U.S. Pet Industry $ales in 2016: $66.75B – Taking a closer look!

U.S. Pet Industry $ales in 2016: $66.75B – Taking a closer look!

According to the numbers from the American Pet Products Association (APPA), the total U.S. Pet Industry increased $6.47B (10.7%) in 2016. This was spectacular to say the least. However, about $4B came from a data reporting adjustment to Food $ales based upon information from the US BLS which indicated that previous years Food numbers were too conservative. What is most important is that this year’s numbers more accurately reflect the true strength of the industry, especially in the largest and critically important Food Segment. Even factoring in “Petflation”, the increase in the amount of goods and services sold was 9.2% and 85.9% of the industry’s growth was “real”. Less than 15% came from price increases.

In this post we’ll take a closer look at the performance of the total market and importantly, the individual segments. The report will cover 2016 but also put this year’s numbers into perspective for the period from 2009 to 2016, the time since the great recession.

Here are the details for 2016. Some key data is highlighted:

OBSERVATIONS

  • Two consecutive years of deflation in the Food segment ended in 2016 with a reasonable CPI increase of 0.2%.
  • Sale of Live Pets fell slightly for the third consecutive year, which is a concern.
  • The Supply segment came up short of projected numbers but prices were flat so 97% of the growth was real.
  • The Service segment hit their projected sales number but the inflation rate was relatively high so only 67.3% of the increase was real, down from 77.5% in 2015
  • The Veterinary Segment also reached the projected number but the continuing high inflation rate resulted in Pet Parents actually buying less in terms of the amount of veterinary services for the second consecutive year.
  • The Total Pet Market – up 10.73%…was primarily driven both by the performance and the reporting adjustment in the Food segment. The Food and Supplies segments, with minimal price increases pushed the real growth up to 85.9% – outstanding. The high inflation rate in the Vet Segment continues to depress consumer sales, affecting the entire industry’s numbers.

The Chart below may make it easier to compare the situation in the individual Segments

Now let’s take a look at the performance of the individual segments from 2009 through 2016 starting with Food.

OBSERVATIONS

  • The adjustment to more accurately reflect the current sales of Pet Food made quite a difference in the average numbers for the period from 2009 to 2016
    • 7.02% Annual Growth Rate
    • Low average inflation – 0.82%
    • 6.15% CPI adjusted Growth Rate: 88% of the growth since 2009 has been “real” – That’s Outstanding!
  • In the 7 years since 2009…
    • 3 were deflationary (-0.6%) Average
    • 4 were inflationary (1.9%) Average

Both deflation and strong inflation can be concerning. We have only had 4 deflationary years in Food (2000 was the other). The 2010 deflation came after a combined 20% Food CPI increase from 2007 to 2009 – in the heart of the recession and real growth ceased. The decrease in 2010 was a welcome break and brought a big positive response from the consumer and adjusted growth exceeded retail sales.

The years from 2011 to 2013 brought CPI increases in the 2+% range. This was a bit too high and dropped the percentage of real growth below 50%. In 2014-15, prices fell so the consumer paid less but “real” growth improved. The big concern with deflation is the impact on the supply and distribution channels and ultimately on the consumer… thru reduced choices. In 2016, prices moved into a healthier range. In the future, a positive inflation rate for Food that stays at or below 1% should produce the best results.

Here’s what the period from 2009 to 2016 looks like on a graph:

2017 Retail Food sales are projected to increase 5.2% to $29.69B. This seems very reasonable. In the chart you also see the big lift caused by the adjustment. It’s important to remember that the 2016 numbers are more accurate. If the APPA were to adjust the numbers from earlier years it would likely just straighten the growth line’s path to the top. It’s also a little too early to project the Pet Food CPI for 2017. February prices are up 0.1% from December and up 0.17% from a year ago. This is on track for a desirable low increase in the CPI.

Let’s turn next to Pets & Supplies.

OBSERVATIONS

  • Deflation
    • Cumulative
      • Prices are 4.87% below 2009 (and still about equal to what they were in April 2008)
      • Falling at an annual rate of -0.71%
    • Short Term – Stopped with very minor CPI increases in both 2015 and 2016
  • Retail Sales – When deflation ended, the retail growth rate slowed as this category is now very price sensitive.
  • Over the whole period, the Consumer bought more…and paid less!
    • Retail Sales annual growth rate is 4.24%
    • Price Adjusted annual growth rate is 4.99% – 18% higher than the retail rate

In Supplies, the first deflationary year was 2010. However, we should remember that inflation has generally not been a big issue in this segment. From 1997 to 2004 Pet Supplies increased in prices at an annual rate of under 0.5%. Then in 2005 and continuing through 2009, the CPI increased an average of 2.75% per year. This doesn’t sound like much but remember it was 5 times the rate of the previous 7 years and 2 of the biggest increases (over 3.0%) came in 2008 and 2009, in the heart of the recession. The consumer reacted – and bought less.

Prices fell 1.7% in 2010 and the consumer bought more. The prices briefly stabilized in 2011 and then began moving downward. The consumer’s reaction was to buy more. 2015 and 2016 brought another pricing pause, similar to 2010. Overall Retail growth slowed to 2.5% and adjusted growth dropped from 4.6% in 2014 to 2.4% in 2016.The good news for the sellers is that this growth was 99% real and more profitable.

