Pet food industry research report: Pet food is high-end, and it is difficult to do the right thing

1. The pet food industry is marching forward, and the growth of single pet consumption brought by the increase of commodity grain penetration rate is the core driving force

1.1 The nearly 100 billion pet market has grown rapidly, and pet food is the largest segment of the track

1.1.1 China's pet industry has a short history of development and is currently in a high-speed development period

China's pet industry started late and is currently in a period of accelerated development. The US pet market has a history of more than 100 years, and the industry is mature. In 2021, the industry scale will reach 64.126 billion US dollars, making it the largest pet consumer market in the world and far ahead of other countries. In contrast, China's pet industry sprouted in the 1990s, and the China Small Animal Protection Association was formally established from 1988 to 1992. The association laid the foundation of China's pet market with the purpose of protecting animals, safeguarding their right to life and freedom from abuse, and improving and improving their living conditions and raising level. Later, overseas pet brands such as Royal and Nestle Purina gradually entered China, and scientific pet breeding concepts and products were promoted. From 2001 to 2009, the pet industry developed initially. During this period, local pet enterprises such as Guaibao, Zhongbao, Petty and so on were born and emerged. The role of residents in the pet industry began to change from house keeping to accompanying their families. Since 2010, the scale of China's pet industry has continued to expand rapidly under the combined effect of residents' consumption ability, consumption concept and the rapid popularization of e-commerce. According to Euromonitor International's statistics, China's pet consumption market will reach RMB 79.989 billion in 2021, with CAGR reaching 17% in the past 10 years and 20% in the past 5 years, and is expected to exceed 100 billion in 2023.

1.1.2 Pet food is the largest expenditure for pet care, and its proportion is increasing

China's pet industry chain is becoming more and more perfect. This report focuses on the pet food market with large scale and rapid growth. From the upstream to the downstream, the pet industry is divided into three major markets, namely, live pet trading, pet consumer goods and pet services. Among them, the growth of pet living body trading market slowed down and it was difficult to operate on a large scale from a commercial perspective; The pet consumer goods market includes pet food and supplies. The former market is large and easy to brand, which is the focus of this report; The pet service market mainly includes general basic services such as pet foster care, cleaning and medical care, as well as customized services such as pet training, photography, weddings and funerals. It is the fastest growing segment of the market at present. However, except for pet medical care, it is also difficult to brand other tracks. Euromonitor International data shows that in 2021, the market size of China's pet consumer goods will reach RMB 79.989 billion, up 13.70% year on year, of which the market size of pet food will reach RMB 48.188 billion, rising from 50.2% in 2016 to 60.2% in 2021. The growth rate of China's pet food industry has always been higher than that of the pet products industry, with the compound annual growth rate of 24.80% from 2017 to 2021, which is higher than the compound growth rate of 20.33% of the pet products industry.

1.2 Both quantity and price increase boost the rapid growth of pet food market, and the increase of single pet consumption is the core driving force

1.2.1 The high increase of pet food is driven by both quantity and price, and the increase of single pet consumption is the core driving factor

The increase in quantity and price drives the pet food market, and the increase in the consumption of single pet food driven by the increase in the penetration rate of commercial grain is the core factor. We propose that pet food sales=number of pets * consumption of single pet=number of pets * consumption of single pet commodity grain * unit price of commodity grain. From the perspective of the number of pets, the space for improvement is more from the growth of the number of pet cats, while the space for the growth of the number of pet dogs is limited. In recent years, the number of pet cats has grown at a high speed. From 2017 to 2021, the CAGR will be 8.88%, while the growth rate of the number of pet dogs will be relatively slow. From 2017 to 2021, the CAGR will be 2.90%. In 2020, the growth rate of the number of pet dogs will turn negative for the first time, down 1.56% year on year. From the perspective of the consumption of single pet, the consumption of single pet commodity grain and the unit price of commodity grain increased together to promote the continuous increase of the consumption of single pet, among which the increase of consumption of single pet caused by the gradual penetration of commodity grain is the core driving force for the rapid growth of the pet food market. In 2021, the consumption and average price of pet food for a single cat will rise to 11.23% and 4.70% year on year respectively, which will increase the food consumption for a single cat to 16.46% year on year, while the consumption and average price of pet food for a single dog will rise to 2.55% and 1.69% year on year respectively, driving the food consumption for a single dog to 4.29% year on year.

