Source: Flickr user Brad Holt.
Pet ownership may not be for everyone, but it's becoming more prominent than you might have first thought.
According to the American Pet Products Association, or APPA, pet ownership by household in the U.S. has risen from just 56% in 1988 when the first APPA National Pet Owners Survey was conducted, to 68% as of 2013-2014, or 82.5 million American homes. Of that grouping, an estimated 56.7 million homes now own a dog, 45.3 million own a cat, and more than 16 million own some form of fish, be it saltwater or freshwater.
Beyond just ownership, however, we've seen a genuine transformation over the years of pets transcending a boundary of being a companion to actually becoming a part of a household's family.
Based on a Harris Interactive poll conducted in 2012 that surveyed more than 2,600 adults online, 91% of respondents affirmed that their pet was a part of their family. This was up three percentage points from the 88% registered in 2007. Additionally, pet owners fessed up to considerable perks for their pets, including two-thirds of respondents allowing their pets to sleep in bed with them frequently or occasionally, 61% who admitted to buying their pet a holiday present, and roughly one-quarter of respondents that noted cooking food specifically for their pet.
Source: Author with Angel.
For the love of a pet
I bring these statistics to light because this past week I did one of the hardest things a pet owner can ever do: I put my 15-year old domestic short-hair cat, Angel, to sleep after her battle with chronic kidney disease. To be brief, Angel had a number of issues, including a heart murmur and anemia, which made dialysis out of the question. Furthermore, chronic kidney disease is a progressive and terminal disease. In other words there was no winning from the get-go.
Yet, I still made countless trips to my local vet's office, bought every pharmaceutical product imaginable to control her disease, and devoted hours daily to ensuring she had the best quality of life possible with whatever time she had remaining, which turned out to be six months.
Tallying up what I spent on Angel would make some people gasp and perhaps call me insane. To some extent, they're probably right. But, the connection and love I had for my cat made cost an unimportant factor in the equation. The only thing that mattered to me was keeping a close member of my family feeling well -- and I'm willing to bet I'm not alone in feeling this way.
APPA statistics show that (at least based on the questions posed to pet owners) dogs and cats cost households an average of $1,649 and $1,271, respectively, per year. For dogs this includes an average annual expense of $621 for surgical vet visits, $239 for food, $231 for routine vet visits, and $327 for kennel boarding. Felines cost their owners an average of $382 per year for surgical visits, $203 for food, $193 for routine vet visits, and $337 for kennel boarding.
Graph by author, in billions of U.S. dollars. Source: American Pet Products Association.
Overall pet industry expenditures are expected to total $58.5 billion this year, up more than 200% from the $17 billion in total expenditures 20 years ago. In 2013, this included $15.25 billion in veterinary care, $13.72 billion in supplies and over-the-counter medicine, and a whopping $22.6 billion in food.
In other words, if you're looking for a long-term investment opportunity in an industry with obvious potential, consider investing in America's growing commitment to their four-legged, feathered, or gilled family members.
Invest in love for the long term
There are a number of ways investors can benefit from the growing bond between households and their pets.
Source: PetSmart.
The clear opportunity is with companies that provide direct servicing or goods for your pet. Think of a company like PetSmart (PETM +0.00%), which provides an array of pet products all under one roof, as well as allows pet owners to shop online at their own convenience. The same could be said for PetMed Express (PETS 0.40%), an online provider of vitamins, food, and other pharmaceutical products, which allows consumers the luxury of never having to leave their home. Not surprisingly, full-year sales for PetSmart and PetMed Express have jumped 106% and 116%, respectively, over the past decade.
But, there's more to the industry than just retail service locations. Veterinary offices, pharmaceutical companies, and even insurers are finding plenty of success in growing their business, as well as improving pets' quality of life, which, in turn, makes their owners quite happy.
Consider a company like VCA (WOOF +0.00%), which offers animal hospital and laboratory services for companion animals. In short, VCA can handle surgical procedures of all forms and diagnostic services, while also prescribing foods, medicines, and even providing boarding services. Let me tell you from firsthand experience that veterinary offices often have beefy margins. Just like in a hospital for humans, some cases are handled on a compassion basis, so veterinary offices ensure their margins are healthy enough to stay profitable and ensure high-quality care of their pet patients in instances where care is given and an owner can't pay.
Source: Flickr user MyFuture.com.
Zoetis (ZTS 1.02%) is another beneficiary, though it should be pointed out that livestock/cattle comprises more than half of its revenue as opposed to companion animals. Still, as the world's largest pharmaceutical products provider for animals based on annual revenue, Zoetis' prospects for growth are phenomenal, especially with consumers like myself willing to go to the ends of the Earth to ensure the health of their pet.
Lastly, a largely under-the-radar industry investors may want to take note of is pet insurance. Most owners, like myself, don't have insurance on their pet and pay high out-of-pocket costs for their pets. It's possible as more animals make the move into being "part of the family" that the pet insurance industry could explode in popularity.
Based on data from research group Embrace as of the end of 2012, just 10 companies were underwriting pet health insurance policies in the U.S. Of those, Veterinary Pet Insurance held about half of all U.S. market share (VPI is owned by privately held Nationwide Insurance), The Hartville Group held about 10% market share, and PetPlan USA clung to 9% market share and is a subsidiary of Allianz (AZSEY +0.00%). While Allianz could certainly see benefits from an increase in pet policies, investors should understand it's a negligible component of its revenue generation at the moment.
Long story short, man's best friend could offer your portfolio plenty of potential if you play your cards right. This is one instance where following pet owners' spending habits could truly pay future dividends and "return the bone" back to the owners over the long run.
