Welcome to Thoughts on the Market. I'm Simeon Gutman, Morgan Stanley's Hardline, Broadline and Food Retail Analyst. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about pets and why pets could be a long tail investment trend. It's Thursday, April 15, at 11:00 a.m. in New York.
Before we discuss Bella, Luna, and Charlie, top three most popular dog names in 2020 - in case you didn't know, you may also be wondering what I mean by Hardline, Broadline, and Food Retail. I'm an analyst of retail stores. I follow big box retail stores, including grocery stores, which covers the food retail part of the title. Broadline simply means a store that carries multiple product categories or a broad set of goods. On the other hand, Hardline refers to a durable good and a narrow product line, for example, sporting goods stores, electronics stores, and relevant for this podcast, pet stores. My coverage area spans a large part of consumer spending and the stores you shop at almost every single week.
With that, I'd like to invite you into the Petriarchy, a.k.a. the pet care industry, which was already a big and steady sector pre-pandemic, and has now emerged as one of the fastest growing sectors going forward - arguably a megatrend. And given the recurring nature of pets, it should create a lot of future value.
The pet care industry was a nearly $120B industry pre-covid, and we expect it to nearly triple by 2030 - in less than a decade. One of the most powerful secular growth stories coming out of covid.
Because of all the covid pets, pet ownership growth more than tripled during the pandemic. And because we treat pets like humans, also known as humanization, animal health looks like it will be the largest subsector among all pet spending categories.
The pet care industry is wide reaching and touches on multiple sectors: online retailers, traditional retailers, fresh food makers, pet food manufacturers, toy and accessory makers, animal health providers, service providers, and all the way to pet insurance.
In a report we recently authored entitled 'Welcome to the Petriarchy', we bring together perspectives from economists, strategists and analysts like me. And our insights are informed by a survey that Morgan Stanley's AlphaWise team conducted during the pandemic to gauge what was happening.
Allow me to highlight 2 key takeaways from the report: robust growth and where the value resides.
First, on robust growth:
Driving this growth are powerful trends pre-covid, even more powerful trends during covid, and good ole demographics as millennials form new households.
What's interesting about pet spend is how durable it is in economic cycles. Elasticity of demand for pet spending has declined over the last 30 years, which means Bella, Luna and Charlie will be cared for in good times and in bad.
66% of US households have at least one pet. About 40% would take on debt to pay for a pet's medical expenses, and roughly 1/3 would put a pet's needs before his or her own.
Hopefully a picture of this robust growth is emerging. But what do our economists and strategists have to say?
Well, extrapolating the current momentum in pet spend per household, we estimate that spending per household will grow from roughly $900 in 2019, to nearly $1,300 in 2025, to about $1,900 dollars by 2030. It's this growth that should allow the industry to nearly triple by 2030, implying a not too shabby 8% compound annual growth rate till 2030. Consider that GDP typically grows in the low single digits, and that consumer spending grows in the 3-4% range, 8% is nearly 2-3x those levels.
This leads to my second point: where the value resides.
Our AlphaWise study provides evidence that the US pet care industry revolves around veterinarians.
Vets are clearly the most important resource for all aspects of pet care. Vets directly influence pet owners spending on foods and treats, which is the biggest expense. Pet owners interact with vets regularly and intentionally, not just for illness. And structural barriers face competitors trying to fulfill prescriptions in place of vets.
The result? Animal health may become the most important segment of US pet care, and the drivers include expected advances in pet health care, favorable demographic trends, and pet owners’ increasing focus on their pets’ well-being.
We hope this overview conveys our optimism on this long tailed trend - pun intended.
On behalf of myself, and my best friend Sammy, thanks for tuning in and remember, if you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or a colleague today.
