Pet Interest

David Salmon Pet Pavilion

Being in the doghouse can be a good thing.

Especially if that doghouse is a David Salmon four-poster Mahogany, Georgian-style Pet Pavilion valued at $23,000.

With the way people pamper their animals these days, you could say investing in the pet industry is like barking up the right tree. From PetSmart’s PetsHotels business to $200 doggie Kimonos from Manhattan boutique Le Chien, companies are cashing in on the four-legged family member.  Industry players say pets are more important than ever.

“With the world so uncertain, people need something to count on,” says Bob Vetere, president of the American Pet Products Manufacturers Association (APPMA). People turn to their pets for comfort, he says, which is why spending remains strong despite higher gasoline prices and events like Hurricane Katrina.

The “humanization” of pets, as the industry calls it, is fueling solid growth across all segments, particularly services, says Erika Maschmeyer, who tracks the pet industry as an equity research associate for Robert W. Baird & Co.’s consumer retail unit.

“People are waiting longer to have kids, so they’re treating pets like babies,” said Maschmeyer, who with her husband owns two cats and a dog and has no children. The market has also grown, she says, thanks to aging baby boomers and more households with children getting pets.

Doggie kimono

Pets can now be found in about 63% of all U.S. households, up from 7% two decades ago. Spending on pets, or animal companions as the industry likes to put it, has more than doubled, with Americans shelling out $38.5 billion in 2006, according to the AAPMA. That’s expected to rise 6% in 2007 to $40.8 billion.

As a result, companies from Target to Kimberly Clark are finding ways to capitalize on the trend, whether through acquisitions, financial investment or marketing deals with current players. How to profit from pets will be a hot topic at the Global Pet Expo in Orlando, which kicks off Feb. 23.

“Over the next three to five years, we’ll see 6% to 8% sustainable growth,” Vetere said.

That’s certainly the case in the fast-growing pet services segment, which raked in $2.7 billion in 2006, an area industry leaders PetSmart and Petco have incorporated into their traditional retail businesses.

They want people to spend more and come more often, Baird analyst Maschmeyer said. “Services like grooming, day care and training classes improve sales because they bring more people in and build customer loyalty.”

PetSmart rakes in 14% of the industry’s sales excluding veterinary care. Still, margins in its services business are three times greater than its product margins.

“For the big chains, the market is attractive because it is fragmented,” Maschmeyer said. “A large majority of pet retailers are independent mom and pops.”

Analysts expect PetSmart to report $4.3 billion revenue for 2006, while Petco Animal Supplies, which was acquired last year by private equity firms for $1.68 billion, has estimated sales of about $2 billion.

Nestle's Purina unit owns Fancy Feast

But pet retailers aren’t the only ones going to the dogs -- or cats or, well, you name it. Target and Wal-Mart both have private labels in the $15.2 billion pet food market. Wal-Mart’s Natural Life brand is its foray into the booming organic pet food market.

“If you see it in human food, I guarantee in three to six months it will hit the pet side,” Vetere said.

Wal-Mart already sells Ol' Roy dog food, a private label manufactured by Doane Pet Care, which was acquired by Mars last year. Mars also owns Pedigree (which sponsors the Westminster show), Sheba and Whiskas.

Other players in the market include Nestle’s Purina brand and Procter & Gamble’s Eukauba and Iams. Colgate-Palmolive owns Hill’s Pet Nutrition, maker of Science Diet, and Del Monte Foods bought the Meow Mix and Milk-Bone brands last year for over $1 billion. Spectrum Brands owns Tetra brand.

With all the big money pouring into the pet industry, life has never been better for Sparky and Fluffy.

Vetere has already felt the wind of change. As a child, Vetere’s dog Duke slept outside in a dog house and was allowed inside only as an exception.

“Now I get put out before the dog gets put out,” he said.

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