Barking up the right tree: investing in pet projects

The economist John Maynard Keynes popularised the concept of “animal spirits”, describing emotions and instincts that influence consumer confidence and human investing behaviour. Moreover, commentators frequently describe bull and bear markets, signifying optimism and pessimism respectively. More recently, the “black swan” theory has been used to interpret increasing numbers of previously rare financial events.

But the phenomenon of making money by investing in living creatures and the products surrounding them is also steadily gaining more prominence.

Companies of interest to investors in the household pet sector include Gambol Pet Group in China in and Chewy in the US.

While the US market for pet products is relatively mature, with 70 per cent of US households owning a pet, in China it is comparatively early stage, with 22 per cent household pet ownership. Both offer opportunities. US companies with global reach continue to trade successfully, as do domestic champions in emerging markets.

Despite the different geographic focus, both strategies can find opportunities in the pet sector, which has undergone a period of normalisation since the Covid-19 pandemic and now looks attractive.

Animal companionship

The Chinese market is growing fast, with household pet ownership increasing from 59m to 187m between 2010 and 2024, as disposable incomes have increased and, amid declining birth rates, there is growing demand for animal companionship.

As a result, the pet food industry is expects a compound annual growth rate of 7–12 per cent over the next three years as pet owners become more educated and interested in higher quality products for their furry friends.

This has led to rising demand for an increasing variety of higher quality products. Gambol is one of the leading players, and with only 6 per cent of market share, the opportunity for expansion in the high growth environment is considerable. It is targeting a market share of 15 per cent. Gambol offers better value products than international players and is an established domestic brand.

Contrastingly, pet ownership and the status of pets as members of the extended family is well established in the US. For instance, one friend living in Brooklyn, New York, shares an already cramped apartment with two “emotional support” animals belonging to their flat mates.

There is a very different consumer dynamic between developed and emerging markets. The average US pet owner spends $2,000 per year on their pet, versus just $300 in China.

Chewy, a pure ecommerce player, has the largest pet product platform in the US; its competitive advantage is the scale of its well-established distribution network.

Chewy’s ‘Autoship’ function enables customers to schedule regular deliveries of food and other products, ensuring a consistent and streamlined supply. As a result, Chewy’s growth stems from an increasing share of wallet as they expand into new verticals and product lines.

Autoship generates 80 per cent of Chewy’s sales, which gives a potential indication of where the Chinese pet sector is heading, with ecommerce already accounting for 68 per cent of China pet food sales.

Distribution dynamics

Gambol has demonstrated agility in adapting to rapidly evolving distribution dynamics and marketing trends. This is where the key growth opportunity lies, as an increasing proportion of younger consumers who lean into online channels become the next generation of pet owners.

Millennials already make up the largest generation of pet owners in the US at 33 per cent, with Gen Z also accounting for 16 per cent, despite their young age. This illustrates that the transition is already underway, with just under half of all pet owners in the younger, more digitally advanced cohort, who skew towards online shopping.

The global pet industry underwent a period of outsized growth during the Covid pandemic, as pet adoptions surged and demand for pet products rose with it. Both companies mentioned grew revenue by more than 40 per cent during 2020.

However, what came next was a significant normalisation, with pet relinquishments outstripping adoptions and pet share prices falling accordingly.

Three years on, the timing now looks promising, with Chewy returning to customer growth for the first time since 2022, a key signal that we have reached a turning point.

We are nearly six months into the Chinese year of the snake, but investors have yet to see if their long-term choices present opportunity, or are ‘dogged’ with uncertainty.

Tom Dalrymple, investment analyst, Aubrey Capital Management