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Daily Intelligence Briefing

Thursday, August 13, 2020

Identifying Change-Driven Investment Themes – Five sections, explained here.

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I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

2020 Pet Care Boom Contradicts Cyclical Patterns

Summary: This is proving to be an extraordinary year for the pet care industry. Adoptions are soaring due the fact that Americans have been stuck at home. Health services focuses on animals have seen volumes and revenues surge as well, something that typically doesn’t happen in a recession. Meanwhile, more companies are adopting pet-friendly workplace benefits to not only attract millennial workers but also to improve productivity and loyalty. All this adds up to a potentially huge spending boom in pet care.


Related ETF: ProShares Pet Care ETF (PAWZ)

Pet care, long considered a cyclical business, is defying patterns seen in previous economic cycles.Typically, pet owners spend more on medical care for dogs and cats when the economy is strong and they have more disposable income. Conversely, they tend to spend less on health care for pets during an economic downturn. Quite the opposite is happening during this downturn. 


Pet Adoptions Surge During Pandemic


Adoption and sales of pets, particularly dogs, are soaring this year. The buying frenzy, as reported by The Washington Post, began in mid-March and has been ongoing since. Shelters, nonprofit rescues, private breeders, pet stores ― all reported more consumer demand than there were dogs and puppies to fill it. Animal shelters are seeing lower than usual return rates on dogs that were taken into foster temporarily. More people are turning the temporary fostering into permanent adoptions. Some breeders say their wait lists now extend well into 2021. 


The primary driver of this phenomenon is the fact that Americans have been stuck working from home. Some have children who needed something to do. Other adopters simply had no work and lots of free time, or felt lonely with no way to socialize. Some of these newly adopted pets even have names that fit the moment: Corona, Rona and Covid.



Booming Demand for Canine & Feline Health Services


Volumes and revenues are notably up at animal hospitals and primary care offices across the United States. VetSuccess, which tracks financial data from 2,800 clinics, estimates that revenue last month was up 18% YoY. Trupanion, a pet health insurer, announced in an earnings call this week that its second-quarter revenue was up 28% over last year. It also has 14% more cat and dog members than it did at the start of the year. 


Dr. Margot Vahrenwald, a veterinarian who co-owns Park Hill Veterinary Medical Center in Denver said “We’re probably seeing 25 percent more new pets than what we would normally. It feels busier, and we’re seeing increased revenue.”


Veterinarians attribute the increase in demand to one key factor that makes this recession different from others: It has forced millions more Americans to work from home. Some are taking the opportunity to bring home new pets. Others are simply paying more attention to their pets.  


“Pets are the new dependents”


Meanwhile, in the corporate world, companies are increasingly looking to extend traditional benefits, like medical insurance and day care to employees’ pets. They are also offering paid time off for pet owners.


Deb Leon is the CEO of WhiskerDocs, a pet telehealth provider that has been around since 2013. She noted a big change in her business recently, remarking that “suddenly this year we’ve had every major employee-benefits broker and consultant in the country contact us to put together a program for them.” 


She says she recently worked with a major insurer looking to expand its pet insurance offerings and that a large financial-services company contacted her last week about setting up pet-care to match its child-care offerings, from telehealth appointments to pet-sitting.


Ms Leon’s view is that “Pets are the new dependents that employers are recognizing.” The company has had to add 20 employees over the past three months ― a staff increase of 40% ― to handle the surge in demand. 


Pawternity leave is also now a reality at some workplaces. mParticle, a New York City-based software company, offers two weeks paid-time off for those who adopt a rescue dog or cat. The Zebra, an insurance comparison site with offices in Austin, TX, encourages employees to use the company’s paid time off policy to get acquainted with their new pet. Likewise, Minneapolis digital marketing agency Nina Hale gives new “pet parents” a week of work-from-home days so that they can adjust to their new pets.


This is not just an American indulgence. BrewDog Brewery – a multinational brewery and pub chain headquartered in Scotland and with locations across Europe, America and Australia – gives its employees a week of paid-time off when they adopt a dog. The same is true of ICD Property, a Melbourne-based development company that offers at least four days of paid leave each year to staff members so they can tend to the needs of their furry friends. ICD says it recognizes the demanding nature of being a ‘pet parent’ and the obligations it entails. 


The Productivity Effect of Pet-Friendly Policies


It is no coincidence that more companies have been adopting pet-friendly workplace policies. After all, millennials have overtaken baby boomers as the country’s largest pet-owning demographic in America. Attracting younger workers is not the only objective, however. For pet-friendly companies, the payoff from such policies is employees more likely to be engaged with their work, research shows. 


2018 study by Nationwide, the nation’s largest pet insurer, and conducted in partnership with the Human Animal Bond Research Institute (HABRI) found that 90% of employees in pet-friendly workplaces feel highly connected to their company’s mission; fully engaged with their work; and willing to recommend their employers to others. That drops to less than 65% in non-pet friendly companies, according to the report.


A pet friendly workplace is defined in the Nationwide/HABRI study as one that allows pets in the workplace (regularly or occasionally) and/or offers a pet friendly employee benefit, such as pet health insurance.


Pet Care Tailwinds


There are definitely strong tailwinds for the pet care industry. According to the American Pet Products Association (APPA), two-thirds of U.S. households have a pet, up from 56% in 1988. Similar trends are at work globally, with the number of pet owners increasing in both developed and emerging nations. 


It was reported last year that 37 million millennials in the U.S. own a pet. That number has certainly gone up given this year’s surge in pet adoptions. Additionally, surveys have shown that nearly all pet-owning households consider their pet to be part of the family


That means big spending potential for the 84.9 million households estimated to own a pet today. It is quite telling for example that, from 2013-2018, America’s pet spending increased 50% while annual income only increased by 23%. In fact, spending on companion pets hasn’t declined on a year-over-year basis in at least a quarter of a century. 


This year alone, an estimated $99 billion will be spent by Americans on their pets. Meanwhile, global pet industry sales are forecast to grow from $190 billion in 2018 to $270 billion by 2025.


One segment likely to expand quickly is pet insurance. Fewer than 3% of North America’s companion pets are insured, so for Trupanion, Nationwide, and other insurers, there’s a massive pool of prospective customers that’s largely untapped.


How to Gain Exposure


The ProShares Pet Care ETF (PAWZ) invests in U.S. and non-U.S. companies that stand to benefit from interest in, and resources spent on, pet ownership. 


PAWZ tracks the FactSet Pet Care Index, which is comprised of 24 companies that provide exposure to potential growth within the pet care industry. The index taps into eight FactSet pet care subindustries, including pet food manufacturing, veterinary services, veterinary pharmaceuticals, pet supplies manufacturing, internet pet/supply retail, veterinary product distributors, pet supply stores, and veterinary diagnostics. Healthcare and retail stocks make up a significant portion of the PAWZ roster. 




In our view, the pandemic has simply accelerated a trend that MRP first identified in its April, 18 2019 report titled Pet Care Booms as More US Households Now Have Pets than Kids


At the time of our report, PAWZ had been lagging the broad market (SPY) and the consumer discretionary sector (XLY). Since the publication of that report, PAWZ has returned +41%, handily beating the XLY’s 20% gain and the SPY’s 16% rise.


Year-to-date, PAWZ is up +26% vs +13% for XLY and +5% for SPY.



Nelly Nyambi

Managing Director, Research

McAlinden Research Partners 

Pet Care vs Consumer Discretionary vs S&P 500

There is much more to this report! McAlinden Research Partners is offering a complimentary one-month subscription to receive the full Daily Intelligence Briefing – to Hedge Connection clients/friends. Activate yours by signing up today!

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