Global Pet E-Commerce - Deborah Weinswig...although both online retailers also sell pet supplies. 15.2% 15.0% 5.0% 4.7% Pet Care E-Commerce E-Commerce Retail Pet Care $24.0 $15.9 $15.0

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DEBORAHWEINSWIG,MANAGINGDIRECTOR,FUNGGLOBALRETAIL&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2016TheFungGroup.Allrightsreserved.

• Spending on pets is growing globally as more peopleconsiderpetsapartoftheirfamily.Globalpetfoodsalesgrewby4%in2015,to$70billion.

•

• The American Pet Products Association reports thatAmericans spentover $60billion on their pets in2015,up3.9%fromthepreviousyear.Weestimatearound7%ofUSpetcaresalesweremadeonline in2015,upfrom6.4%in2014.

• Chinese pet owners have flocked to the Internet topurchase pet food: the Internet captured an estimated38%oftotalpetfoodsalesinthecountryin2015.

• In the US, e-tailers Chewy.com and Amazon dominatetheUSpetfoode-commercemarket,andarefaraheadofspecialistpetretailersPetSmartandPetco.

D E B O R A H W E I N S W I G

M a n a g i n g D i r e c t o r F u n g G l o b a l R e t a i l & T e c h n o l o g y d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m

U S : 6 4 6 . 8 3 9 . 7 0 1 7 H K : 8 5 2 . 6 1 1 9 . 1 7 7 9

C H N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6

Global Pet E-Commerce:

A Dynamic Channel In a Growing Market

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Global Pet E-Commerce: A Dynamic Channel In a Growing Market

PETE-COMMERCE:GROWINGGLOBALLYSpending on pets is increasing globally and, in many regions, e-commercesalesgrowthinthepetcategoryisoutpacingbothtotalcategorysalesgrowthandtotale-commercegrowth.Inthisreport,weanalyzesomeoftheleadingpete-commercecompaniesintheUSandselectedinternationalmarkets.

TheInternet’sshareofpetproductandfoodsalesisstillrelativelylowinmanyregions. Although precise definitions of the category vary, inmostWesternmarkets, e-commerce accounts for single-digit shares of pet category sales.AccordingtoEuromonitorInternational,e-commerceaccountedforonly4.4%of total pet care sales globally in 2014 (latest confirmed); we estimate thisrosetoaround5.3%in2015.

However,ChinesepetownershaveflockedtotheInternettopurchasepetfood: GfK estimates that e-commerce represented fully 38% of total petfood sales in the country in 2015, and it predicts that figure will rise toaround43%in2016.

Figure1. E-Commerce’sEstimatedShareofTotalPet Food,PetCareandPetProductSales*inSelectedRegions,2015

*ShareofpetfoodsalesinChina,petcaresalesintheUSandglobal,andpetproductsalesintheUKandEurope.

Source:EuromonitorInternational/GfK/PetsatHome/Zooplus/FungGlobalRetail&Technology

38.0%

9.4%7.0% 6.5% 5.3%

China UK US Europe Global

I

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US,34.3%

Japan,8.6%

Brazil,7.1%UK,6.3%

Germany,6.0%

France,5.9%

Canada,4.3%

Italy,3.7%

Australia,2.9%

Spain,2.1%

Russia,2.1%China,1.9%

Others,14.9%

AccordingtheAmericanPetProductsAssociation(APPA),totalUSpetcareexpenditure, including nonfood categories, surpassed $60 billion for thefirsttimein2015.

• In 2014, research company Forrester Research estimated that $3.7billion,oraround6.4%,ofUSpetcaresaleswentonline.

• In 2015, we estimate that the Internet’s share of US pet care salesgrewtoaround7.0%,or$4.2billion.

INCONTEXT:THEWORLD’SBIGGESTMARKETSAccording to researchcompanyGfK, totalpet foodsalesgloballygrew4%yearoveryearto$70billionin2015.Asweshowbelow,theUSaccountedfor more than one-third of this. Petfood Industry notes pet food sales inJapan,thesecond largestmarketglobally,haveshownsignsofstagnation,whilesignificantgrowthisexpectedthrough2020inotherAsiancountries,includingChina,IndiaandTaiwan.

Figure2.ShareofGlobalPetFoodSales,byCountry,2015

Source:GfK/FungGlobalRetail&Technology

INFOCUS:AMERICANS’LOVEFORPETSBOOSTSPETE-COMMERCEAs noted in our Pet Technology report from December 2015, manyAmericans treat their pets like family members, and they have shown awillingnesstoincreasetheirspendingontheirpets.

