Hollywood celebrities and eccentric socialites. Think Paris Hilton and her handbag Chihuahua, or the late Karl Lagerfeld whose Siamese cat had two maids. But now the trend is distinctly mainstream, as highlighted last week with the impressive Wall Street debut of online pet retailer, Chewy.

Chewy is riding the global wave of pet humanisation, whereby pet owners regard their cats and dogs as family members and treat them like they would human children.

Even New Zealand public officials are hip to the trend, with Auckland recently joining Wellington in allowing pets on selected forms of public transportation.

Millennials have been key to the fur baby phenomenon, especially in developed countries where falling birth rates and delayed parenthood are boosting both the number of pets and the discretionary dollars spent on them.


Kiwis are owning fewer pets, but spending more on them

New Zealand is something of an outlier in this regard. Although we’ve historically had one of the highest rates of cat and dog ownership in the world, pet numbers have been tapering off in recent years. Lower home ownership rates and the difficulty of finding pet-friendly rentals are thought to be responsible for the fall.

But even with the modest drop in pet numbers, the industry continues to thrive with Kiwis spending more on a per-pet basis than ever before.

You only have to step inside your nearest Animates store to see where the money is going. Coconut lime daily spritz for dogs. Grain-free chicken pâté for cats. Pet-sized electric beds. Not to mention the services such as wash and blow dry treatments, puppy preschool, and the fast-growing business of pet insurance.

"Chewy is like an online Animates on steroids."

The range of products and brands on offer is truly staggering. Looking for salad dressing for your pet tortoise? You got it. Doggy pyjamas? They have forty-two different designs.

Many of the products follow trends we see in the human population. Lots of dogs are going organic or vegetarian, and there are plenty of weight-loss diet options.


Pampering pets is a huge business

Sounds a tad ridiculous, but this is big business. A report last year by Grand View Research estimated the global pet care market will grow to more than US $200 billion by 2025, with pet food the largest category. In a world where packaged food revenues are struggling for growth, the pet food category is a notable bright spot.

Many of the multinational consumer giants are heavily invested in pet food, such as Nestle with Purina, Colgate-Palmolive with Hills, and General Mills with Blue Buffalo.

Chewy sells all these brands and more through its website, as well as its own private label products. But what’s really driven the story has been the loyalty of its customers, many of whom buy their supplies automatically via subscription. Chewy understands that pets are special in a way that Amazon doesn’t.

And its growth has been spectacular, with revenues jumping 68% to US$3.5b last year. To put that in perspective against other recent market debutantes, Chewy’s sales are higher than Lyft, Pinterest and Beyond Meat combined.


Investors are chomping at the bit to get involved

Of course, it’s not profitable yet, but Chewy believers point to the company’s heavy investment in delivery fulfilment, strong customer loyalty and net margins that are moving in the right direction. As a result, growth hungry investors went crazy for the stock on its opening day, pushing Chewy’s share price up 59% to give the company a market value of about US$14b.

The excitement is understandable given the strong secular trend of pet humanisation and the fact that the pet care industry has historically been relatively recession-proof.


But will the bubble burst?

Those of us with long memories will remember another famously unprofitable pet retail company that listed almost twenty years ago. Pets.com collapsed within a few months of its 2000 listing, and its name and sock-puppet mascot came to be synonymous with the dotcom bust.

This time it’s different, for sure. Chewy has a great brand, and it’s really nailed customer service in a high growth area.

But it’s still predominately selling third-party products online, which means the competition from Amazon will never go away. Given the price transparency on the internet, we question whether expanding margins will be a feature of the story over the long term.

There are other, less-expensive companies exposed to the pet humanisation theme, such as Zoetis, which specialises in pet health care products, or Idexx Laboratories, which does diagnostics for veterinarians.

We expect Chewy’s pet-centric business will continue to evolve, but only time will tell whether its rampant top-line growth can translate into long term earnings expansion. At the very least, it’s going to be a better story than Pets.com.

And in case you were wondering, no you can’t use regular dressing for your tortoise’s salad. Chewy’s online support team could tell you that.


This article reflects the personal views of the author, and does not reflect the views of Kiwi Invest or any related companies of Kiwi Invest.

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