Led by Brazil, sales of pet food and pet care products are surging in Latin America.
BY EMILY WOON
Led by the vibrant Brazilian market, sales of pet food and pet care products are surging in Latin America on the back of the emergence of a much broader middle-class.
Latin America has undoubtedly been the star performer of the global pet care market in recent years. Over 2005-2010 (the review period), value sales of pet food and pet care products rose from $4.8 billion to $8.3 billion, according to Euromonitor International data. This represents a compound annual growth rate (CAGR) of 11.9 percent. As a result, the proportion of global pet care sales accounted for by the Latin American market rose from 7.6 percent in 2005 to 10.2 percent in 2010. Brazil is by far the largest market in the region, with pet care value sales of $5.2 billion in 2010, followed by Mexico ($1 billion) and Argentina ($645 million).
SURGE IN HOUSEHOLD INCOMES
Income growth has been the driver of this increase in value sales. According to Euromonitor International data, the proportion of Brazilian households with an annual disposable income of at least $25,000 (at purchasing power parity) jumped from 21.7 percent to 30.1 percent over the review period, while in Argentina it expanded from 33.5 percent to 44.8 percent. Chile, Venezuela and Peru also saw significant increases in this regard. These increases are indicative of the emergence of a vibrant middle-class, something that had previously been conspicuous by its absence in Latin America.
It is also noteworthy that this widening prosperity was not significantly disrupted by the global economic downturn, particularly in Brazil. Here, the annual rate of real GDP growth slowed from 5.2 percent in 2008 to -0.2 percent in 2009, but rebounded strongly to 7.5 percent in 2010. In most cases, this growth was driven in large part by increases in the price of key commodities, such as oil (Venezuela), copper (Chile) and soy (Argentina). Improved monetary and fiscal policy management also played a role, along with increased spending on education and social welfare and such socio-economic trends as urbanisation and smaller family size.
However, income growth in some countries in the region, most notably Mexico and Colombia, was much less impressive. In the former case this was largely due to its high degree of dependence on the struggling U.S. economy, the 2010 outbreak of the H1N1 “swine flu” virus and instability arising from drug-related violence.
CONSUMERS SHRUG OFF PRICE INCREASES
Consumers in the region have also absorbed significant price increases. According to ANFALPET (National Association of Pet Food Manufacturers), a trade body in Brazil, the average unit price of dog food and cat food in the country saw increases of 7 percent and 5 percent, respectively, in 2009. It would appear that few consumers have responded to this by reverting to feeding table scraps to their pets.
This may be in part because these price increases have been cushioned to an extent by the fact that consumers have been able to take advantage of discounts in the supermarket/hypermarket channel. Leading supermarket/hypermarket retailers have increased the number of their outlets in the major cities across the region. However, pet shops remain the dominant retail channel in many markets, most notably Brazil, where they often provide credit to regular customers.
In particular, the economy segment has been resilient in the face of slower economic growth. According to Euromonitor International data, growth in value sales of economy dog and cat food in Latin America slowed only marginally between 2008 and 2009 (from 13.9 percent to 10.5 percent), before recovering to 14.5 percent in 2010. Growth in sales of mid-priced products was somewhat more sluggish, slowing from 15.9 percent to 8.3 percent between 2008 and 2009, before recovering to 10.6 percent in 2010.
This suggests that the main impact of the global economic downturn on the Latin American market may have been some owners trading down from mid-priced to economy dog and cat food. Nonetheless, for the moment, mid-priced products remain the mainstay of the Latin American dog and cat food markets, but they are gradually becoming more differentiated.
In some markets, such as Argentina, price differentials between mid-priced and economy products have been reduced. As a result, a substantially homogeneous group of brands has now become closely grouped across a limited pricing range.
PREMIUM SEGMENT: SMALL, BUT LUCRATIVE
In spite of a slight shift towards greater egalitarianism in recent years, income distribution in Latin America remains highly skewed by the standards of most developed economies. This limits the sales base for premium products to a relatively small group of highly affluent consumers. Nonetheless, the downturn forced many to trade down to cheap alternatives. Having dipped from 10 percent to 2.7 percent between 2007 and 2008, growth in value sales of premium dog and cat food in Latin America recovered to 4.2 percent in 2009 and surged to 12.3 percent in 2010.
Affluent Latin Americans are increasingly spending large amounts of money on healthcare for their pets. According to Dr Valter Yoshio Hato, the co-owner of a veterinary clinic in São Paulo, "People who have chosen not to have children, often they have a pet to fill the void where there's no child, and because it's just like a child, people don't spare any expense, they spend". He adds that, "Around 80 percent of the animals we see here are dogs. Another 15 percent or so are cats. The rest are various animals, like monkeys. We even had an iguana in the other day".
Simple operations start at $30, rising to $1,700 for more complex operations, such as procedures on spines or to remove cataracts from eyes. Overall, pet healthcare sales in the region (excluding prescription medications) rose from $69.4 million to $119.1 million over the review period, an increase of 71.6 percent, according to Euromonitor International data.
Meanwhile, São Paulo hosted Latin America’s first Pet Fashion week in April 2010, illustrating the region’s rising demand for other pet products, such as clothing. Value sales in this category rose by nearly 36 percent over the review period, to $334 million.
THREATS: INFLATION, COMMODITY DEPENDENCE
Euromonitor International predicts that Latin American pet care value sales will exhibit a CAGR of 5.5 percent over the 2010-2015 period, to $10.9 billion (in 2010 prices). This will represent a significant slowdown from the review period and is indicative of the gradual maturation of the region’s market.
This forecast also takes into account a number of downside risks to growth, particularly the regional economy’s overdependence on commodity exports (where pricing tends to be extremely cyclical) and the risk posed by inflation. For example, consumer price inflation in Argentina accelerated from 6.3 percent to 10.4 percent between 2009 and 2010, but some independent economists maintain that consumer prices increased by up to 30 percent during the year. While the Latin American pet food market has already demonstrated its ability to cope with inflationary pressures (during 2008), a renewed bout would hurt real income growth and inevitably take the edge off the region’s recent stellar growth performance.
Emily Woon is Global Head of Pet Care Research at Euromonitor International. This article was written for Latin Business Chronicle.
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