Tuesday, August 10, 2021

Pets are big business

People love their four-legged friends, and consumer behavior around pet ownership has changed over time. Increasingly, people feel like their pets are part of the family and happily pay for premium pet products and healthcare. Investors should not overlook the potential in pet care, as the opportunity may be bigger than most realize.

Consider these facts:

  1. Pet care’s annual revenue is larger than many other well-known and established industries

  2. U.S. consumer spending on pets has grown faster than many other market segments

  3. Growth in sales per share is one of the most rapid across several themes

As measured by the FactSet Pet Care Index, the pet care industry has outperformed the S&P 500 by 37% since the inception of the ProShares Pet Care ETF (PAWZ) on November 5, 2018.1 This may sound surprising, but pet care is big business, and the industry has yielded a rapidly growing opportunity.

The Pet Care Industry Is Big Business
The U.S. pet care industry generates $100 billion in annual operating revenue. Versus established GICS industries, pet care ranks higher than wireless telecom services at $80 billion and airlines at $94 billion in annual operating revenue. The industries that rank just below and above pet care are ubiquitous. According to Pew Research, 97% of Americans have cellular phones, but the U.S. pet care industry generates more revenue than the wireless telecom industry.2 Pet care falls just a little below the entire U.S. textile, apparel and luxury goods industry (i.e., U.S. clothing manufacturers, including companies like Nike and Hanesbrands).

 Source: Bloomberg GICS Industry-Level Revenue, Fiscal Year 2020. The Global Industry Classification Standard (GICS) is a method for assigning companies to a specific economic sector and industry group that best defines its business operations. It is one of two rival systems that are used by investors, analysts, and economists to compare competing companies.

There are a number of notable characteristics associated with this revenue stream. The industry is broadly made up of two segments: general pet care and pet health. General pet care can include items like food and litter, while pet health can include therapies and preventative medications. Both segments have defensive features associated with recurring revenue streams, much like the consumer staples or healthcare sectors. Further, pet health does not face some of the regulatory hurdles associated with the broader healthcare sector that can increase costs and slow innovation.

 Source: Bloomberg, as of 9/30/21

Then there are the businesses focused on pet insurance, such as Trupanion, which can help alleviate pet owners’ concerns about the costs of keeping their pets healthy. While Trupanion has seen impressive revenue growth of 31% year-over-year for the third quarter, the company believes the United States is still in the early lifecycle of adopting pet insurance. Penetration rates are currently close to 2%, versus projected penetration rates of 25% over the long-term, according to the company’s most recent investor presentation.

Source: Bloomberg, as of 9/30/21

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