1.2.2 Increase in quantity: scientific pet care has attracted much attention, and the consumption of pet commodity grain has accelerated

The scientific awareness of pet care was strengthened, and the penetration rate of pet commercial grain was improved. According to Euromonitor International data, only 16.2% of domestic professional dog food will be used in 2021, and the remaining 83.8% will be unprocessed food, which shows that the proportion of feeding pets with leftovers is still quite high. However, as scientific pet raising methods can improve the physical and mental state of pets and prolong their life span, there is a wide space for the penetration rate of pet commercial food to increase in the context of the improvement of pet owners' consumption ability and pet raising concept. Based on the feeding suggestions of mainstream cat food/dog food brands in the market, if a cat/dog needs to eat about 70g/230g cat food/dog food every day, it will consume about 25.5kg cat food/83.95kg dog food every year. In contrast, in 2021, the consumption of commercial pet food for a single cat and a single dog in China will be only 7.42kg and 6.92kg, respectively, which shows that there is a huge growth space for the consumption of commercial pet food for a single pet in China. In fact, from 2017 to 2021, the compound annual growth rate of China's single cat and single dog commercial grain consumption will be 12.23% and 7.37% respectively. According to our aforementioned split formula of pet food sales, the increase of commercial grain penetration rate has become the main driving force for the growth of the pet food industry.

1.2.3 Price rise: the trend of refined pet care has come, and pet food is in the process of consumption upgrading

The improvement of pet status stimulated the demand for refined pet care, and the unit price of commodity grain continued to increase. The white paper data of China's pet industry in 2021 shows that the status of pet families is increasingly valued. More than 90% of users regard pets as relatives and friends, of which 85.1% are pet owners who regard pets as relatives, 8.5% are pets as friends, and only 5.7% of pet owners regard pets as pets only. We believe that with the maturity of pet breeding concept and the improvement of pet status, pet food, as an important product indispensable for pet growth, has also received more attention from pet owners, and the demand for refined pet breeding will be further intensified. The quality and safety are highly valued by pet owners, and the attention paid to the product information such as whether to use fresh meat, meat content, whether to use cereals and additives has increased significantly. In addition, the demand for refined pet food is driving the consumption upgrade of pet food. The price of pet food per ton is rising rapidly. The price of cat food per ton will rise from 29400 yuan/ton in 2017 to 36800 yuan/ton in 2021, and the price of dog food per ton will rise from 29000 yuan/ton in 2017 to 34200 yuan/ton in 2021.

2. The industry is still in the primary stage, and the "marketing+OEM" mode of local brands has caused "internal volume"

2.1 China's pet food industry is still in the primary stage: the concept of pet care is not mature, the penetration rate of commercial grain is low, and the brand concentration is low

2.1.1 The degree of specialization of pet owners' information access channels in China is insufficient, and the concept of scientific pet keeping has not yet been popularized

The two major information access channels for pet owners in China are professional channels and e-commerce platforms. According to the white paper data of China's pet industry in 2021, in addition to more professional pet hospitals and pet stores, e-commerce platforms and various content platforms are still important sources for pet owners to obtain pet information. Although these platforms are rich in information, they are more based on the personal experience of pet owners, and the quality of information from different sources is uneven or even contradictory. This has led to numerous products and difficulties in choosing pet staple food. We believe that, overall, the degree of specialization of pet owners' access to pet information in China is insufficient, and a scientific and systematic concept of pet care has not yet been fully formed.

2.1.2 The penetration rate of pet food in China is low, and the consumption of single pet is far lower than that of mature market

The domestic consumption of professional pet food is far from the mature market. As mentioned in the previous article, there is still a gap between the consumption of single pet commodity grain and the amount of food recommended by brands in China, and this gap is more obvious when compared with mature markets. In 2021, the utilization rate of professional cat food in the US and Japan pet markets will be 89.8% and 93% respectively, and the average annual consumption of professional cat food for single cat will be 30.87 kg and 29.53 kg respectively; The use rate of professional dog food is 75.5% and 92% respectively, and the average annual consumption of professional dog food for single dog is 86.75 kg and 31.95 kg respectively (Japan's consumption of dog food for single dog is lower than that of the United States, mainly because Japan has a higher proportion of small and medium-sized pet dogs). Judging from this indicator, the pet industry in China is still in the primary stage of extensive feeding.

