Why Pets Could Be a Long-Tail Investment Trend

The pandemic has upended the lives of humans, but for pets, it's been a bonanza: Their owners have been home all day, showering them with attention and treats.

A lot of new faces are also turning up at the dog park. Morgan Stanley’s housing strategists estimate that the growth trend of U.S. pet ownership more than tripled during the pandemic, while spending on everything from veterinary care to pet accessories has proven resilient, even during the recession.

Many investors have been following closely. What the market may not fully appreciate, however, is how multiple developments, including Millennial and Generation Z household formation, may drive this long-term trend.

“We think the U.S. pet industry has reached an inflection point, taking topline compound annual growth rates to 8%, vs. 3% for the last decade, " says Simeon Gutman, equity analyst covering hardline retail for Morgan Stanley Research.

In a recent report, Gutman joined with AlphaWise—the proprietary survey and data arm of Morgan Stanley Research—and the firm’s Economics and Housing Research teams, to look at why changes in demographics, household formation and consumer behavior could nearly triple the size of the U.S. pet industry, from $118 billion in 2019 to $275 billion in 2030.

A Multi-legged Trend

Americans may be divided on many issues, but the majority rules when it comes to pets. A recent AlphaWise survey found that 66% of U.S. households have at least one pet, with 1.7 on average. Even more notably, 69% of respondents "strongly agree" that their pets are important members of the family, 37% would take on debt to pay for a pet's medical expenses, and 29% would put a pet's needs before their own.

And while the pandemic accelerated pet ownership, household formation among Millennials and Gen Z will likely sustain it. In the AlphaWise survey, 65% of 18- to 34-year-olds plan to acquire or add a pet in the next five years, helping drive what's expected to be a 14% increase in pet ownership by 2030.

What's more, pet owners—younger ones in particular—are spending incrementally more on their pets. Average annual household spending per pet could grow from $980 in 2020 to $1,292 by 2025 and expand further to $1,909 by 2030, Morgan Stanley forecasts.

More significant still, this spending has stabilized. “Consumers are increasingly less willing to cut pet spending as a whole when real personal disposable income declines," says Gutman. Indeed, an October 2020 survey of pet owners by the American Pet Products Association found 66% of respondents saying that their spending hadn’t changed in the previous month, while 72% indicated they wouldn’t alter spending on pet food, regardless of their finances.

Animal Health is Key

Petcare spending can span many different categories, but animal health may be the most important. After food and treats, animal health is the biggest subsegment, and vet care could be the fastest growing subsegment in the industry over the next decade.

Amid advances in treatment and diagnostics, vets today directly influence many pet-related spending decisions. In the AlphaWise survey, 20% of pet owners said vet recommendations were the most important factor in their food and treat purchases; roughly 50% would change brands following a vet's recommendation.

This loyalty to vets could prove problematic for online prescriptions post pandemic, but for other pet-related categories, e-commerce continues to gain traction. After all, online retailers give owners more choice, convenience and time to dote on their dogs and cats. Other ways to invest in the growing market for pets include retailers with scale and the burgeoning pet insurance industry.

For more Morgan Stanley Research on the outlook for the U.S. pet industry, ask your Morgan Stanley representative or Financial Advisor for the full report, “Welcome to the Petriarchy" (Mar 3, 2021). Plus, more Ideas from Morgan Stanley's thought leaders.