Amid a nationwide spending decline, China’s pet owners are looking for higher value for money when it comes to food and other products for their furry companions. This shift, according to analysts, gives domestic companies a chance to fetch themselves a larger share of the country’s 279.3 billion yuan (US$39 billion) pet market.
Investors who are betting big on this trend have identified manufacturers as likely winners. For instance, US private equity giant Advent International and Chinese investment firm Boyu Capital announced on August 12 that they had acquired a stake in Seek Pet Food, a Shandong-based manufacturer of mid-range and high-end pet food. The transaction was reportedly valued at over 1 billion yuan, making it the largest deal in the sector in China this year.
In May, China’s Legend Capital took a stake in functional pet food maker RedDog. And Last February, L Catterton, a US consumer-focused investment firm, injected capital into Partner Pet, a Chinese brand known for its premium freeze-dried pet food.
“China’s pet food sector is still fragmented, with the top 10 companies’ market share only accounting for 31 per cent of the total, and local companies grew faster than imported brands in recent years, leaving large upside for those local brands,” said Nina Jiang, China consumer analyst at UBS. Substitution of domestic brands for imported ones will accelerate as consumers seek value and awareness of local brands grows, she said.
The pet food market was worth 69 billion yuan in 2023.
An increase in deal activity in pet-related industries reflects investors’ enthusiasm for the sector. In the first half of the year, the industry saw 16 investments, surpassing the 13 deals recorded throughout the entirety of 2023. Pet food was the most active segment with five deals, three of which involved domestic manufacturers, according to data compiled by CSC Financial.
“Investors are turning their attention to companies that are moving upstream on the value chain,” said Derek Deng, head of Bain & Co’s Greater China consumer products practice. “The majority of brands still rely on [contract manufacturers], but given how quickly trends can emerge and fade, choosing the right [brand to invest in] can be challenging. Manufacturers, in contrast, are more stable.”
As China is grappling with an ageing population and historically low birth rates not seen since 1949, consumers, especially older generations, are attaching greater emotional value to their pets and dedicating more time and money to caring for them.
The pet market expanded by 14.3 per cent between 2019 and 2022, making it one of the best-performing consumer categories. The segment is estimated to grow another 2.6 times to 756.5 billion yuan by 2030, according to UBS.
“There is a unique human aspect to the pet sector’s growth,” said Jason Wang, director of private equity at KKR, which backs Gambol, China’s largest pet food manufacturer. “Two big baby booms occurred in the 1960s and late 1980s, and what we have been observing is greater demand for pet companionship from these demographics, who also have greater ability to provide their pets with higher quality food and attention.”
However, years of stop-start economic activity, a persistent property crisis and rising unemployment are dampening consumer confidence. Pet owners are not immune. Euromonitor data shows that growth in the pet-food market has slowed to the mid-single digits after the Covid-19 pandemic, compared with its peak of 45 per cent in 2016.
Moreover, per capita spending on pets in mainland China has stagnated at around US$5 per pet per year, markedly lower than in other regions: US$170 in the US, US$103 in Hong Kong, and US$109 in Australia.
“During times of economic prosperity, the pet industry has seen substantial growth, especially due to trends like an ageing 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 macroeconomic headwinds dampening spending, China’s pet food companies are also struggling to build their brands and gain loyalty among Chinese consumers, who switch brands more frequently than their peers in more mature markets, according to Bain.
“The entry barrier is low, and competition remains intense due to the fragmented market,” said UBS’s Jiang. “Currently, most domestic companies are focused on gaining market share rather than profitability. Establishing brand awareness for local brands may take a significant amount of time.”
And for investors keen on building the next industry champion and profiting from mergers and acquisitions, the market may simply not be ready.
“When it comes to acquisitions, consolidation typically only occurs when there are two or three strong companies in the market. Among Chinese firms, few have the strength to acquire smaller companies, and many smaller brands lack the brand power to make such acquisitions worthwhile,” said SPDB International’s Lin.
The prevalence of e-commerce in China, with its low barriers to entry, will support “numerous innovative pet food brands”, according to David Chen, managing director at Advent International.
“We expect the pet food brand landscape in China to remain fragmented compared with the US and Europe, partially due to China’s much higher penetration of the e-commerce channel for pet food sales, which offers democratized shelf space that enables a wide array of brands to emerge and thrive,” the company said.
Additional reporting by Mark Gong and Eric Jiang
