Pet Business Trends 2013

  • by Embrace Pet Insurance

     

More than ever, pets are considered a part of the family. Along with that, the share of the family budget allocated to pet-related spending continues to grow at a healthy rate. During the past few years, spending has focused on value for money. However, in 2012, we saw discretionary spending on products and services—from pet Halloween costumes to travel-related services—increase substantially.

So for 2012 and beyond, the news continues to be good for all aspects of the pet business. Overall pet industry spending has held up well the last few years, demonstrating solid if not spectacular growth, even despite the Great Recession in 2009.

SPENDING SNAPSHOT: OVERALL US PET INDUSTRY

  2008 2009 2010 2011 2012E 2013E
Expenditures ($billion)
43.2 45.5 48.4 51.0 52.9 55.0
Growth   5.3% 6.4% 5.4% 3.7% 4.0%

Source: www.americanpetproducts.org

No time in history has seen such a wide and growing variety of products and services for pet parents and their charges. From cardiac specialists for dogs to first-class travel accommodations, there is a medical treatment for every malady and a way to fulfill nearly every pet’s real and assumed whim.

That wealth of options is one reason that pet spending continues to increase despite a dip—a temporary one, in our opinion—in the veterinary spending subcategory this year.

LESS SPENDING ON VETERINARY SERVICES
(FOR NOW)

According to American Pet Products Association (APPA) estimates, growth in this subcategory dropped markedly in 2012. While APPA projects a meager 1.5% increase for 2012, we believe the number will be closer to 3.0%—much less of a deceleration from the 8.1% of 2009 and 8.3% of 2010. Our suggested estimate revision also predicts less of a spike needed to achieve the 5.0% growth expected for 2013.

SPENDING SNAPSHOT: VETERINARY SERVICES

  2008 2009 2010 2011 2012E 2013E
Expenditures ($billion)
11.1 12.0 13.0 13.4 13.6 14.3
Growth   8.1% 8.3% 3.1% 1.5% 5.0%

Source: www.americanpetproducts.org

Why are pet parents scaling back on vet care? The reasons vary. For some, the long-term recession impact means they cannot afford routine care, not to mention the specialized treatments now available. For others, the confidence brought by a recovering economy was overshadowed by election-year financial insecurities.

Now, even those who are disappointed by the election results have a better sense of where they stand financially. That’s why, in 2013, pet parents will be more likely to spend money on wellness care and elective procedures they’ve been postponing, just as spending increased after the 2008 election.

Do you have a vet gender preference?One area to watch in this subcategory is cat-related services. For the past several years, many cat owners have scaled back their visits to the vet, likely spurred by a change in vaccination protocols from annually to every three years.

Now, some veterinary hospitals are taking measures to be more feline-friendly and lure back these lapsed clients. Strategies include recommending twice-annual preventive care visits, designating separate waiting and examination areas for dogs and cats, training staff for improved cat handling and coaching clients on lower-stress cat transports.

A study released by the CATalyst Council in 2012 showed that cat-friendly practices realize a 2.6% increase in year-on-year cat visits, while non-participating clinics showed a decrease of 2% in cat visits during the same period of time. To increase overall revenues, expect vets to pay closer attention to the unique needs of cats and their humans in 2013 and beyond.

MORE SPENDING ON OTHER PET SERVICES

In May 2012, Inc. magazine named pet care one of the best industries for starting a business in 2012, and with good reason. Following strong growth in 2011, the trend continues this year for the pet services category, which includes services such as pet insurance, boarding and grooming.

SPENDING SNAPSHOT: PET SERVICES

  2008 2009 2010 2011 2012E 2013E
Expenditures ($billion)
3.2 3.36 3.51 3.79 4.11 14.3
Growth   5.0% 4.5% 8.0% 8.4% 8.0%

Source: www.americanpetproducts.org

One driver for this upward motion is the influence of retailers like Petsmart pushing services—not only in-store veterinary practices but also boarding and grooming—into the mainstream shopping experience. While this practice is not new, Petsmart is extremely adept at selling services in addition to pet products. In fact, Petsmart is so skilled at separating customers and their discretionary dollars that the company stock price increased substantially during the past five years, compared to a relatively flat S&P 500. In turn, their size and wild success levels influence the overall gains in this category.

Pet insurance poised for significant growth.

Pet insurance continues its steady ascent as both the awareness and quality of the plans increase. While this year’s estimated growth rate of 10% looks, on the surface, like a plummet from last year’s 18%, the numbers are misleading. Last year’s growth rate is skewed by a one-time change to the reporting calculation of dominant players with a majority—but rapidly shrinking—share of the market. Minus this anomaly, the rate for this year would be closer to 15%, with a smooth upward trend from 2011 to 2012.

The smaller companies are growing aggressively, with leaps of 50% to 100% for the year. As these smaller companies gain more share by the end of 2013, industry-leader VPI will represent less than 50% of the market—a sharp decline from six years ago, when they held a 95% share!