Here’s the graph:

In 2017 Pets & Pet Supplies are projected to increase only 0.8% to $16.94 B. This reflects an expected $100M decrease in Live Animal Purchases and minimal growth in Supplies (1.5%). Many categories in the Supply segment have become commoditized and commodities are very price sensitive. February 2017 prices are down 0.9% from December and 0.7% from a year ago. If this continues, it could spur increased spending. However, innovation is the only real cure. Consumers will spend more for products that make Pet Parenting easier or better.

Now onto the Service Segments – First, NonVet Services.

OBSERVATIONS

  • Growth
    • Annual Retail Growth rate 8.00% – The highest in the industry
    • Annual Inflation rate – a little high at 2.42% but appears to be slowing.
    • Years of inflation may be catching up to this segment as the spending increase in 2016 was about half of the increase in 2015.
    • 68.1% “real” growth – 75+% should be their target.

There are no big negatives regarding this segment. However, it is largely driven by discretionary spending so the consumers’ spending power is a big factor. That’s why years of relatively strong inflation could result in a consumer “push back” at some point. However, it has grown strongly and consistently in the improving economy since the recession, especially since 2011. In 2015 the growth even reached double digits at 11.8% but slowed to a more normal 6.5% in 2016. The impact on the industry is limited as it is by far the smallest segment, only accounting for 8.6% of total Pet Industry Sales…but that’s better than 7.4% back in 2009.

Here’s how the sales look on a graph:

2017 sales are projected to be $6.11B, up 6.1%. This increase is down a bit from last year’s 6.5% and 25% below the segment’s average annual growth rate. In regard to inflation, prices are up 0.2% since December and 1.4% from a year ago. Inflation is still ongoing in this segment. The big question is how much? If it stays near or below 2% then their real growth would be about the same as 2016 – 66%. Since price is increasingly a factor in spending, we’ll periodically update the CPI status for all segments during 2017.

Veterinary Services generate 23.9% of Total Pet Industry $ales.

Let’s take a closer look at the Veterinary Service Segment.

OBSERVATIONS

  • Retail Growth
    • Sales are Up 32.5% since 2009
    • Annual growth rate 4.10%
  • Inflation is the problem
    • Annual average CPI increase 3.59%
  • Price increases account for 88.1% of Retail growth!
  • “Real Sales”
    • Consumers actually bought less in vet services in 2011, 2012, 2015 and 2016. They just paid more.
    • Sales have been stagnant since 2009 – average annual growth rate 0.49%
    • Even worse, 2016 “real” sales were about equal to 2010 (actually a little less). Consumers bought the same “amount” of Veterinary Services. They just paid almost $4B more.

Regular veterinary visits are generally viewed as a “need” not a “want”. The high inflation rate over the years finally generated a consumer response in 2011…they cut back on veterinary services. Consumers have turned to OTC medicines, supplements, treatments and home testing whenever possible. Some NonPet Retailers are offering “no appointment” clinic days in their stores where Consumers can bring their pets for vaccinations and other procedures at radically discounted prices. Pet Health Insurance is growing and there may be fundamental changes in Veterinary Clinics – more chains and groups. Major medical procedures and emergency care will always be needed but it seems steps should be taken to make regular veterinary care more affordable.

Here’s the graph of sales since 2009:

Veterinary Services are projected to reach $16.62 B in 2016, up 4.2%.That seems a bit high considering recent performance. Inflation continues unabated as the CPI in February is already up 1.2% since December and 2.5% from a year ago. If the Veterinary Segment can hit the projected Sales number then they will likely avoid a third consecutive year with a decrease in services. However price increases would probably still account for 80+% of the increase in sales.

Now in our final section we’ll go back to the total pet market.

OBSERVATIONS

  • Retail Sales in 2016 46.6% since 2009; Annual growth rate 5.62%
  • Inflation: Only 10.57% since 2009; 1.45% annual CPI increase.
  • “Real” Sales are 73.2% of the Total increase with an annual growth rate of 4.11%

The great Total Pet Retail numbers are a big reason why so many people are attracted to the industry. They look even better with the APPA’s adjustment in Food reporting to get a more accurate number, but the retail numbers are consistently good across all segments. However, as I’ve said so often, you need to look a little deeper into “petflation” and the actual amount of goods and services being sold. In recent years we have been struggling with deflation in Food and Supplies and inflation in the Veterinary Segment.

  • Deflation in the Supplies Segment has now paused for 2 consecutive years. Commoditization, channel migration, consumer value shopping and lack of innovation had created extreme competitive pressure which deflated prices. Consumers were buying more… but paying less. Recent small increases in the CPI have slowed the growth of retail sales slightly. We’ll see if deflation begins again or if this segment has truly reached a turning point.
  • After 2 years of deflation in the Food segment, prices rose slightly in 2016. However, the big news is the significant consumer move to Super Premium foods, which offer superior nutritional benefits at a higher price.
  • The Veterinary segment has the opposite pricing problem. Years of inflation have caught up. Consumers bought less in 4 of the last 7 yrs. 88% of growth is from price increases and 2016 “real” sales are slightly below 2010.

Here’s the graph of Total Pet Sales since 2009:

In 2017 the Total Industry is expected to increase 3.9% to $69.36B. This could be a little low if the Super Premium Food trend continues and expands and Supplies bounce back with improved growth. In terms of CPI Inflation, the 2016 rate of 1.39% seems to be a reasonable estimate. Recent years have seen real sales growth at about 3%. Combined with the CPI this would produce a Total Industry Increase of 4.4% to $69.7B. We’ll just have to wait and see what happens.

One last thought – Always look beneath the surface in your business numbers. The headlines may not tell the whole story!