Spending on pets by UK consumers was estimated at £4.6bn in 2015 (Euromonitor), a 25% increase since 2010. However, UK pet ownership levels have remained largely flat over recent years, so what is driving this value growth? One answer is that pets are becoming increasingly pampered – or to put it another way, two long term trends are at play in the sector: the premiumisation of pet products and the humanisation of pets. These trends, combined with the resilience of spend on pets through the cycle make this an exciting area in which to invest and ECI is actively seeking opportunities.
While it is not new for pets to be considered part of the family (a 2011 census found that 54% of UK pet owners surveyed would include a pet in their will) there is a growing tendency for owners to provide their pets with levels of nutritional and medical care comparable to that given to human members of the family. This humanisation, or consumers’ desire to provide their pets with higher quality food and care and to indulge them with treats and accessories, is in turn driving premiumisation in the sector, and a raft of independent pet food brands are thriving as a result. This trend has caught the eye of supermarkets, with the likes of Waitrose and Ocado launching dedicated online pet stores stocking a wider range of brands to attempt to capture some of the growth at the premium end of the market.
When compared to the US, the largest and most developed pet food market in the world, the penetration of premium or ‘natural’ pet food in the UK remains relatively low. However, market share of the premium segment continues to grow as consumers become more discerning as to what they’re feeding their pets, mirroring a healthier eating trend playing out across the wider food and drink sector. The marketing language of pet food now often resembles that of a premium ready-meal (think casseroles, fillets and hotpots) and the proliferation of functional treats, whether enriched with vitamins as dietary supplements or with breath-freshening properties, further demonstrates the converging characteristics of branded consumer and branded pet products.
There are also demographic tailwinds supporting the trends outlined above. Firstly, people are having children at an increasingly late stage in life and young couples or single adults, developing a nurturing desire in their late twenties, often fill this gap with a cat or a dog. For the urban-dwelling professional, cats are popular companions, being relatively self-sufficient and happy living in confined urban environments. With disposable income and no children to provide for, this pet-owning demographic is more likely to spoil their pet with premium food and treats. Secondly, people are living longer: the over-50s account for an ever larger share of the overall pool of wealth and are staying active for longer. With more leisure time and being more likely to live outside of cities, the silver segment represents a key dog-owning demographic that is less price-sensitive and more likely to trade up.
Aside from these positive market dynamics and trends underpinning value growth in the pet care sector, another attractive feature of the market is its resilience. Surveys have shown that pets are a very high priority for their owners, with spending on pet care subordinate only to essential human amenities. The non-discretionary nature of this spend means it is likely to remain robust in a downturn, and even premium pet food products are likely to be considered an affordable indulgence by consumers. Secondly, pet ownership levels have remained stable or slightly increased over time, with almost 50% of UK households owning a pet and around one pet for every person in the UK. Ownership levels in the US are significantly higher at over 60%, which suggests there is scope for further growth in the level of pet ownership here in the UK.
Rapid innovation is taking place across the pet care sector, both in food and treats as well as the smaller but fast-growing accessories, grooming and services segments. Growing consumer demand for premium pet products, driven by trends such as humanisation and an interest in more natural, healthier products, is creating exciting opportunities for smaller brands to compete with conglomerates such as Mars and Nestle that have previously dominated the market. These characteristics, when combined with the underlying resilience of the pet care market, make it a highly attractive sector for growth investors such as ECI.
Contact Chris Watt for further information.