2.1.3 The concentration of pet food industry is low, and the competition pattern is far from solidified

The concentration of China's pet food industry is low, and there is still room for local brands to improve. According to Euromonitor International data, in 2021, the CR10 of China's pet food industry will be 24% based on the company's caliber, while the CR10 of the U.S. and Japanese markets will be 76.8% and 84.4% respectively in the same period; The CR10 of China's pet food industry was 18.6% based on brand caliber, while the CR10 of the US and Japan markets were 40.5% and 49.8% respectively in the same period. Although Mars and Nestle, the first to enter the Chinese market, once occupied a fairly high share of the pet food industry (23.8% in 2012), with the opening of China's restrictions on the import of pet food and the entry of many local brands, Mars and Nestle accounted for only 10.7% of the total market in 2021, and the overall industry concentration is in a downward trend and still presents a situation of "warlords fighting".

2.2 Local brands are good at operating content platforms, but the "marketing+OEM" model has led to industry roll in

2.2.1 The new media platform is an important channel for customers, and local brands are good at it

Local brands can more flexibly use new media platforms for marketing promotion. The main users of new media platforms such as Tiktok and Xiaohongshu are highly coincident with domestic pet owners, so they become an important channel for pet owners to obtain pet information and brand merchants to conduct product publicity. As local brands have more accurate insight into domestic social culture and consumer psychology, local brands have overall stronger advantages in new media publicity than overseas brands. As of June 2022, taking the Tiktok platform as an example, except for 323 short videos released by the Royal Family and 105W fans, the rest of overseas brands have not formed influence; However, local brands such as Bernard Tianchun, Crazy Dog, Naughty, Biruiji and Lilang fans have exceeded 10W. Among them, Powerwolf has 65.4W fans and 358 short videos.

2.2.2 The combination of new media publicity and e-commerce platform sales enables emerging brands to gain customers quickly

In addition to the advantages in building momentum on the new media platform, the characteristics of pet food sales in China, which are dominated by e-commerce channels, further enable small and medium-sized brands to gain customers quickly. Different from overseas markets, the accelerated development of China's pet food industry is highly consistent with the outbreak of e-commerce platforms in terms of time, and the attributes of high-frequency consumption, easy storage, standardization but not easy handling of pet food naturally conform to e-commerce positioning, so e-commerce channels dominate the sales of China's pet food industry. According to Euromonitor International data, in 2021, China's pet food will account for 60.9% in e-commerce distribution channels, and the e-commerce channel sales will be 29.347 billion yuan, with a compound annual growth rate of 37.51% from 2017 to 2021. The popularity of e-commerce channels enables emerging brands to quickly cover a wide range of markets. With the mutual cooperation of marketing and publicity with the new media platform, these brands have the possibility of rapid customer acquisition. Thanks to the fact that China's pet food industry is still in its infancy, and pet owners have not yet formed the concept of scientific pet care and product discrimination, many emerging brands have indeed gained better brand exposure through heavy investment in marketing. According to the big data of CBN data, the number of online dog and cat brands in China has greatly increased. In 2021, there will be more than 37000 brands, nearly 14000 more than in 2019. A large number of brands have gained the attention of young pet owners by creating their own IP images, inviting celebrities and big V endorsers, and have been transformed into actual purchasing power through e-commerce channels.

2.2.3 The "marketing+OEM" mode causes the "internal volume" of the industry. How to precipitate brand power is the key

"Marketing+OEM" can accelerate the growth of emerging brands, but it has caused the industry to roll in. Local emerging brands are good at creating extreme cost-effective products, aiming at sinking markets and pampering small white people through marketing means, so as to quickly seize market share. JD data shows that most domestic staple grain brands are distributed in the lower price zone. According to our statistics, 73% of domestic brands have a unit price of less than 30 yuan per kilogram, and the competition in the lower price zone is too crowded. We believe that the concept of pet ownership in China is not yet mature. For emerging brands, it is a more efficient development strategy to give priority to the OEM model to reduce the financial pressure, and to make marketing efforts to seize the minds of consumers. However, after the brand share has grown, the supply chain and brand strength also need to be strengthened. The light asset expansion model of "marketing+OEM" will not be sustainable in the long term. For example, Crazy Dog, a new domestic brand, is aimed at the new generation of pet raising people. With its high cost performance (average price is about 20 yuan/kg), it has risen rapidly. It only took five years from the start to the market share of 1.1%. However, with a large number of industry entrants and similar cost-effective strategies adopted by most brands, the market share of crazy puppies that failed to transform their sales scale into brand strength in time was rapidly squeezed, and the market share fell from 1.1% in 2019 to 0.4% in 2021.

