Market trends in the pet industry look promising, but in which sectors will the most activity take place? Read the latest industry update to find out.
Online, wholesale, and bulk supply companies know the answer. Consumer preferences will dictate future market changes with a heavy influence from price confidence and disposable income. M&A activity could be the key to market growth as pet industry players seek to grow through vertical integration.
Income and Ownership
All major pet-related industries are expecting both revenue and profit increases through 2025. Per capita disposable income plays a major role in the spending decisions of households and individuals.
When income is high, the consumer propensity to spend on items such as pets and premium foods tends to increase. In relation to income, the number of households is projected to steadily increase with pet ownership rates.
As of 2021, the American Pet Products Association reported that 68% of households own a pet (IBISWorld). Theoretically, an increase in the number of households will likely increase pet ownership rates as younger consumers or “pet parents” are choosing to purchase an animal as opposed to or in delay of having children.
However, the current inflationary period has shifted the housing market to favor sellers. In the next five years, the housing market could pose a threat to an expanding pet parent market should current conditions remain stagnant or decrease the CPI (further discussed in Price Index Forecast section).
The total number of pets is forecast to increase at an annualized rate of 1.3% to ~186 million while the number of households is only expected to increase at an annualized rate of 0.5% in the next five years (IBISWorld). This steady increase is likely to attract additional retailers and wholesalers looking to profit from pet-related niche or specialty markets.
Pet Food Supplies Wholesaling Market
The Pet Food and Supplies Wholesaling industry is expansive and includes dry and wet food, edible and non-edible chews, treats, toys, carriers and cages, leashes, collars, grooming supplies and more for domesticated animals (Pitchbook). As with most commodities, cost efficiency for wholesalers and manufacturers in the market has been impacted by price increases across all agricultural industries.
Current manufacturing costs are increasingly stringent, even before distribution and transportation costs are incurred. Traditional costs associated with pet food production have kept the barriers to entry within the market quite high.
However, the wholesale sector has been, and is continuing, to experience disruptions through e-commerce channels. Amazon.com Inc., PetSmart, and Petco Animal Supplies have been able to sustain generous revenue streams through their e-commerce platforms (IBISWorld).
In relation to this battle for market share, brick-and-mortar retailers have been able to keep revenue streams steady by marketing service-based offerings such as pet grooming and training. Though these added services have been helping, this strategy may not be sustainable in comparison to increasing cost forecasts.
Online Pet Food Market
Though the industry outlook for the online pet food market looks promising, state legislation will certainly play a factor in its continual growth. Prior to 2021, operators were benefiting from a tax loophole that effectively gave customers in specific states a discount equivalent to the amount of sales tax during initial payment (IBISWorld).
This situation increased the overall competitive advantage for e-commerce sites. However, state legislation is expected to place blocks on e-commerce capabilities, increasing competition between brick-and-mortar stores (grocery stores and mass merchandisers) for the next five years. Pricing strategy will be key for online retailers as price transparency has become commonplace, enabling consumers to find the best prices available.
As marketing tactics advance, smaller retailers are expected to increase their e-commerce efforts. Currently, over 80% of retail stores have a website, but only 30% of those stores are estimated to use the website for online sales purposes. The highest growth potential within the industry is through direct-to-consumer marketing efforts online.
Niche markets that offer premium goods will begin to enter the online realm and further differentiate the pet food and supply wholesaling industry. With continued market growth and diversification of products, the wholesaling market is becoming oversaturated with new entrants. Due to this shift in market potential, M&A activity has risen.
Merger & Acquisition Activity
Significant acquisition activity within the pet industry supply chain has exclusively benefitted the largest manufacturers and distributors looking to control costs. Most notably, the leading pet food and supplies wholesaler, Animal Supply Company, acquired six smaller wholesalers across the west coast and has continued to acquire complementary brands over the last five years (IBISWorld).
Strong brand names including Mars Inc., Nestle, and The JM Smucker Company will be looking for brands that have high-quality product offerings, wide shipping networks and strong relationships with downstream retailers when seeking acquisitions.
Additionally, continued mergers of various marketing, sales and logistics networks by industry leaders will allow for the most substantial growth opportunity (IBISWorld). Therefore, industry concentration is expected to increase in favor of national corporations who can effectively generate organic revenue while bolstering niche market demand through strategic acquisitions.
Price Index Forecast
Recent spikes in oil prices and inflation have had an adverse effect on the Agricultural Price Index (API), the Producer Price Index (PPI) and the Consumer Price Index (CPI). Each has its own specific relationship with the pet industry, though they work in tandem with similar results.
The API represents overall prices for agricultural products including but not limited to corn, wheat and soybeans (all close substitutes within the animal feed industry). When the API increases, the PPI will also increase. The PPI represents the changes in farm and wholesale prices and typically has more volatile implications before reaching the CPI.
Farm-level cattle, wholesale poultry, wholesale dairy and wholesale fats and oils constitute the majority of the PPI product offerings. The CPI is the final index with correlating increases, though it tends to lag behind the PPI. Therefore, the PPI is a good indicator of how the economy’s CPI will respond with price changes and product scarcity (IBISWold).
What does this mean for production and sales? Heading into 2022, all three indexes are projected to increase at the following rates: 4% in wholesale beef, 12% in wholesale poultry and 24% to 27% in fats and oils (USDA). Though the CPI will fluctuate a few months behind the API and PPI, consumer spending will negatively affect revenue growth opportunities should both indices stabilize before products reach the market (IBISWorld). Pricing discrepancies during production would eventually increase overall wholesale and online pricing for the consumer.
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