Cash in on man's love for animals

Last August a New York catwalk was filled with international models, diamond-encrusted jewellery and couture designer clothing. So far, so typical. But with one big difference: the stars were all pets.

But don't dismiss this as another example of 'wacky America' these events reflect the growing tendency for owners to treat their pets as well as, or better than, humans. As Sam Knight notes in the FT, a recent survey showed that 70% of American pet owners regard their animal as a family member, while 40% of US dog owners share a bed with a pooch. So why is this happening and how can you take advantage?

One factor, says Open University Professor Terry O'Sullivan, is advertising, which has pushed the idea that "animals are like people, only nicer". This message plays on major social trends, says Knight. As urbanisation takes us further away from animals in their natural environment, "we are losing our bearings" and expect human-like traits from animals. American dog expert Michael Schaffer told The Daily Telegraph that the craze is a result of our increasingly fragmented society. "The change in our pets' status coincides with the increase in divorce rates, more atomised families, longer work hours and a decline in communities. As we lose our social support, we use pets to fill the gap."

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Demographics also play a part. Older people often buy pets as companions and as people live longer the number of animal 'buddies' will increase.

The combination of these factors has caused pet populations to rocket. In America the number of homes with a pet has increased from 56% in 1988 to 62% today, while in Britain the dog and cat population has risen by 60% since 1970.

It's not just happening in the developed world either pets are becoming increasingly popular in China, says Reuters' Tyra Dempster. The market is growing by 8% per year. Prized Tibetan mastiffs can exchange hands for $1m. Market research group Euromonitor estimates that the Indian pet food market is growing at more than 10% per year.

Unsurprisingly, the pet-care market has also boomed. Pet products range from the extreme (dog dancing lessons in Japan, or specialist pet cosmetic surgeons in the US) to mundane mass-market products, such as vitamin-enriched dog food. And Euromonitor says the increasing tendency to treat pets as people means that "manufacturers are increasingly able to persuade pet owners to trade up to the super-premium and premium products".

Small wonder then that the pet industry is surging. According to the American Pet Products Association the sector grew to $45bn in 2009 from $17bn in 1994. Meanwhile, Japan's pet market has grown by 7% during the last three years to $7.5bn. Euromonitor estimates that the global pet-care industry is now worth $70bn. What's more, the industry has proved surprisingly resistant to the financial crisis it grew by 4% in 2009.

A key feature of the pet care industry is that it is very fragmented. For example, in America, veterinary services a sub-sector of the industry that includes both livestock and pets is worth £25bn. Yet the 50 largest companies account for less than 10% of revenue. This pattern is repeated globally and suggests the market is ripe for consolidation.

With the main forces driving pet-care spending in the developed world showing no signs of abating, and emerging markets providing growth potential in the long-term, now is a good time to buy into the industry. We look at the best bet in the box on the bottom of the page.

The best bet in the sector

Dechra Pharmaceuticals (LSE: DPH) provides veterinary treatments and services for pets. It sells directly to vets and is the market leader in Britain. It also boasts a growing business in nine other EU countries and America.

The group's products range from Vetoryl, a drug that treats Cushing's disease in dogs, to specialist dog food. In the last year the firm has increased investment in its product pipeline by 36% and has several products awaiting approval. Its services division consists of a distribution network and laboratories that offer advanced veterinary services to local practices. One of the group's best assets is its experienced management team. Current CEO Ian Page used to work as a warehouse worker for the firm and has gradually risen through the ranks. The same determination has seen him grow Dechra's international business since taking the helm.

Group sales were up 6% in the year ending 30 June 2010, while earnings per share were up 16% over the same period. That performance is already in the price on a forward p/e of 14.6, Dechra is not cheap. However, its big product pipeline and strong track record still make it a great long-term play on the growing global pet-care market.

This article was originally published in MoneyWeek magazine issue number 508 on 15 October 2010, and was available exclusively to magazine subscribers. To read more articles like this, ensure you don't miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.