Now, you’re probably wondering where I’m going with this and thinking I’m going to struggle to find a way to link this back to an investment topic – and you could be right – but I’m going to give it a go.
While our offices are divided on the pet ownership front (and whether I should be considering this topic at all), it turns out the UK’s enthusiasm for cats – and pets in general – knows no bounds. Pet ownership has leapt from 40% in 2019 to around 57% today. Not only is pet ownership expanding, but we are also indulging them more and more. Spending on pets has doubled over the past 20 years.
This is where the investment angle comes in; there are two main reasons that a company’s profits rise. The first is that the overall economy expands and creates a better environment for a company to sell its products and services. This is all well and good, but in slower-growth economies, such as the UK and much of Europe, it is not a route to riches.
The alternative is to find companies that are in a market that is expanding. The most obvious one at the moment is artificial intelligence (AI), where companies have a vast new market to address. This means they can make many times the rate of economic growth.
If you can find these growth markets, you have a fair chance of finding fast-growing companies and thereby growing your investments. The risk is always that everyone else has discovered the same theme and share prices are already enormously high. However, I would venture to guess that’s not the case when it comes to investing in the pet industry.
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According to research from Morgan Stanley, the pet industry outpaces nearly all retail subsegments and boasts one of the largest rates of return of any retail sector.
The anthropomorphism of our pets
The anthropomorphism of our pets has been an incredible driver of spending in what’s traditionally viewed as a discretionary area. Despite global cuts in discretionary spending, due to inflation and the cost-of-living crisis, we don’t see this same pullback in pet spending. The pet industry is unique in its resilience to economic recessions and downturns.
According to Nasdaq research, in comparison to other consumer goods and services, the pet industry has held up remarkably well during recent market declines. Despite the financial crisis of 2008, the pet industry experienced a 5.1% growth in sales.
This stems from a wider societal change regarding the importance of the pet in the family unit, which is driving higher spend per pet, says deputy manager of the AXA Framlington American Growth Fund David Shaw, who has exposure through Freshpet, the leading provider of fresh pet food (refrigerated) in the US.
He said: “The AXA Framlington American Growth Fund started to invest in Freshpet over 2022, when other investors had major doubts about the growth in the pet market, and fresh pet food in particular, post the pandemic.
“Freshpet has a relatively low market share within the overall pet food category, so should be able to further increase its market share while benefitting from a market where pet adoption continues to grow and owners are prepared to pay more to provide a healthier diet for their pets.”
Spending on animal health
Simeon Gutman, Morgan Stanley’s retail analyst, said: “Among spending categories, pet services such as animal health are expected to be the main driver of growth, more than doubling to $112bn in 2030 from $48bn in 2019 and outpacing growth in pet consumables, the largest spending category.”
IDEXX Laboratories, a holding in Comgest Growth America, is a global leader in pet healthcare innovation. The market is large and growing, due to structural trends including the ‘anthropomorphism’ of pets, favourable demographic trends (millennials are 50% of all pet owners and are willing to spend a larger percentage of their disposable income on their pets), and a growing standard-of-care trend.
Of course, no good story is without its hurdles or regulatory pressures. Earlier this year, the Competition and Markets Authority (CMA) announced a full investigation into veterinary services for household pets in the UK.
Essentially, the CMA was concerned that the supply of veterinary services in the UK might not be a well-functioning market. However, according to Scott McKenzie, co-manager of the WS Amati UK Smaller Companies Fund, the decision has had a profoundly negative impact on the valuation of shares in UK-listed companies. One such company is CVS Group – a leading provider of veterinary services in the UK.
Scott said: “Whilst not currently held in the fund, we believe that shares in CVS Group could now offer excellent long-term value. AIM-listed CVS has seen its market capitalisation halve since February, from £1.2bn to £600m today.
“With the CMA due to publish its initial findings by June 2025, investors look to have priced in a very negative outcome to the value of CVS already.”
He believes that the company could recover strongly at some point in 2025 once the CMA review provides longer-term clarity on the future shape of the UK veterinary market.
As American author Dean Koontz once said: “Once you have had a wonderful dog, a life without one is a life diminished.”
But, increasingly, investors of all types are recognising the value of pet investments – and that once you have a promising pet investment in your portfolio, a portfolio without one is a portfolio diminished.
Juliet Schooling Latter is research director at FundCalibre and Chelsea Financial Services
