Cascadia Capital has released its Pet Industry Overview and notes the pet industry, while "remaining optically attractive," may face some underlying challenges and issues within the industry.
According to Cascadia's report, data suggests pet population slowing and retrenchment and pressure at the consumer level as evidenced by growth in private label. Pet owners have also bought forward and are now reducing their debt, while persistent input inflation continues to put industry profits under pressure.
"While we remain optimistic in the medium and long term, 2024 will be choppy and only well positioned companies will experience the benefits," noted Bryan Jaffe, COO and managing director, and John Gulvezan, vice president, of Cascadia Capital, in the report. Also highlighted in the report:
- Consumer spending has held up well in total, but cracks are evident with consumer sentiment continuing to sink and purchasing power remaining under pressure. Decreasing increases in prices are still increases relative to the baseline. Cascadia has not seen any interest from brands to rollback price increases that would provide some relief.
- While unemployment has remained persistently low, a forthcoming spike is anticipated. Whether a recession materializes in 2024 or not, it is clear that the psychology is taking its toll.
- Industry growth has been supported by price relative to volume by a factor of 3x – 4x depending on category. Companies are unlikely to be successful pushing price increases in 2024 and will be pressured to reduce prices by both retailers and consumers, said Cascadia. Absent input cost deflation, margin pressure will cut into innovation and discretionary marketing spend, which are key drivers of growth.
Publicly-traded pet company performance
Public company performance can provide insight into the state of an industry. According to Cascadia, its pet index experienced record revenue in 2023. Earnings have accelerated as price increases have been passed on to end consumers. Cascadia noted for its publicly traded pet company index:
- Revenue grew 5.3% versus 4.1% in the prior-year period
- Adjusted earnings increased 116% versus 66.3% in the prior-year period
Nestle: For the first nine months of 2023, Purina PetCare achieved CHF 14 billion in global sales and continued to be Nestle’s largest contributor to organic growth. Overall, Nestle reported sales were down -0.4% , but PetCare posted strong double-digit growth (13.1% organic growth, 2.6% real internal growth) despite capacity constraints. PetCare growth is moderating, but management expects to continue to see high-single digit growth through 2025.
Freshpet: Consumption across channels continues growth at a strong and steady rate, and net sales increased 28.4% to $551.5 million for the first nine months of 2023 compared to $429.5 million for the first nine months of 2022, driven by both volume gains and higher pricing. Freshpet is delivering improved margins from better operational performance in logistics, input costs and quality and is ahead of pace to deliver cost improvements to achieve FY2027 margin targets. Store count continues to grow with 20% of all store having multiple fridges.
Swedencare: Swedencare's net sales increased 25% YoY to SEK 602 million, representing its strongest quarter ever. All regions delivered double-digit growth for the period, and both brand and contract development/manufacturing are in high demand. The company’s largest brand NaturVet closed another record quarter with growth in both pet retail and online.
Chewy: In the second fiscal quarter 2023, Chewy reported $2.78 billion in net sales +14.3% YoY and a 3.1% adjusted EBITDA margin. Consistent with expectations, active customers were broadly flat on a sequential basis, while net sales per active customer reached $530, reflecting a 14.7% increase YoY. Cascadia noted the Chewy Health platform is taking hold and cross-category penetration into pharmacy currently represents nearly 20% of Chewy’s overall active customer base. Chewy’s revenue growth may not be sustainable as the company laps price increases; this is yet to play out.