Pet lovers in China turn to domestic brands for value as investors sense opportunity

Amid a nationwide slump in spending, Chinese pet owners are looking for more value for money when it comes to food and other products for their furry companions, a shift that analysts say gives domestic companies a chance to grab a bigger share of the 279.3 billion yuan ($39 billion) pet market.

Investors betting on this trend have identified manufacturers as likely winners.

For example, U.S. private equity giant Advent International and Chinese investment firm Boyu Capital announced on Aug. 12 that they had acquired a stake in Seek Pet Food, a Shandong-based producer of mid- and high-end pet food. The deal was reportedly valued at more than 1 billion yuan, making it the largest transaction in the sector in China this year.

In May, China’s Legend Capital acquired a stake in functional pet food maker RedDog. And in February last year, L Catterton, a U.S. consumer-facing investment firm, injected capital into Partner Pet, a Chinese brand known for its high-quality freeze-dried pet food.

Have questions about the biggest topics and trends around the world? Get answers with SCMP Knowledge, our new platform of curated content with explainers, FAQs, analyses and infographics brought to you by our award-winning team.

“China’s pet food sector remains fragmented, with the top 10 companies accounting for just 31 percent of the total, and local companies have grown faster than imported brands in recent years, leaving local brands with big growth potential,” said Nina Jiang, a consumer analyst for China at UBS. The substitution of domestic brands for imports will accelerate as consumers seek value and awareness of local brands grows, she said.

The pet food market was expected to be worth 69 billion yuan in 2023.

The surge in deal activity across pet-related industries reflects investor enthusiasm for the sector. The industry saw 16 investments in the first half of the year, topping the 13 deals seen in all of 2023. Pet food was the most active segment with five deals, three of which involved domestic producers, according to data compiled by CSC Financial.

“Investors are looking at companies that are moving up the value chain,” said Derek Deng, head of consumer products at Bain & Co in China. “Most brands still rely on (contract manufacturers), but given how quickly trends can come and go, choosing the right (brand to invest in) can be difficult. Manufacturers, on the other hand, are more stable.”

With China’s population aging and birth rates at record lows not seen since 1949, consumers, especially older generations, are attaching greater emotional value to their pets and spending more time and money caring for them.

The pet market grew 14.3 percent between 2019 and 2022, making it one of the best-performing consumer categories. The segment is expected to grow another 2.6 times to 756.5 billion yuan by 2030, according to UBS.

“The growth of the pet sector has a uniquely human aspect,” said Jason Wang, a private equity director at KKR, which backs Gambol, China’s largest pet food maker. “The two big baby booms were in the 1960s and the late 1980s, and what we’re seeing is a greater demand for pet companionship from those demographics that also have greater opportunities to provide their pets with higher-quality food and attention.”

But years of unstable economic activity, a continuing housing crisis and rising unemployment are eroding consumer confidence. Pet owners are not immune. Euromonitor data shows that pet food market growth has slowed to mid-single digits in the wake of the Covid-19 pandemic, down from a peak of 45 percent in 2016.

In addition, pet spending in mainland China per person remains at around US$5 per pet per year, which is significantly lower than in other regions: US$170 in the US, US$103 in Hong Kong and US$109 in Australia.

“The pet industry has seen significant growth during times of economic prosperity, especially due to trends like an aging population,” said Richard Lin, chief consumer analyst at SPDB International. “However, in the current economic environment, the investment logic that once applied may no longer hold true.”

In addition to unfavorable macroeconomic conditions that are curbing spending, Chinese pet food companies are also struggling to build their brands and gain loyalty among Chinese consumers, who switch brands more often than their competitors in more mature markets, Bain said.

“The barrier to entry is low and competition remains fierce due to the fragmented market,” said UBS’s Jiang. “Currently, most domestic companies focus on gaining market share rather than profitability. It can take a long time to establish brand awareness for local brands.”

And for investors interested in creating the next industry leader and profiting from mergers and acquisitions, the market may simply not be ready.

“When it comes to acquisitions, consolidation tends to happen only when there are two or three strong firms in a market. Among Chinese firms, few have the strength to acquire smaller firms, and many smaller brands lack the brand strength to make such acquisitions worthwhile,” said Lin of SPDB International.

The popularity of e-commerce in China, where barriers to entry are low, will support “numerous innovative pet food brands,” according to David Chen, managing director of Advent International.

“We expect the pet food brand market in China to remain fragmented compared to the U.S. and Europe, in part due to the much greater penetration of the Chinese e-commerce channel for pet food sales, which provides democratized shelf space for a wide range of brands to emerge and grow,” the company said.

Additional information: Mark Gong and Eric Jiang

More on South China Morning Post:

For the latest news from the South China Morning Post, download our mobile app. Copyright 2024.