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We spend more money on our pets than ever before. Fido pulls on our heartstrings and out pop our wallets. The pet products industry salivates over tactics to capture more of our paychecks. As an investor, what's the best way to play the big business of pet ownership?
Melting our hearts... and wallets
More and more, our pets are viewed as members of our families. And we spend money on them like they are. The ASPCA anticipates that the first year of ownership of a large dog will run you roughly $1,800. If you prefer felines, your first year as a cat owner will run you about $1,000. According to Packaged Facts and the American Pet Products Association, pet industry sales are projected to top $74 billion by 2015, up from the current $52 billion. Spending money on our furry friends is considered not only a trend, but also a long-term societal shift.
Here are four ways to play this love for pet companionship in your portfolio.
1. Pet retailers
This societal shift is like a scratch behind pet retailers' ears. A shrinking number of local mom-and-pop pet stores and privately held Petco circle this pet-centric retailing space, but PetSmart (UNKNOWN: PETM.DL ) is the undisputed alpha male.
PetSmart boasts four main strengths: its strong brand, licensing partnerships, differentiation through services, and prospects for international expansion. The company continues to grow its menu and number of services and is more actively pursuing international opportunities. Last year, the company entered into a product licensing deal with a South Korean retailer. I consider this a relatively inexpensive and low-risk approach for PetSmart to gain an understanding of how well its brand may be received in developing markets.
The company's results speak for themselves. Net sales have increased nearly 8% annually for the past four years. PetSmart's third-quarter 2012 earnings per share were up 50% compared to the same period last year. Same-store sales grew 6.5%, while sales for PetSmart's services like grooming, training, and boarding increased 8%. Fourth-quarter and full-year 2012 company results will be announced on Monday, Feb. 25.
2. Big-box merchants
Pet products are the central focus of pet-centric retailers, but mainstream merchants like Wal-Mart (NYSE: WMT ) offer expanding varieties of pet supplies. In fact, Wal-Mart unleashed Pure Balance, its first private-label premium dog food, last year. Pet-related product sales represent only a sliver of Wal-Mart's overall businesses, and the company does not break out its pet sales for the public. I think that until big-box merchants like Wal-Mart distinguish themselves as one-stop shops for pet supplies, they won't gain much more market share.
Forrester Research projects online retail sales of pet supplies to grow close to a $4 billion market in 2014, up from approximately $2 billion in 2010. This figure pales in comparison to the $74 billion in total pet industry sales projected by 2015, but it's still a huge and growing market.
As a result, e-tailers like Amazon.com (NASDAQ: AMZN ) have stepped up their game. A couple of years ago, the company launched Wag.com. The pet products site features 25,000 pet products, 15% off your first order plus 5% back on pet food, a two-day delivery promise, and free shipping (including pet food) on orders over $49. Since most of PetSmart's sales are derived from merchandise (instead of services), e-tailers can potentially bite into PetSmart's revenues. But the closing of a sales tax loophole and increasing competition would likely put further pressure on Amazon's already razor-thin profit margins and may lead to a hike in product pricing.
Interestingly, most every retail sector has seen a shift from in-store shopping to the ease of online. The one exception? Pet-centric stores. Pet owners still fancy the intimate interaction for their pet as opposed to an unceremonious online purchase.
4. Pet meds niche
Animal health is a strong and growing market, and a recent entrant got my attention. In the biggest IPO since Facebook , Pfizer (NYSE: PFE ) spun off Zoetis (NYSE: ZTS ) a few weeks ago. With more than $4 billion in annual revenue, Zoetis is the largest stand-alone company completely devoted to pet medicines and vaccines. Pfizer divested Zoetis to focus on its core business, but still owns 80% of the company.
Pet owners are willing to fork over whatever the costs needed to ensure the health of their furry friends. And because pet parents often completely forgo pet insurance or just buy enough to take care of catastrophic misfortunes, almost all of the cost of pet meds comes directly out of pet owners' pockets. As a result, Zoetis is uniquely positioned to benefit from the huge and growing animal health market.
Foolish bottom line
Of these four ways to play our love of pets, I like pet-centric PetSmart and Zoetis. PetSmart is poised to continue its success due to its dominant brand, licensing partnerships, strength of its services, and ample international growth prospects. I think Zoetis, while more of a niche market, offers an enticing way to play a growing industry. And I also like that the company was born out of Pfizer, the world's largest drugmaker.