How can domestic enterprises expand globally and build their own brands as the Chinese pet food market skyrockets?
Pet food is a rigid demand for pet ownership, which runs through the life cycle of pets. It has the characteristics of high repurchase, low price sensitivity, and strong stickiness, and is also the largest expenditure category for pet consumption in China. According to data from Debang Securities Research Report and the "2021 China Pet Industry White Paper", in recent years, with the upgrading of consumption, the food market share of pet consumption has decreased, but it still accounted for over 51% in 2021. From the perspective of consumption amount, the size of China's urban pet (dog and cat) food market has expanded from 15.7 billion yuan in 2012 to 128.2 billion yuan in 2021, with a compound growth rate of 26%.
Among the top pet food companies in China, Guohai Securities Research reported that overseas business is their main source of revenue. In the past two years, OEM/ODM has been affected by exchange rate fluctuations and overseas production capacity shutdowns due to the impact of the epidemic. These leading enterprises have shifted their focus more to the construction of domestic independent brands, and the development of the domestic market and the logic of domestic pet food substitution will become the main development line. For example, Petit Holdings began implementing a dual wheel drive strategy in 2018, shifting its focus from overseas to "China+Overseas".
Regarding the development of enterprise brands in China's pet food market, Debang Securities Research Report introduces that China's pet food industry started relatively late, with early mature overseas brands taking the lead in entering the domestic market and occupying a major market share. However, with the rapid rise of domestic brands in recent years, relying on high-quality products and continuously increasing marketing investment, the pet food market pattern has been reshaped. After years of development, the cultivation of domestic brands such as Guaibao Pets, Zhongchong Shares, Petty Shares, and Fubei Pets has begun to take shape.
Most domestic enterprises started out as contract manufacturers, with early revenue mainly focused on overseas business, and later began to build local own brands. At present, industry leaders have accumulated significant advantages by relying on the OEM starting model, mainly including the advantages brought by global layout. According to Petit, its global layout is mainly reflected in six aspects, including research and development globalization, standards globalization, manufacturing globalization, supply chain globalization, market globalization, and organizational globalization.
Shift focus to domestic private brands
Currently, regarding the development trend of China's pet food industry, Debon Securities believes that firstly, the penetration rate of pet raising in China is significantly lower than that in the European and American markets, and it is expected that the penetration rate of pet dog and cat raising in the future is expected to maintain an upward trend; Secondly, the average number of livestock raised by Chinese households is currently close to the overseas level, and it is expected that the subsequent increase will be relatively small; In addition, the average consumption amount of pets in China is significantly lower than the overseas level, and it is expected to achieve single digit growth with the improvement of residents' economic level in the future.
Based on the above analysis, Debang Securities predicts that the food consumption of urban pet dogs and cats in China is expected to achieve double-digit growth from 2022 to 2025, with pet dog food expanding at a compound growth rate of 16% to 111.5 billion yuan and pet cat food expanding at a compound growth rate of 24% to 137 billion yuan.
According to Guohai Securities Research Report, overseas business is the core source of revenue for top pet food companies in China. The leaders of domestic pet food companies, such as Zhongchong, Petty, and Guaibao Pets, all started their businesses through overseas OEM models in the early stages. Therefore, overseas business is the core source of revenue. Petty's overseas revenue accounts for over 80% of the total revenue, Zhongchong accounts for over 70%, and Guaibao Pets accounts for about 50%.
Guohai Securities believes that in the past two years, the OEM/ODM business has been affected by exchange rate fluctuations and overseas production capacity has been affected by the impact of the pandemic. From the changes in overseas gross profit margins of Petty and Zhongchong, it can be seen that overseas gross profit margins have decreased in recent years. The company has shifted its focus more to the construction of domestic independent brands, and the development of the domestic market and the logic of domestic pet food substitution will become the main development line.
Petit Corporation stated that it began its dual wheel drive strategy in 2018, shifting its focus from overseas to "China+Overseas". Prior to this, Petty's main layout was in overseas markets represented by the United States, Canada, Europe, etc. The overseas market has entered a mature and stable stage. The pet industry has a long chain, wide coverage, and multiple segmented needs. Petty provides chewing gum products and other meat based snacks, toys, etc. for pets. At present, the main trend in overseas markets is to prioritize snacks and upgrade consumption. The growth rate of pet snacks is higher than the industry average.
At the same time, Petty Group has also begun to pay attention to the gradual rise of the domestic pet market. While the pet industry is rapidly expanding in total market volume, the trend of high-quality development and consumption upgrading in the industry is becoming increasingly evident. Among them, the market volume of cat products is rapidly increasing, the cat economy is rising, and new domestic products and new staple foods represent the development trend of the industry. At the same time, the concentration of the domestic pet food market is gradually increasing.
Regarding the segmentation of the pet food market, Debon Securities Research Report introduces that currently pet food can be divided into pet staple foods, pet snacks, and pet health products, among which staple foods are the main pet food. According to the research report of Debang Securities and the "2021 China Pet Industry White Paper", the pet food market in China in 2021 was about 128.2 billion yuan, of which the main grain market size was about 89.2 billion yuan, accounting for 69.5%; The size of the snack market takes second place, with approximately 34.6 billion yuan, accounting for 27.0%; Health products are still in the early stages of development, with a relatively small market size of about 4.5 billion yuan, but growing rapidly.