AccordingtoPetProductNews,babyboomerswerethefirstgenerationtotruly “humanize” pets, which has fueled the growth of the pet productindustry.Subsequentgenerationsarefollowingtheboomers’lead,andGfKsays millennials have now overtaken boomers as the largest pet-owningpopulationintheUS.

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Thisshiftisimpactinghowconsumersbuyfortheirpetsandisalsodrivinge-commercegrowthinpetproductsales.AswediscussedinourMillennialsand Grocery report, millennials are highly adept at using technology toresearchandbuyproducts,andtheylookforconveniencewhenshopping.Thesehabitscarryoverintotheirspendingontheirpets.

Severalfactorsdrivetheimpressivee-commercegrowthinthepetproductscategory,andtheypointtocontinuedgrowthinthefuture:

• TotalInternetsalesofconsumerpackagedgoods(CPGs)arebooming.OnlinesalesofCPGs,whichincludepetproducts,grewby42%in2015yearoveryear,outpacingthe30%growthseenfortotale-commercesalesoverthesameperiod,accordingtoresearchfirm1010data.Thecompanynotes,however,thate-commercegrowthforCPGsisfromarelativelylowbasecomparedtothatofotherproductcategories.

• ConsultingcompanyThistle Insightnotesthatdirectdeliverybenefitspetownerswhohavetobuyahighvolumeofproducts.

• A relatively low proportion of all pet food sold is fresh, allowingowners tobuy largerquantities that last fora longerperiodof time.Online shopping is ideally suited to branded, packaged, ambientproducts—anditisespeciallyusefulforconsumerswhentheyneedtobuyheaviercupboardbasicssuchascansorlargebagsofpetfood.

Below, we compare the growth of pet care e-commerce to that of totale-commerce, total retail sales andpet care retail sales in theUSbetween2010 and 2014. According to Forrester Research, pet care e-commerce intheUSgrewby76%over thatperiod.APPA recorded20%growth for thetotalpetproduct industryoverthesametimeframe.Pete-commercenotonlysubstantiallyoutpacedtotalpetcaresalesfrom2010to2014,butalsogrewfasterthantotale-commerce.

Millennialshavenowovertakenboomersasthelargestpet-owningpopulationintheUS.

OnlinesalesofCPGs,whichincludepetproducts,grewby42%in2015yearoveryear.

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Figure 3. US: Pet Care E-Commerce Sales vs. Total E-Commerce, TotalRetailandTotalPetCare(CAGRs),2010–2014

Source:APPA/ForresterResearch/USCensusBureau/FungGlobalRetail&Technology

PetFoodIstheLargestCategorybyValueSowhat pet categories are consumers spending on? It is not just pet food,although food is the largest pet product category by value in the US.AccordingtotheAPPA,spendingonservicesandsuppliesisgrowing,too.Theonlycategorywherespending isdeclining is liveanimals;valuesales in thatcategorydeclinedby1.4%between2014and2015,andtheyareexpectedtodeclinemarginally in 2016. The APPA estimates that total spending on petproductswillincreaseby4.1%in2016,toatotalof$62.8billion.

Figure4.US:PetIndustrySpendingBreakdown(USDBil.),2014–2016E

Source:APPA

TwoCompaniesDominatePetFoodE-CommerceintheUSTwo companies—Chewy.com and Amazon—stand apart in terms of petfoode-commerceintheUS,accordingtoanalyticsfirm1010data.Theytookacombinedmarketshareofover85%inthecategoryinthefirstquarterof2016, 1010data says. Note that this market share is for pet food only,althoughbothonlineretailersalsosellpetsupplies.

15.2% 15.0%

5.0% 4.7%

PetCareE-Commerce E-Commerce Retail PetCare

$24.0

$15.9 $15.0

$2.1

$5.7

0

5

10

15

20

25

Food VeterinaryCare Supplies/OTCMed

LiveAnimalPurchases

OtherServices

2014

2015

2016E

Pete-commercenotonlysubstantiallyoutpacedtotalpetcaresalesfrom2010to2014,butalsogrewfasterthantotale-commerce.

TotalUSspendingonpetproductswillincreaseby4.1%in2016,toatotalof$62.8billion.

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Figure5.US:TopPetFoodWebsites’MarketShares,byOnlineSalesDollars,1Q16

*Chewy.com’sshare includes40.5%share forChewy.comand10.2%share for thecompany’ssubscriptionservice.

