Two weeks ago I spent a week in Japan, a country I find incredibly calming and a pleasant place to live. And when I got back I realised why: Japan has more pets per capita than children – a country not only with an ageing population, but one where society has partially replaced offspring with something that can live in a cage or bowl, that can be trained to be obedient, and can be sold to someone else if one tires of it. The Japanese population might be on to a good idea here.
But, humour aside, this trend in Japan is important in two ways. First, the number of pets globally is increasing and, possibly more significantly, the disposable incomes of those who own pets has steadily increased in the past few decades. Gone are the days when a pet was a near-free addition to the family – now they are a high-cost addition and also possibly a status symbol. At one end, medical costs of pets have soared, with almost any human medical condition having an equivalent animal treatment at the same, or sometimes even higher, cost. Second, animal accessories have become a part of conspicuous consumption and accessorising some pets is now de rigueur. Let us consider a couple of examples.
Pet ownership in many parts of the world is at all-time highs. Owners in the US spent $53bn (£34bn) on their pets last year and almost half of that was on food, including treats, with another quarter on supplies and medicines. In the 10 years after 1998 the spend on pets almost doubled in the US – about 1 per cent of total spending a year for the average household. This is more than was spent on alcohol, landline phone bills or clothing for men. Spending on pet food alone is more than on sweets, bread, chicken, cereal or reading material.
Pet owners seem willing to provide products for their pets that they would never dream of spending their hard-earned wealth to buy for their human family members. The pet services industry has become ever more innovative in providing items which meet pet owners’ specific needs – who knew a dog would need boots to protect its paws from hot sand; never mind an iPad app to entertain your cat while you are out. This all adds up to an attractive market for companies and therefore an opportunity for investors.
Pet insurance is also expected to be a key growth area with a large number of cats and dogs still uninsured in the UK, offering a potential £2.5bn in untapped premiums. Growth – even in the insurance-sceptical UK consumer market it has been robust – of around 30 per cent in the past three years. A number of companies, including L&G, have launched offerings in this market in recent months, as well as existing specialists such as Petplan, part of Allianz and Anicom which owns the largest share of the Japan market to benefit from this trend.
Demographic trends are not just about humans – and the intelligent investor looks beyond high-level data to see growing markets, such as those around petsSpending has also been remarkably robust. While consumer spending at restaurants, for example, fell during the financial crisis, spending on pet food stayed constant – and spending on other pet-related items actually grew. In the UK – known across the world as a national of animal lovers – pet owners have been willing to sacrifice their own lifestyles to make sure their pets do not have to contend with austerity. Eight in 10 consumers changed their shopping habits to save money, but only one in 10 pet owners cut back spending on their animals. In fact more than a third of owners said they would cut back on spending on their own food (and quite possibly their children’s food) before their pet’s, according to a recent Mintel survey.
This is an area of the market that investors are waking up to. The recent $2.2bn (£1.4bn) initial public offering from Zoetis – Pfizer’s animal health division, the largest in the industry – exceeded expectations, was 17 times oversubscribed and was one of the largest debuts since Facebook. Meetings during the company’s nine-day road show were often standing room only as potential buyers and analysts crowded into conference rooms to listen to Zoetis’s executives and its advisers pitching the company. Pfizer retains 80 per cent ownership currently but has recently announced plans to spin off its remaining interest to focus on core businesses.
What can we learn from pets? First, demographic trends are not just about humans – and the intelligent investor looks beyond high-level data to see growing markets, such as those around pets. And second, having found such a growth market, there are many different ways an investor may choose to gain exposure. How many of these ‘second derivative’ effects of population change are considered by investors? And how many opportunities are missed?
James Bateman is head of multi-manager and multi-asset portfolio management for Fidelity Worldwide Investment