2.3 Capital continues to pour into the pet food track, increasing the "internal volume" of the industry

The capital boosted the entry of competitors, and the internal volume of the pet industry increased. In recent years, the pet market is favored by the primary market. Before 2013, there were only 11 investment and financing events in China's pet market. Since 2014, investment in the pet market has become active. In 2019, there were 39 investment and financing events in the pet market, with a total investment amount of nearly 3.4 billion yuan. In 2014-2019, the CAGR of the number and amount of investment and financing events in China's pet market was 19.51% and 56.32% respectively. Influenced by the epidemic, the investment and financing rhythm of the pet market will slow down in 2020, but the high profile of China's pet industry will still attract a large amount of capital after the marginal improvement of the epidemic. As a relatively high frequency consumer track, pet food is favored by the capital. According to IT Orange, there are 17 pet food investment and financing events in 2021, with a cumulative financing amount of more than 1.6 billion yuan. Chongxing has the highest single financing amount, and the B+round financing amount has reached 400 million yuan.

3. High end cities dominate pet consumption, and high-end is the way to break the situation for local brands

3.1 High line cities dominate the pet raising trend, and the cat economy is stronger than the dog economy

High line cities have concentrated pet raising population and high consumption level, leading the development of pet market. From the perspective of the number of pet raising people, the number of pet raising people in first tier and second tier cities is the highest. According to the white paper data of China's pet industry, the number of pet raising people in first tier cities will be 33.5% in 2021, and the number of pet raising people in second tier cities will be 43.9%. From the perspective of consumption level of pet raising population, most of the high consumption population of pet raising (the monthly cost of staple food exceeds 500) are concentrated in the first tier and second tier cities. In 2021, the proportion of high consumption population in the first tier and second tier cities will be 40.9% and 39.2% respectively, and the high consumption population of pet raising will show a trend of youth. Among them, the post-80s and post-90s are the most important pet raising population. We believe that, considering the number of pet raising population and pet raising consumption capacity, China's pet market is led by high-end cities and followed by low-end cities. Cats are more enthusiastic than dogs, and cat economy is stronger than dog economy. Euromonitor International data shows that the number of cat households in China has increased year by year, from 54.74 million in 2017 to 79.17 million in 2021, with a compound annual growth rate of 9.66%. The number of cats per household has always been higher than the number of dogs per household. In 2021, the number of cats and dogs per household will be 1.21 and 1.01 respectively. In recent years, the prosperity of cat food in China is gradually stronger than that of dog food. From the perspective of the overall sales volume of pet food, the sales volume of cat food in China in 2021 will be 26.3 billion yuan, up 21.72% year on year, and significantly higher than the sales volume of dog food of 21.8 billion yuan. We believe that, because pet raising groups are characterized by youth, and the energy and conditions of the post-80s and post-90s are limited, the energy and space required for pet cats to grow are far less than that of pet dogs, and pet cats are more in line with the preferences of pet raising groups in China. It is expected that China's cat economy will continue to lead the dog economy. 2021 33.5% 43.9%5002021 40.9% 39.2% 80 90

Cats are more enthusiastic than dogs, and cat economy is stronger than dog economy. Euromonitor International data shows that the number of cat households in China has increased year by year, from 54.74 million in 2017 to 79.17 million in 2021, with a compound annual growth rate of 9.66%. The number of cats per household has always been higher than the number of dogs per household. In 2021, the number of cats and dogs per household will be 1.21 and 1.01 respectively. In recent years, the prosperity of cat food in China is gradually stronger than that of dog food. From the perspective of the overall sales volume of pet food, the sales volume of cat food in China in 2021 will be 26.3 billion yuan, up 21.72% year on year, and significantly higher than the sales volume of dog food of 21.8 billion yuan. We believe that, because pet raising groups are characterized by youth, and the energy and conditions of the post-80s and post-90s are limited, the energy and space required for pet cats to grow are far less than that of pet dogs, and pet cats are more in line with the preferences of pet raising groups in China. It is expected that China's cat economy will continue to lead the dog economy.

