The Pet Industry is a Recession-Resistant Category for Investors Seeking Long Term Gains – Here's Why
The pet industry is one of the most attractive and rapidly growing sectors in today's market, projected to reach US$277 billion and expected to experience 8% compound annual growth by 2030.
Millennials and Gen-Z
The increasing number of Millennials and Gen-Z now entering their prime pet-owning years is propelling the industry forward, especially as this demographic outspends other generations on their pets, creating a larger pool of potential revenue for investors. The pet category is expected to continue its growth, making it one of the most lucrative industries in which to invest.
Resilience to Economic Recessions and Downturns
The pet industry is unique in its resilience to economic recessions and downturns. 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. During the more recent 2020 COVID-19 recession, sales of pet products and services continued to grow at a faster rate than the overall U.S. economy, with a 16.2% growth compared to 4.3%.
The rise in pet ownership during these times of economic uncertainty is likely due to the increased amount of time spent at home and the desire for companionship. According to Packaged Facts’ research director David Lummis, “More than ever, people are turning to pets as companions through thick and thin, as we look for comfort in these uncertain times.” This demonstrates that the pet industry has proven itself to be one of the most resilient sectors even during times of economic hardship. With an increasing number of Millennials entering their prime pet-owning years and record high M&A activity in 2022, this trend is expected to continue in the years ahead, making investing in the pet sector a potentially advantageous option for those looking to add growth and diversification to their portfolio.
Pet Market is Booming
Despite this boom in the pet industry, investing in publicly traded pet sector stocks may not be the best option for those looking to capitalize on this trend. For example, BarkBox shares have lost 90% of their value - a similar decline experienced by other non-pet subscription services like StitchFix. Meanwhile, PetCo attempted to rebrand itself as a "wellness" company, offering an all-in-one solution for pet care needs, but its stock has suffered an over 60% loss in value. On the other hand, a pure play wellness company like Idexx, which develops laboratory tests for pets, has gained considerable value even during periods of market decline.
For those who want to tap into the potential of the pet industry without assuming the same risks as public investors, the best approach lies in investing in service providers that are community-focused and offer a single much-needed service such as daycare, hotel, grooming or medical care.
Record Number of Recent M&A Transactions
With the market changes from the pandemic, the pet industry has seen a record number of recent M&A transactions, including the $610 million dollar acquisition of Zesty Paws by H&H Global and the $700 million dollar purchase of Pet Supplies Plus by Franchise Group. Mars purchased fresh food company Nom Nom, and Manna Pro acquired Oxbow Animal Health. Additionally, Canada-based Spectrum Brands Holdings Inc. acquired animal health products company PetKing Brands Inc. for $250 million to expand its portfolio of pet care products and services, while Nestle Purina PetCare purchased Tails.com, a United Kingdom-based personalized pet food delivery service provider.
Cascadia Capital observed: “During the COVID-19 period, the pet industry will have undergone the greatest ownership transition the industry has ever witnessed as measured by deal volume… As the equity community seeks to rotate into defensive categories, pet company sellers are finding it easier than many other categories to cash in on the ‘COVID-bump.’”
Large investors are recognizing the promise of the pet industry and have prioritized adding pet businesses to their portfolio. The president of the World Pet Agency told Pet Product News, “What the pandemic did was add fuel to the steady fire of the industry. While the pet industry was already doing well pre-pandemic, the pandemic provided a new motivation for large corporations to acquire products and solutions that appeal to our ‘new normal.’”
The record 169 transactions in 2021, up from 76 in 2020, increased further in 2022 and expectations for more M&A activity in 2023 remain high. According to an interview with David Lummis of Packaged Facts, this high level of mergers and acquisitions activity will only continue to grow.
In summary, those looking to gain exposure to the pet industry should consider investing in highly localized service providers. Whether it’s a franchise or entire regional network of locations – this type of investment offers more security and potential returns than simply betting on publicly traded stocks which have been known to suffer significant losses when market conditions change.
Source: Mark Van Wye, CEO Zoom Room (Nasdaq)