Are challenging times coming for the pet industry in 2022?

COVID-19 has created a set of societal challenges that have both accelerated and constrained the pet industry. While the pandemic may have further underlined the human–animal bond, it has constrained our access to shopping channels and products. It has also taken a substantial toll on the income of the middle class, who make up the bulk of pet ownership and pet purchases. With COVID variants continuing to impact our lives, the potential for a longer period of constraints is evident.

Sourcing from elsewhere

While the US pet market has seen a significant shift towards domestic manufacturing, it remains the case that many segments of the product market are dependent on foreign-sourced goods.

Goods from China, already more expensive due to tariff escalations between 2018 and 2019, face further headwinds. In October 2021, the Chinese Producer Price Index – a measurement over time in the selling prices received by domestic producers for their products – increased by 13.5%. The fastest pace of increase in 26 years.

On top of this, the cost of transporting goods from East Asia to US ports has increased over 400% in the past year, according to the Freightos Baltic Index. But it does not end there! Goods typically face long wait times to be unloaded. After unloading, goods are trucked to distribution points at per-mile costs that – according to freight service provider C.H. Robinson – have increased 150% on average, depending on the market and modality.

Longer lead times have led to increased utilization of air freight, but this is costly. Countries that we often think of as alternatives to China sourcing – including Vietnam, Cambodia, Brazil, India – offer no easy solution, as their labor forces and supply chains have been ravaged by COVID-19. The net result is fill rates have plummeted, even for the best-performing companies. And retailers, physical or virtual, cannot sell what they don’t have.

Local production

Domestic production has faced its own challenges. Starved for human capital, faced with input cost inflation and shortages, and constrained by workforce density restrictions, manufacturers are navigating a challenging landscape.

While US government data suggest non-farm labor productivity grew 2.0% in 2020, unit labor costs increased 4.5%. Through the first three quarters of 2021, productivity was up 1.7% while unit labor costs increased 6.6%. What this boils down to is that more is being paid per unit produced than pre-COVID-19.

Since most manufacturers do not operate on a costplus basis, this means that as input costs increase there is a lag before such increased costs can be passed on to customers. Domestic manufacturers subsequently face the same route to market issues as imported products post-port.

Ability to pay

The other side of the coin is the ability to pay. US unemployment has declined markedly since the early pandemic period. An estimated 9.6 million jobs have been lost in the pandemic, according to Pew Research. The World Economic Forum estimates 114 million jobs were lost globally, costing workers €3.26 trillion ($3.7T) in income. The US Labor Participation Rate is hovering at 62%, which is equivalent to the prevailing rates in 1977.

While wage growth has increased an incremental 5% in 2021, the Consumer Price Index increased 6.8% in the last 12 months through November 2021, wiping out all of these gains. Further, pet category inflation, both products and services, has lagged the broader Consumer Price Index year to date. However, marketers can no longer hold back on passing these increases through to the end customer, which will eat of a larger percentage of their income going forward.

When grain-free dog food arrived in the US market, the idea that consumers would pay twice as much for kibble was met with intellectual resistance. Then the dog moved out of the backyard and into the house and then on to the bed. Today, a US consumer has a myriad of options to purchase dog food at €8.8 per kilo ($10), more than double the price of ultrapremium in 2012. Yet, pet ownership in the US has meaningfully transitioned from older generations, with considerable stored wealth, to younger generations, with less access to resources and means of economic gain outside of income.

Challenging times?

The net result is that market dynamics are colliding – supply is constrained, costs will continue to rise, but the ability to pay is falling behind. The sum of all these circumstances creates the potential for the category’s performance track record to be tested. This confluence of factors is creating commercial opportunities for innovative pet food brands to capitalize on designing precision products for specific health-enhancing purposes in pets.

Have you devoted enough focus on your present business to leverage discoveries from the microbiome field into your pet products? This is a rapidly advancing and expanding scientific field that will differentiate products and brands.