3.2 Quality creates brand barriers, and high-end imported brands break away from the industry

High end imported brands are firmly within the price band of 100 yuan, and superior quality creates brand barriers. In recent years, among the top 10 domestic cat food brands in terms of market share, the market share of imported cat food brands continues to increase, from 12.1% in 2017 to 15.5% in 2021; Among the top 10 domestic dog food brands, the market share of imported dog food brands has declined year by year, from 11.60% in 2017 to 8.20%. In order to explain the above phenomenon, we selected the top 5 domestic and foreign cat/dog food brands based on JD's comprehensive sales, JD's user evaluation, Euromonitor's brand share and other factors, and analyzed the differences between domestic and foreign brands from the three perspectives of price band level (excluding the actual price of promotion), main raw materials and nutritional ingredients: 1) From the perspective of main raw materials, foreign high-end imported brands mostly use fresh meat as raw materials, Domestic brands mostly use meat powder as raw material; 2) From the price band level, foreign high-end imported brands are all in the price band above 100 yuan (>100 yuan/kg), while most domestic brands are in the price band of 50 yuan (50 yuan/kg); 3) From the perspective of nutritional composition, the nutritional composition of high-end imported brands is better than that of domestic brands. The vitamin content of domestic cat food brands lags far behind that of foreign high-end brands. The protein content of domestic dog food brands is far lower than that of foreign brands. We believe that: (1) High end imported brands have built their own competitive barriers by virtue of their advantages in formula, raw materials, process technology, etc., and have stabilized the 100 yuan price band supported by high quality, avoiding the low price band with a crowded competitive environment. (2) Pet cat feeding requires high refinement. High quality high-end imported brands are more popular. The share of imported brands can be kept rising, while pet dog feeding requirements are lower than that of pet cats. Local brands can occupy the share of overseas brands by virtue of price advantage.

3.3 High end of pet food is the way to break the situation, and pet cat track is the key to high end

The high-end should focus on the cat economy, and high-end cat food may be the way to break the situation. According to the data of the Chinese Pet White Paper, nutrition ratio (55.1%) and ingredient composition (46.5%) are the two major decision-making factors for pet owners to select staple food, which lays a mass foundation for high-end strategies to win by quality. According to the previous analysis, the cat economy is the main force for the development of the pet industry in the future, and pet owners pay more attention to the quality of cat food than dog food. Therefore, cat food is the key to high-end pet brands, and wet cat food has become the top priority of high-end pet brands due to its greater penetration space and higher quality requirements. Euromonitor International data shows that the volume and price of wet cat food in China are rising at the same time, and the growth rate of wet cat food consumption and price per ton is continuously higher than that of dry cat food. In 2021, the growth rate of wet cat food consumption and price per ton will be 9.54% and 6.04% respectively. In addition, based on the experience of the mature market in the United States, there is considerable room for high-end wet cat food in China. In 2021, the proportion of high-end cat food consumption in the United States will be 38.23%, while the proportion of high-end cat food consumption in China will be only 11.44%. The proportion of dry cat food/wet cat food consumption in the United States will be 1.83, while that in China will be 2.98. We believe that the high-end of local brands should anchor the direction of cat food, and high-end wet cat food may be the way to break the situation for local brands.

4. Investment analysis: high-end is a difficult and correct thing, waiting for the local leading brands to break

To sum up, there are two completely different development models in China's pet food industry. A number of local emerging brands take full advantage of the characteristics of the domestic market and enter the industry in the mode of "marketing+OEM". Although many brands have achieved considerable sales in the short term, it is difficult to settle into brand stickiness, and the mode of maintaining high growth by burning money is difficult to sustain in the medium and long term. In contrast, imported brands generally transplant the high-end product strategy of quality first to the Chinese market. Although they have no advantages over local brands in terms of new media operation and marketing, their product positioning and brand operation philosophy are in line with the core demands of pet owners in the first and second tier cities leading the development of the domestic pet food industry. In recent years, many imported high-end brands represented by desire, peak, etc. have flourished in the domestic market.