Paw Patrol; Investing In Non-Discretionary Pets

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This story was published earlier today. It has now been updated to include today's FY23 result release.

Let's talk about the unbreakable bond between households and their pets, and about the companies that offer exposure

-Demand for premium goods and services for pets is strong and resilient
-Australia has one of the highest pet ownership rates in the world
-ASX already offers a plethora of investing opportunities

By Nikhil Gangaram

With one of Australia’s largest veterinary chains, VetPartners, recently hitting the market (not through the ASX), the spotlight has been poured on the country’s booming animal and pet sector. Fuelled by demand during the pandemic, pet ownership has soared to new heights with many households prioritising the health and wellbeing of their four-legged family members. 

The humanisation of pets has led to a soar in demand for premium goods and services, resulting in many large companies investing heavily in the space. Despite the dog-eat-dog world of retail, many investors have flocked to the sector as a potential recession beater. 

Fur Babies 

Australia has had a long-term affinity towards pets, with the country boasting one of the highest pet ownership rates in the world. According to the RSPCA, there are an estimated 28.7m pets in Australia, with approximately 69% of households owning a pet, with cat and dogs being the most common. Thanks to the pandemic, with many people forced to stay and work at home, pet ownership has never been higher. 

A 2022 survey by the RSPCA found the bond between pets and their owners has never been stronger, with many pet owners adopting ‘pet parenting’ behaviors. Essentially, this has translated to owners treating their pets as ‘fur babies’ resembling parent-child relationships. 

The ‘humanisation of pets’ has resulted in a burgeoning market of goods and services to help owners treat their animals to all the creature comforts and optimal care. Overall, the RSPCA estimated Australian households have spent over $33bn on pet services and products in 2022, with food representing 51% of all expenditure followed by veterinary services. 

With 82% of pet owners hailing from households with annual incomes of $100,000 or more, the market for pet care may be ‘recession-proof’. According to a recent consumer sentiment survey by NAB, households are open to cutting spending on their morning coffee and restaurants. However, among priorities like private school fees, the very same households are less likely to axe spending on their pets.

According to the study, only 18% of consumers surveyed reported they made cuts to spending on their four-legged friends. 

As a result of its ability to perform strongly during both strong economic growth and during tougher conditions, the pet industry has emerged as an attractive sector for investors. 

Pet Friendly

Thanks to Australia's ‘pet friendly’ nature, there are a plethora of investing opportunities. In addition to food and supplies, the industry also comprises veterinary care, insurance and a burgeoning technology sector. 

The pet food and supplies market in Australia is substantial, including a wide range of products such as organic and inorganic food, treats, toys, bedding, grooming supplies, collars and leashes, cages, and more. As a result, the sector has rightly attracted attention from Australia’s retail giants. 

Late last year Woolworths Group ((WOW)) splashed $586m to take a 55% stake in pet business Petspiration Group. The company operates the PETstock brand which boasts a network of 276 retail stores, 65 vet clinics and 162 grooming salons.

In addition, Petspiration also has an established e-commerce platform with 2.4m subscribers to its loyalty program. Woolworths is no stranger to the sector, owning online pet store PetCulture and is also Australia’s second largest pet insurer. 

Similarly, Bunnings owned by conglomerate Wesfarmers ((WES)), announced earlier this year it would be increasing its range of pet supplies to compete with supermarkets and speciality retailers. Marking its biggest product expansion in two decades, Bunnings has expanded its offering to feature up to 1000 pet products, including kennels, bedding, toys, apparel and the introduction of pet food. 

Given Australia’s love and care for pets, there is a growing demand for professional services to enhance the well-being and happiness of people's furry companions. The veterinary industry plays a crucial role in the overall pet industry, boasting high demand for veterinary services, including routine check-ups, vaccinations, surgeries, and specialised treatments. 

Following the acquisition of Greencross and National Veterninary Care Ltd, the ASX has miniscule undiluted exposure to the sector.

Apiam Animal Health ((AHX)) remains the lone standing veterinary company listed on the exchange. Apiam is Australia’s largest regional veterinary service, boasting 73 clinics across several states. In its trading update in February, the company reported revenue of $93.7m, up 24.7% and gross profit of $61.4m, up 32.9% on the first half of FY22.

Apiam's FY23 result, released this morning, showed revenue growing by 22.6% to $192.8m, and underlying EBITDA improving by 11.6% to $12.8m, while the net profit was impacted by increased wages and finance costs. The company also took a one-off inventory write-down of -$1.7m post tax.

Those impacts reduced net profit by -50% to $2.3m from the year prior. Management already announced in June redundancies and an operational restructuring are put in place to lower costs, including reducing the size of non-veterinary staff at the company and its clinics.

Higher margins and earnings are expected for FY24.

Management at the company had noted in the past pet care remains a non-discretionary service with average transaction values increasing by more than double digit percentages. Apiam also highlighted a change in demographics, with rapid growth in treatment provided for domesticated pets. 

In addition to traditional veterinary services, the sector also boasts a bunch of ancillary offerings.

Creso Pharma ((CPH)) produces cannabinoid (CBD) pharmaceuticals tailored for animals, with the company’s flagship ‘Green Goo’ label spreading across the Asia Pacific region. In the same vein is AusCann Holdings ((AC8)),which  acquired former ASX-listed Cannpal Animal Therapeutics in 2021. Both companies are in the process of developing CBD-based veterinary products designed to support the immune systems and treat various animal conditions. Australia’s largest distributor of pharmaceutical products Ebos Group ((EBO)) has also ventured into the sector under its subsidiaries Marketpet and Lyppard. 

A relative newcomer to the ASX is the online digital platform Mad Paws ((MPA)). The company’s flagship e-commerce network provides owners a variety of pet services including walking, day care and grooming with 40,000 registered pat carers Australia wide. In addition to its subscription ecommerce arm, Mad Paws has also looked to invest heavily in other market verticals including medication, toys, insurance and other accessories. 

Inside the Doghouse 

Given the increasing population of animal companions, pet humanisation and demand for premium products, the pet industry is fast becoming an attractive and rapidly growing sector.

Thanks to the changing demographics of pet ownership, the industry is also unique in its resilience to economic downturns versus other consumer goods and services. Globally, the industry is purring along with record merger and acquisition activity and a swathe of new products entering the market from biotics and personalised nutrition to smart ‘pet-tech’ and sustainable toys. 

Despite the promising growth, caution should still be exercised by the prudent investor looking to gain exposure to the pet industry. As a result, investors must weigh up the security and potential return of putting their money in publicly traded companies which are at the mercy of fluctuations in economic and market conditions.

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