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Profiting from pampered pets

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

In recent years, people have become more inclined to spoil their pets and spend thousands on veterinary care. Does this trend spell an opportunity for long-term investors?

Click to toggle accordion What you’ll learn:

Why global sales of pet products and services are soaring.

How the pet care market has a reputation as a relatively recession-proof industry.

What opportunities this sector may hold for investors.

Not too long ago, few pet owners would have dreamt of wheeling their dog or cat around in a pushchair. Yet pampering pets has now become one of the key consumer trends of our age. Luxuries such as jackets and hats for pets, or a Bubbletastic Bacon Bubble Blower – which produces bacon-scented bubbles for dogs – are becoming more common.

The pampering goes far beyond toys and small treats, however. Five-star pet hotels, complete with flat-screen televisions, pools and spas, are on the rise. And if you feel that you are not in complete harmony with your dog, there’s always dog yoga, or doga, to help you both relax.

Growing incomes, improved veterinary care, and demographic and social developments are all fuelling a trend researchers refer to as ‘pet humanisation’. It describes the phenomenon of treating animals as family members, or substitute children.1

In 2016, global sales of pet products and services, ranging from premium food to vet care, reached $103.5 billion, eclipsing the $100 billion mark for the first time.2 The US market, the world’s largest, was worth over $62 billion last year, a 61% jump from $38.5 billion a decade before.3 The previous decade had seen growth of 83%: in 1996, the market was worth just $21 billion.

Most of the annual expenditure on pets in America goes on vet care and over-the-counter medicines; in 2015 these jointly comprised just under half of the total. Food accounted for 38%; services such as grooming and boarding, 8%.

A major corporate takeover last year highlighted the growing importance of pet services beyond food or toys. Confectionery giant Mars, which is also the world’s biggest pet food producer, spent $9.1 billion buying veterinary services group VCA.4

The pet sector is also growing rapidly in emerging markets. In February, Swiss food giant Nestle said it planned to open an $86 million pet food plant in Brazil to cater for the 132 million domestic animals there.5 Pet care has been a key source of growth for the group, and it now represents over a tenth of overall sales.

Seeking comfort in pets

Several trends appear to be fuelling the pet-pampering trend. One is ageing populations, as people who live longer occupy themselves with pets during their extended retirements. This is especially noticeable in Japan, where the proportion of people aged over 65 is currently 25%, and could hit 40% by 2055.6 Combi, one of Japan’s biggest baby products makers, saw sales of pushchairs for pets double last year.7

The gradual rise of single-person households8 could also be playing a part, as people who live alone may be more inclined to keep a pet and spoil it. Animals are also living longer thanks to the cumulative impact of changes such as indoor living, and better food and vaccinations.

The overall quality of veterinary care has improved, with courses of pills or chemotherapy for pets now common. Chemotherapy can cost between $1,000 and $15,000 (£780 and £11,700).9 An endoscopy for a dog will set its owner back by $800-1,000. Merely dealing with an ear infection can mean a bill of up to $250 a visit. This helps explain why the worldwide vet care market is expanding at an annual pace of 8% a year.10

As people become richer, they become more inclined to spend money on pets, so the rise of middle class consumers in developing countries is also a key driver of pet care demand. A major study by consultancy group EY predicts that two-thirds of the global middle class, defined as people earning between US$10 and US$100 per day, will live in Asia by 2030.11 At this level, they have disposable incomes that allow them to buy cars, televisions and other goods.

No wonder, then, that the pet care market in south-east Asia is expected to grow at an annual pace of 6.8% between 2014 and 2020.12 Thailand accounts for 44% of the south-east Asian pet care market, followed by Malaysia’s 22%.

Consumers are buying more nutritious, organic food for their pets, and upping their vet spending too. Spending at veterinary clinics, the fastest-growing segment of the regional pet care market, is expected to rise by 7.1% a year.

Brazil, meanwhile, is the third-biggest pet care market in the world13 after Britain and America, and it already has the world’s second-largest pet population after China. The latter has 289 million pets to Brazil’s 266 million. And while Brazilians tended to concentrate on pet food in the past, they are now spending more on vets and pet insurance. The vet market expanded by 14% in 2013 and another 8% in 2014.

It’s also interesting to note that the bond people establish with their pets often means they will maintain standards for them even if money gets tighter during an economic downturn. Pet care therefore has a reputation as a relatively recession-resistant industry. In Brazil, for instance, the sector has not suffered nearly as much in the recent recession – Brazil’s worst on record – as some other consumer-orientated sectors. It expanded by 6% last year, even as the economy contracted by 3.5%.14

How Barclays can help

The trends explored above suggest that the long-term future of the pet care market could be bright – although remember there are no guarantees.

One way for investors to gain exposure is through Pets at Home (ISIN: GB00BJ62K685), a UK retailer of products ranging from pet food and treats to grooming, nutrition consultations and veterinary services. CVS Group (ISIN: GB00B2863827), a veterinary services group listed on the Alternative Investment Market (AIM), is another possibility.

Bear in mind that stocks on AIM are subject to less regulation than those on the main section of the London Stock Exchange. AIM is also home to much smaller companies, which are much riskier and more volatile than companies listed on the main market. You could lose all your money.

You could spread your risk by investing in a UK equity fund with exposure to range of companies, including those operating in the pet care market. For example, the Blackrock Smaller Companies investment trust has CVS Group in its top 10 holdings. Standard Life UK Smaller Companies fund (ISIN: GB00B7FBH943) also holds CVS Group.

Alternatively, investors could also consider an emerging markets fund that holds companies operating in the pet care market in countries such as Brazil and China.

While investing in funds is less risky than opting for individual shares, bear in mind that you could still lose money. All investments can fall as well as rise and you may get back less than you invested.

Please bear in mind that our referring to these investments does not constitute advice or a personal recommendation to invest in these or any other investment. We do not provide investment advice. If you’re unsure whether an investment is right for you, you should seek independent advice.

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