8 signs pets are becoming a big consumer class

Lee Smith, Special to CNBC, additional reporting by Roy Luo, CNBC Digital

A $55 billion leash with room to run

John Lund | Workbook Studios | Getty Images

At just what point cats and dogs became full-fledged members of the family is difficult to determine. But today, pets' elevated status is apparent—in psychiatric counseling, organ transplants and even the introduction of a communications device called Pet Chatz, which allows a love-struck owner to call the pet at home from the office and even electronically release a treat from a dispenser while chatting.

Some 82.5 million American households, or 68 percent, include domestic animals. Americans spent an all-time-high $55.7 billion on their pets last year, and spending will inch close to $60 billion this year, according to recently released APPA data. That's a huge jump from 1996, when total pet spending was just $21 billion.

It starts with the $2.2 billion spent on live animal purchases last year, but it doesn't end there. ...

By Lee Smith, Special to CNBC.com, with additional reporting from Roy Luo, CNBC Digital
Posted 23 March 2014

Obamacare for pets

Monty Rakusen | Cultura | Getty Images

Forget about Obamacare adoption; pet insurance is quickly growing.

More and more companies are offering pet insurance as a perk to employees, with one in three Fortune 500 companies providing coverage.

Wal-Mart introduced store-branded pet insurance plans at select Canadian stores last year, marking their entry into an industry with an average growth rate of 13 percent a year, according to the North American Pet Health Insurance Association. Wal-Mart is following in the footsteps of outdoor-gear retailer Cabela's, which introduced pet insurance in 2011.

There's still plenty of room to grow: Less than 1 percent of America's 160 million cats and dogs are insured. Of the $55 billion that Americans spent last year on pets, $14.4 billion went to veterinary care.

Pet ab crunches

Whistle
Image source: Whistle

Pet training may currently be associated with the negative underworld of pit bulls and greyhounds, but that's quickly changing. Many dog-training facilities already offer exercise-oriented classes for pets, and "human" fitness clubs are also starting to offer pet-friendly classes as well. The fitness industry is even giving new meaning to the yoga pose "downward facing dog"—there are now yoga classes for owners and their pets.

In addition, the wearable fitness-tracker market is also extending its reach to pets. Whistle, a device that attaches to an animal's collar and is otherwise known as Fitbit for dogs, measures information such as steps taken and calories burned. "The idea is to offer pet owners and vets data that they "have never seen before," said Ben Jacobs, Whistle's CEO.

Health-conscious pets

FreshPet pet food.
Source: FreshPet | Facebook

The new slew of health-conscious pet foods entering the market today are revolutionizing their diet. Companies, such as FreshPet, are leading the way, with freshly made pet foods that require refrigeration. The APPA estimates the biggest chunk of spending in 2013—$21.6 billion—went toward this more expensive, healthier grub.

Pet Einstein

Nina Ottoson's dog and pet activity toys and games.
Source: Nina Ottoson | Facebook

Remember Baby Einstein, the children's products company that introduced the arts and humanities to infants to stimulate their curious side and hopefully turn them into "geniuses" (at least before the iPhone)?

Pet toymakers are starting to spare no expense in making increasingly complicated toys, as more pet owners make the bet that graduating kitty from cat nip to interactive toys will increase the number of neurons firing in the feline.

Two new toys for cats make the point. The Nina Ottosson MixMax Puzzle is a sort of three-dimensional board game with sliding panels. The owner hides a treat within the network of pieces, and the cat has to move them to find it. Another, the SmartyKat Hot Pursuit, consists of a round plastic mat with an electronic mouse hidden underneath. The mouse scurries around out of sight, and Tabby jumps on the bulge and bats it, never catching a mouse but willing to endlessly try. Sounds more like torture than toy, actually. But it does get the lazy cat up off the couch.

Pets on pills

Jin Lee | Bloomberg | Getty Images

From arthritis to cardiovascular disease, the ills that bedevil humans imperil animals as well. But "Drugs that work on humans don't necessarily work as well on animals," said Jay Lichter, a venture capitalist and chairman of the board of Aratana Therapeutics, which makes, among other drugs, a treatment for chronic pain in animals. "As an arthritis treatment, for example, acetaminophens tend to cause liver and kidney problems in dogs," Lichter said. "Over the coming years, I expect an explosion in innovative products from all kinds of companies."