Regarding the segmentation trend of the Chinese pet food market, Petty Group stated that as the industry gradually matures and the concept of scientific pet care is gradually popularized, pet owners are paying more attention to pets and their consumption ability is increasing. Pet care will also become more refined, and different age groups, body types, and varieties of pets will be matched with different pet foods. Petty believes that in the future, the concepts of staple foods and snacks in the pet food market may gradually become blurred. With the increasing frequency of daily feeding of snacks, they may gradually replace some of the staple foods, and more cross category pet foods will enter the market.
What are the advantages of global layout
Regarding the enterprise brands in China's pet food market, Debang Securities Research Report introduces that the pet food industry in China started relatively late, with early mature overseas brands taking the lead in entering the domestic market and occupying a major market share. According to Euromonitor International data, in the top ten pet food market sales in China in 2012, Chinese brands only accounted for 3 places, while the rest were foreign brands. Among them, Mars and Nestle held a leading position, with a total share of 24% for their respective brands. In recent years, with the rapid rise of domestic brands relying on high-quality products and continuous increase in marketing investment, the pet food market pattern has been reshaped. In 2021, the top ten Chinese pet food brands in China occupied 5 seats, and the mischievous brand under Zhongchong and Shanghai Yiyun's Bernard Tianchun ranked among the top three in the industry.
According to Debang Securities, after years of development, the cultivation of domestic brands has begun to take shape. Among them, Guaibao Pets has formed a brand echelon mainly consisting of McFardie+Waggin'Train. From 2018 to 2021, the brand revenue expanded at a compound growth rate of 39% to 1.33 billion yuan, leading the scale of other domestic pet food brands; Zhongchong Co., Ltd. currently forms a brand matrix with Wanpy mischievous, Zeal Zhenzhi, and Toptree leading as the core, with a domestic revenue scale of 690 million yuan in 2021; Petty shares and Forbes pet brands have similar revenue, both ranging from 200 million to 300 million yuan. Petty's subsidiaries include dog snack brands such as Jueyan and Tooth Energy, while Forbes mainly includes dog and cat staple food brands such as Bili and Aibei.
In recent years, these domestic brands have continued to strengthen their main grain layout. According to Debang Securities Research Report, in the main grain layout of domestic brands, Maifudi, a pet of Guaibao, starts from dry grains and continues to improve its product categories after accumulating reputation and recognition. At the same time, it actively upgrades its dry grain technology. In 2021, the main grain revenue scale of Guaibao's domestic revenue has significantly led that of snacks; Zhongchong Co., Ltd. started from pet snacks and took the lead in laying out wet food products while maintaining its advantages. In 2019, Zhongchong strengthened the production capacity construction of pet dry food and achieved significant growth in the scale of pet dry food; Petty Co., Ltd. focuses on snack products and gradually entered the field of pet staple food in 2018. In 2021, Petty will strengthen its production capacity layout for wet and new dry food products; Fubei Pet's main products include dog food, cat food, and other pet dry food staple foods.
Petty Corporation plans to expand its focus on the staple food market. On the one hand, it aims to apply the mature and high standard pet food experience advantages from abroad to the domestic market. On the other hand, it also wants to reach more consumer groups through staple food, advocate for the concept of scientific pet care, and promote the upgrading of pet health and nutrition standards.
Regarding the business layout of these domestic pet food enterprises, according to the research report of Guohai Securities, most domestic enterprises start with OEM, and their early income is mainly from overseas business. After accumulating years of experience, they strive to build local brands through overseas mergers and acquisitions, self built factories, and other means. At present, industry leaders have accumulated significant advantages by relying on the OEM model, mainly manifested in food safety passing international and domestic authoritative certification and review; The R&D center has strong strength and is endorsed by a scientific research institute; The production base is intelligent and high-end, with globally advanced modern production lines; And the food supply system is spread all over the world.
What advantages will the global layout bring to domestic private brand business? According to Petit, its globalization is mainly reflected in six aspects, including research and development globalization, standards globalization, manufacturing globalization, supply chain globalization, market globalization, and organizational globalization. For domestic private brands, global layout can bring about global technological level of products, global standards of products, cost and raw material advantages brought by globalization of manufacturing and supply chain, global market advantages, and enhance global awareness.
In the "dual wheel drive" strategy, how to allocate domestic and foreign resources, Petit Group stated that the domestic and foreign markets are mutually collaborative and promoting relationships. In foreign countries, Petit Corporation mainly adopts the ODM model and uses more resources such as production and raw materials; However, the domestic market is in a period of rapid growth, and in the coming years, Petit Group will consider the domestic market and its own brand as a strategic business, striving to increase its proportion in operating revenue. In 2023, Petit Corporation will invest more marketing resources in new media for key projects, increase the penetration rate of core products, enable users to make purchasing decisions, enhance product and brand popularity, enhance consumer awareness and experience, and ultimately transform into business growth.
According to Petit's announcement on March 9th, during recent institutional research, it was stated that the domestic market business is still in a loss state, and it is expected that the loss amount in 2023 will be narrowed to a certain extent. What are the supporting points for narrowing losses? Petit Group stated that through years of operation in the domestic market, it has gradually developed relatively mature and adaptable marketing and promotion experience. Petit Group has set a goal of maintaining high-speed growth in operating revenue over the next 3-5 years, and is currently in the investment stage. With the expansion of revenue scale and high C-end gross profit margin, it will gradually achieve a breakeven point. In addition, overseas production capacity is in the release stage, which will also empower the domestic market, reducing costs and increasing income.