MARKET SNAPSHOT: GROWTH OF PET INSURANCE

  2008 2009 2010 2011 2012E 2013E 2014E
Written Premium ($million)
253.1 280.9 314.4 369.6 407.4 462.6 519.4
Growth   11% 12% 18% 10% 14% 12%

Source: Embrace Pet Insurance

Using public data and our own analysis, we estimate that less than 1% of all dogs and cats in the U.S. are covered by pet insurance. This figure is much lower than the 2 to 5% that is often quoted.

Thus, the U.S. market has ample room for expansion, and that opportunity has driven a surge of activity in 2012. The U.K.-based Protect Your Bubble retail brand staked a claim here and is working to grow a brand unfamiliar to U.S. pet lovers. In the U.K., 25% of the dogs and cats are covered under pet insurance. Conversely, despite the vast potential in this country, Philadelphia-based Petplan expanded into Canada this year, while Trupanion began underwriting the American Kennel Club’s pet insurance plan.

In 2013, we predict that at least one U.S. pet insurance company will expand across the pond, following in the footsteps of Canada-based Pethealth which, in 2008, acquired U.K.-based Pet Protect. We also believe the time is near for some level of consolidation in the U.S. market. We see aggressive players like Trupanion seeking additional growth by any means possible, including acquisition.

dubs in singletrack packTravel-related pet services are booming.

Who says you can’t take them with you? More and more, pet parents—51% of them, according to a study by AAA and Best Western International—are taking their dogs, cats and other animals along when they travel. The industry is cashing in with everything from TheJetSetPets.com, "the first and only one-stop resource for luxury pet travel expertise," to JetBlue’s frequent-flier miles for pets. Last summer, Washington state's Yakima Valley Visitors & Convention Bureau added a new feature on its website—a list of dog-friendly wineries, restaurants, museums and stores. Expect other tourist bureaus to follow the lead.

For people who choose to (or must) leave pets at home, online pet-sitting services are launching and expanding across the country to match travelling pet parents with locals willing to host Fido or Fluffy for a fee. Rover.com launched in November 2011 and serves clients in more than 50 cities. Four months later, DogVacay opened for business and boasts 150+ cities.

Watch for much more activity in this sector as the idea catches on with pet parents as well as individuals who choose to become “freelance pet-sitters.”

Pet "aftercare" becoming the new normal.

The days of burying the family pet in the backyard may soon be over as services from cremation to funerals to pet cemeteries become a more suitable close for a life spent as part of the human family. A decade ago, there were next to no “pet aftercare” facilities in the country. Today, there are about 700.

While there is no hard data on profits, owners claim staggering success. In a September BusinessWeek article, the owner of Hillcrest-Flynn Pet Funeral Home and Crematory reports that, since opening in 2006, profits have increased 25% per year.

The story is much more dramatic for online “pet grieving” store Peternity, which sells items such as headstones, urns and sculptures. According to founder Colleen Mihelich, sales increased significantly between the store’s launch in 2003 and the end of 2011. For 2012, she projects that sales will skyrocket to more than double.

WHAT SUPPLIES ARE PET PARENTS BUYING?
MORE OF EVERYTHING!

Orthopedic dog beds. Designer sweaters. IQ-raising toys. Seat belt systems. Automatic water and food dispensers. Food—every kind of food, from basic to breed-specific to organic, a dizzying array of food at all price points.

Growth in the Pet Supplies & OTC Meds subcategory, which includes food, medicines, vitamins, supplements and more, continues to be very robust. People from every demographic group and income level are spending more on their pets. We think this will continue and that the actual number for 2012 will exceed the APPA’s estimate of 6.7%.

SPENDING SNAPSHOT: FOOD, SUPPLIES & OTC MEDICATIONS

  2008 2009 2010 2011 2012E 2013E
Expenditures ($billion)
10.0 10.4 11.0 11.8 12.6 13.4
Growth   4.0% 5.8% 7.6% 6.7% 7.0%

Source: www.americanpetproducts.org

Organic and natural premium pet food continue supernatural sales rate.

According to market research firm Packaged Facts, pet parents spent $4.1 billion on natural pet products in 2012—a compound annual growth rate of 17% for the past four years.

Traditional and new players are taking advantage of the trend. Hill's Science Diet is being rebranded as a natural product line, and Nestlé Purina is positioning Purina One Beyond as a “values-based” food, touting “naturally delicious ingredients, small steps for sustainability and a commitment to shelter pets.”

To no one’s great surprise, Walmart introduced an “ultra-premium” dry dog food this year. Pure Balance touts no soy, wheat or corn additives, no artificial colors, no preservatives and no chicken by-products. With this new product, they are betting that Walmart shoppers won’t walk next door to Petsmart or Petco if premium products are available right in-house.

What’s behind the interest in feeding organic and non-traditional foods, such as elk, bison and salmon, to pets? Recalls. Beginning with the alarming spring 2007 pet food recalls and fatalities, pet parents grew more fearful about the safety of their pet food. They are right to worry: During 2012, Dog Food Advisor announced more than 25 recalls on a variety of brands and items, including multiple recalls from Diamond Dog Food in April and May.

Unfortunately, because pet food is not regulated, these mass recalls—and poisonings—will only continue, as will the increasing interest in foods that, while pricier, can help to prevent ER visits … and worse.