According to APPA, $13.1 billion was spent in 2013 on pet supplies and over-the-counter medicines.

Newly IPO'ed businesses such as Zoetis, an animal medicine and vaccine company that was spun off from Pfizer, show the market's appetite for this trend. From the perspective of a pharmaceutical company searching for blockbuster drugs, animals have an additional attraction: the clinical trials are much shorter than for humans.

Diva pets

A dog participates in FIT's Fifth Annual Pet Apparel and Accessories Fashion Show at The Fashion Institute of Technology in New York City.
Cindy Ord | Getty Images

It's easier than ever for the rich to make sure their pets are dressed to kill. Most articles of pet clothing are no more than miniaturized fleece pieces or tiny ironic Christmas sweaters, but more and more haute couture fashion houses are dipping their paws into canine and feline apparel.

Designers ranging from Gucci to Vivienne Westwood are making fur coats and diamond armor pieces that are easily more expensive than an average person's entire outfit. New York, fittingly, has become a mecca for pet fashion. The New York Pet Fashion Show just celebrated its tenth anniversary just last February.

Pet penthouses

A true double bed with fluffy pillows, a flat-screen TV, a gym and meals cooked by a chef: a luxury reserved for dogs will opened in New York, where nothing is too good for man's best friend.
Don Emmert | AFP | Getty Images

Some lucky pets receive a level of service that most Americans can only dream of. In 2010, Disney World Resorts in Buena Vista, Fla., established a luxury hotel (you can call it a kennel if you prefer) for pets accompanying the family on vacation. However, Disney World isn't the first to offer pets luxury service, and it undoubtedly won't be the last. The D Pet Hotel looks like any normal hotel, with full-size beds and flat-screen TVs, but its only guests are dogs. The hotel is popular enough to have two trendy locations: one in Hollywood and another in Manhattan's Chelsea neighborhood.

The trend continues to pick up momentum. Statistics tell the story. Pet services, including grooming, boarding, training and pet-sitting, grew by the largest percentage among pet economy sectors from 2012 to 2013—6.1 percent, to $4 billion, according to APPA data.

Big market bets on pets

A Petsmart pet groomer combs the hair of a teacup poodle.
Getty Images

It may be a long time before Fido can invest in Purina stock, but we humans can pick up the slack in the meantime. The industry is sturdy—it kept growing year by year for well over a decade, shaking off the Great Recession like a spaniel shaking off the water from a dip in a pond. In fact, it's been expanding at a steady 4 percent to 6 percent rate a year since the APPA started record-keeping in 1996.This leaves investors with plenty of ways to place long-term bets on pets.

Investment opportunities range from big public companies like PetSmart to Zoetis. In addition, many smaller companies are looking for private-equity investment.

"At some point this industry might slow down, but it's not going to be in 2014," said Carol Frank, managing director and pet-industry specialist for SDR Ventures Investment Bank of Denver. "There are hundreds of new products coming out."

Will Pet Inc. last?

Is the pet industry as inexhaustible as a mouse-pouncing cat or a stick-fetching dog?

The head of APPA, Bob Vetere, said in a recent interview in USA Today, "What is feeding a large part of the growth now are the baby boomers who have become empty-nesters and are looking for some other ways to find the love and affection they used to get from their kids."

Yet Frank sees a limit to this trend and thinks the pet market may start to slow down in five years or so as Baby Boomers, the cohort that has been driving the growth, ages and settles into a different sort of life. Frank said many people in their 70s will elect not to replace dogs and cats that have passed away. Some of the big pet-product niches are showing signs of slowing already: Health and wellness products (including supplies and over-the-counter medications), which grew by 7.4 percent in 2012, grew by only 3.9 percent in 2013, the APPA said.

Economic history is littered with examples of once-thriving pet markets that have all but disappeared. The gerbil and guppy sectors are sluggish, apparently because children—who have traditionally been the principal enthusiasts—have substituted video games.

There are also some human concepts being refigured for pets that are bold, which may consequently result in failure. In the easier-said-than-done (for pets) category, some imaginative producers have experimented with creating cable television programming for dogs and cats—no luck so far. The pilots have left the animals scratching their heads.

But innovators will keep trying. The hope of humanizing our pets is endless. Perhaps their next focus will be on texting.