These days we see no shortage of investment articles about promising megatrends in electrification, artificial intelligence (“AI”), and GLP-1 weight loss treatments. While these exciting new developments garner a lot of attention, there are a number of other secular growth stories that, for investors, are equally worthy of attention.
One such growth story is the fundamental shift in how consumers view their household pets. According to the Chamber of Commerce, over 114 million U.S. households own at least one pet, and these days pet owners are more likely to refer to themselves as ‘pet parents’ as they view their animal companions as de facto members of the family. They also spend on their pets accordingly. In fact, from 1990 – 2021, personal consumption expenditures on pet-related items and services grew at around 6.5% per annum with growth every single year regardless of economic circumstances. By comparison, overall personal consumption expenditures grew at around 4.6%:
Perhaps more tellingly, as a share of overall consumer spend, or “share of wallet” in industry speak, pet-related expenditures have almost doubled since 1990:
There are various explanations for this shift in consumer patterns that are part economic, part demographic, and part cultural. Economically speaking, lavish pet expenditures were once viewed as a luxury, but as incomes have grown, consumers have been more willing to pay up for everything from premium dog foods to extensive life-extending therapies for their pets. Through good times and bad, consumers have consistently demonstrated their willingness to spend on pets even as they cut back on other areas in the budgets.
From a demographic perspective, there are various tailwinds to the pet spend growth story. According to investment firm Thornburg, the average household size has fallen from around ~3.5 members to ~2.5 today as many young people elect to get married later in life, or, if married, to have children only several years later. Pets have become the preferred way to fill the void, so to speak, in these interim periods in personal lives. Older generations, too, are active in the pet economy as their pets afford them companionship now that their children have largely left the house.
Culturally speaking, the ‘humanization’ of pets is a recent but very strong force in consumer spending on pets. Last year, Ron Coughlin, CEO of Petco, was quoted in the Washington Post as saying:
“Pet parents don’t want to be called pet owners. Seventy-seven percent say they want to be called pet parents, and [sixty] percent say they love spoiling their pets.
“They spend more. They’re more likely to treat their pets as human, and therefore, they’re more likely to get fresh food. they’re more likely to get premium kibble. They’re more likely to get a puffer vest at our Reddy shop.”
Mr. Coughlin’s point about spending on premium products is especially critical in understanding the growth in overall category spend. In 2019, Nestle, owner of the Purina brand of pet products, noted that ~80 of growth in select pet-related categories was simply due to premiumization, using the example of the company’s Fancy Feast line of cat food, which offers canned food at a low price point, and cleanly packaged filets at the high end of the spectrum (source: Nestle):
Furthermore, “pet parents” have been proven to be particularly brand loyal and not particularly sensitive to price, as this graphic from Thornburg and Alliance Bernstein demonstrates:
This premium diet for pets has had a carryover effect to the service side of the industry as pets’ lives have now broadly been extended beyond but what might have been expected a generation ago, and these longer life expectancies have come with correspondingly higher spend on diagnostics, treatments, and therapies for older pets. Idexx, a large multinational that specializes in pet-related products and services, noted in a recent investor day presentation that average life expectancies for both dogs and cats are up double digits since 2010, and, that according to survey data, pet owners are more likely to shrink other areas of their budgets before cutting back on pet-related spend (via Idexx):
It is impossible to know how long this trend of pet humanization will prevail, but the economic, cultural, and demographic tailwinds of delayed household formation, smaller family sizes, and innovation-driven spend on premium products seem strong enough to propel this secular growth story for quite some time to come.
Disclosure: Both the author and clients of Fortune Financial Advisors, LLC own shares of Nestle.