Can the global situation change the industry as we currently know it?

While some industries were devastated by the pandemic, the pet industry weathered it better than most and even flourished, as lockdowns and working from home prompted more people to get pets and increased demand for pet food and services.

Very real challenges

In recent months, the industry has had to navigate “through some real challenges”, according to Cascadia Capital managing director Bryan Jaffe, varying from soaring prices for ingredients and shortages of materials to transportation headaches. “That’s not to say that companies won’t be able to overcome these difficulties. It’s just going to require a different playbook and the rewards may go to different participants along the supply chain,” he added.

Dana Brooks, president of the Pet Food Institute (PFI), warns that bottlenecks at key US ports “continue to threaten their ability to serve export markets and source key ingredients”. She says, “Transportation challenges continue domestically, with trucking shortages that make it difficult for companies to secure vehicles, drivers and even pallets.”

Still problems in 2023?

According to a Cascadia report, revenue for publicly traded pet companies in its index grew by 16.2% in 2021. But the figures for 2022 are not yet known. Industry analysts believe that supply chain problems will continue throughout 2022 and well into 2023. “I think by the third quarter of 2023 and into 2024 we are going to be feeling some relief,” predicts Victor Mason, president of the World Pet Association (WPA), who has been hearing “horror stories” of shipping containers that used to cost $3,000 now going for $20,000.

The cost of shipping has prompted the US industry to open a debate on whether to continue outsourcing some ingredients and products, or whether it makes more sense to move production back to North America.

Some companies are now assessing for which products or ingredients it makes more sense to source, and for which ones producing locally makes more sense. In the near future, this could change the way we understand production in the pet industry.

“In a free-market system, those are the kind of numbers you have to look at. And certainly, the numbers change when your freight costs may now be more than the actual product value,” adds Mason.

Exploring sourcing options

While Asia may be the only source for certain ingredients, US companies have begun exploring the option of sourcing ingredients from neighboring countries like Canada and Mexico.

Brandon Forder, vice-president of Canadian Pet Connection, is already seeing pet food manufacturers switch to sourcing more ingredients locally and regionally, to get around the supply chain and shipping problems. “What they may be doing is looking for farms or suppliers that are a little bit more regional, where it can cut down on things like transportation costs and fuel,” explains Forder. “All of these things, of course, are inflating the prices of pet products.”

David Lummis, senior pet market analyst for Packaged Facts, points out that there are limits to the ability to source locally for some companies, and a lot of materials, like plastic trays for cat food, are still coming from abroad. “It’s not like a quick process where a pet food processor can suddenly say, oh, I’m going to get all of my ‘whatever’ from local sources. Because if they could do that, and it was financially viable, they would have been doing it already,” he admits.

Higher costs, the new normal

Georg Müller, CEO and president of Interquell Pet Food (Germany) puts some numbers on the increased cost that the industry is facing. For example, oils and fats have risen by 200% while grains are up 100%. The continuous rise in the cost of ingredients has left many companies grappling with questions like pricing and packaging.

“If their costs go up, say 12%, they’re very wary in the short term of raising the price that much, because they feel like they might price themselves out of the market. So I think a lot of brands are trying to figure out where the price points are going to be, whether they should change package sizing,” adds WPA’s Victor Mason.

Brandon Forder from the Canadian Pet Connection predicts the increased prices are here to stay. “I don’t believe the costs of these things are going to go down much. Once they go up, they never really go down.”

In the same line, Müller doesn’t expect prices to decline anytime soon. “Manufacturers and distributors will have to shoulder this new cost level together, in order to be able to offer livestock farmers somewhat reasonable prices.”

Risk of a fractured market

If price increases make it harder for the middle and working class to afford pets, while more affluent consumers are affected far less, that could result in significant changes in the market.

Bryan Jaffe from Cascadia Capital believes that the market has “the very real potential” to fracture in a “meaningful way”. He says, “And if it does, that’s going to change the competitive landscape in terms of products and channels as well as pricing paradigms.”

Slower growth ahead

David Lummis of Packaged Facts is optimistic that the pet industry will continue to be resilient, despite the possibility of a recession in the US, and Bryan Jaffe predicts that the industry will experience a “slower growth”.

WPA’s Victor Mason agrees that the industry will grow despite the challenges some businesses will face in months to come. “I think that, over the next year, there are going to be many businesses experiencing challenges in surviving some of the supply chains, pricing and competition that’s going on out there. But generally speaking, the pet industry will continue to grow,” he concludes.