They’re also buying Halloween costumes. Yes, Halloween costumes.

Did you dress your pet as a dinosaur, pumpkin, bumblebee or other character on Halloween? If yes, you are part of a burgeoning trend. Pet parents were expected to spend $70 million more this year than they did in 2011 on costumes. This reflects a 40% increase to similar spending in 2010.

Halloween has been big business for years, so we expect spending to continue growing in this category and for costumes to grow more elaborate and expensive. It’s hard to predict how this trend might extend to other holiday celebrations, although Arbor Day leaves little to the imagination.

OTHER TRENDS TO WATCH

Veterinary specialization up. Generalist practice down.

From cardiology to neurology, oncology to ophthalmology, the trend to increasing specialization has been underway in veterinary medicine for several years and shows no signs of abating. The AVMA shows membership of board-certified veterinary professionals growing at around 4.0% or higher for the last five years, while general membership has been slower—in some years, dramatically so.

AVMA MEMBERSHIP SNAPSHOT: GROWTH OF SPECIALISTS

  2006 2007 2008 2009 2010 2011
Specialty Members
8,510 8,885 9,305 9,826 10,210 10,632
Specialty Growth   4.4% 4.7% 5.6% 3.9% 4.1%
General Members
75,307 75,901 77,972 79,432 81,621 81,945
General Growth   0.8% 2.7% 1.9% 2.8% 0.4%

Source: www.avma.org

What is driving this trend, and what does it mean for consumers? On the one hand, pet parents grow more willing to pay specialists’ fees or carry insurance to cover it. Specialty practices open with the belief that if you build it, they will come, and they do—not just in metropolitan areas but in smaller cities as well.

We believe there is another compelling reason: the ballooning debt burden faced by new graduates. In 2001, the average educational loan debt of graduating veterinary students was about $53,000. A decade later, it had more than doubled, to nearly $119,000—and that doesn’t include debt from undergraduate studies. With the average starting salary for generalists hovering around $70,000, many are choosing to pursue higher-paying specialties to lessen the number of years (or decades) they will devote to paying off student loans.

For consumers, more specialists mean more options for treating and curing their pets’ maladies. However, it also means that the costs of veterinary care will likely increase across the board. We expect that more and more pet parents will seek a financial product, such as insurance, to alleviate these escalating, and ever-more-mainstream, costs of treating ill or injured pets.

M&A activity accelerates.

The pet market is certainly booming, and proof of this vitality extends far beyond the purchase of organic foods and pet-friendly travel lodging. Take a peek behind the scenes and you’ll find increased merger activity, with 40 pet-related transactions in 2010 and 42 in 2011. However, in 2009, there were just 22 such transactions, and 32 the prior year. For 2012, the upward trend continues, with most of the activity in pet product and animal health manufacturers, as well as animal health services.

There is more interest and investment in the pet industry, with new players and innovators joining the fray. We see this very positive trend continuing in 2013 and beyond.

woman-with-catOnline retail a growing threat to brick and mortar.

For the consumer, it’s the ultimate game of fetch. Throw out an online order and the item arrives at the front door—perhaps, very soon, the same day. If Amazon has its way, it will be the one-stop-shopping site for all your pet care needs, from treats to collars to medications. Currently, the core Amazon site includes thousands of pet supplies; a search for “leash” returns more than 46,000 items! However impressive, their domain is even larger than it appears. Amazon also sells pet products via Wag.com, part of the package when it purchased rival Quidsi in 2011. The website boasts 25,000 products, free two-day shipping on orders over $49—and no extra shipping charges on food and litter.

Of course, Amazon is not the only game in town. Watch for Walmart, Target and Petsmart to offer continuing competition for the online market for pet food, supplies and pharmacy items.

Veterinarians continue social media experiment.

The growth of social media seems unstoppable. According to Nielsen and NM Incite, when consumers are online via personal computer, they spend about 20% of their total time on social media sites; using mobile devices, time spent on Facebook and other social media sites swells to 30% of total time online. For U.S. users, from July 2011 to July 2012, the total time spent on social media grew 37%.

Judging by the many cat and dog faces featured in (human) profile photos, many if not most pet parents are visiting these sites. To engage them, many veterinary hospitals launched or increased marketing efforts on Facebook, Twitter and Pinterest this year. Veterinary practices historically haven’t used these channels strategically—but we think they will continue to find their voice and their way.

What they are NOT buying anymore in Los Angeles: retail pets.

One of the most heartening changes this year is the ban on retail sale of cats, dogs and rabbits in Los Angeles. With the new law, L.A. joins 27 other cities in North America, including Toronto, in forbidding the sale of these animals in pet stores. While this cannot yet be called a trend, we predict that if one more major U.S. city, such as New York, follows suit, many others will as well.

This new law will not only help shelters and rescues to find an increased market for “second-hand” pets, it will also put a serious dent on the demand for cute, high-margin but genetically and emotionally unsound puppy mill litters.

Let’s hope this is the beginning of the end for these notoriously inhumane animal production facilities and their traditions—which have no place in the business of adding love and companionship to enrich so many lives.