**Amazon.com’sshareincludes23.5%forthedirectchannel,7.6%forthesubscriptionchanneland3.6%forthemarketchannel.Source:1010data

Regular e-commerce is not the only force driving sales at these tworetailers.AccordingtoPetfoodIndustry,thepetfoodonlinesubscriptionmodel is growing rapidly,withChewy.com’sandAmazon’s subscriptionsalesofpetfoodhavingnearlytripledyearoveryearinthefirstquarterof2016.

Subscription services appear to be a good fit for pet food, given that it istypicallyaroutinepurchaseforwhichshopperscanpredictneed.

America’sOnlinePetRetailersBelow, we provide a rundown of the major players in the US pete-commercemarket.

Chewy.com*,50.7%

Amazon.com**,34.7%

Peoooddirect.com,5.7%

Petco.com,3.1%

Petsmart.com,2.2%

Peolow.com,1.7%

Walmart.com,0.7%

Other,1.2%

Chewy.com’sandAmazon’ssubscriptionsalesofpetfoodnearlytripledyearoveryearinthefirstquarterof2016.

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• PrivatelyownedonlinepetretailerChewy.comlaunchedin2011.

• Customers can saveup to20%onproductswhen they subscribe tothe company’s Autoship service, through which they can set up ascheduleforproductstobehomedeliveredregularly.

• Amazon sells pet products through its own website as well asthrough e-commerce site Wag.com, which is owned by Quidsi, acompanyAmazonacquiredin2011.

• Wag.comoffersautomaticproductshipmentsthroughaservicethatissimilartoAmazon’sSubscribeandSave;customerscansaveupto15%onpetproductswhentheypurchasethemregularly.Accordingto1010data,Amazon’ssalesfromSubscribeandSavegrewby200%yearoveryearin2015.

• AccordingtoeMarketer,21%ofAmazon’sPrimeNowUSsubscriberspurchasedpetproductsinJanuary2016.

Leading US-based specialty pet retailers PetSmart and Petco both have astrongnetworkof storesacross thecountry.Online,however,neitherhasbeen able to match the success of pure plays Chewy.com and Amazon,accordingtothemarket-sharedatashownabove.

• PetSmartwentprivatein2015,afterBCPartnersacquiredit.

• Net sales in 2014 were $6.9 billion (up 2.3% year over year),accordingtothecompany’s10-Kfiling.

• Thecompanyoperatesmorethan1,430storesintheUS,CanadaandPuertoRico.

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• In order to gain market share online, in 2014, PetSmart acquiredonline pet products retailer Pet360, which runs more than 30 petwebsites,includingPetfooddirect.com.

• Pet360’s online stores offer an Auto Ship service, through whichcustomerscansetupascheduleforproductstobehomedelivered.Customers can save up to 10% when they buy Auto Ship BonusBrandsthroughthesites.

• Customers can also choose to collect orders made online fromselectedPetSmartstores.

• PetcowasacquiredbyCVCCapitalPartnersandCanadaPensionPlanInvestmentBoard in January2016 fromTPG (formerly TexasPacificGroup)andLeonardGreen&Partners.

• AccordingtoCVC,Petco’sannualturnoveris$4.4billion.

• Thecompanyoperatesmorethan1,430storesintheUS,MexicoandPuertoRico.

• According to Internet Retailer, Petco’s online sales grew by 38.3%from2010to2014,reaching$83.1million.

• PetcooffersaRepeatDeliveryservice,throughwhichcustomerscansaveup to20%when they subscribe forhomedeliveryofproductsshippedonascheduletheycancreateonline.

Despite having lower onlinemarket shares than Chewy.com andAmazon,PetSmart and Petco, thanks to their strong store networks, can competewith pet e-tailers by offering services that range from grooming to pethotels.PetcoandPet360offersubscriptionservicesonlinethatoffersavingsto customers who make regular purchases. Petco also sells on Amazon,whereasPetSmartnolongerdoes.

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INFOCUS:PETE-COMMERCEINTERNATIONALLYNeither the growth in overall spending on pets nor the growth in pet e-commerce has been confined to the US. Below, we look at some of theother leadingpetproductmarketsworldwideandhowtheyhaveadaptedtopete-commerce.

AustraliaAccordingtoAustralianbusinessmagazineINTHEBLACK,petsuppliesisoneof the fastest-growing e-commerce sectors in Australia, which has one ofthe highest pet ownership rates in the world. Analytics company SPSCommerceestimatesthattheonlinepetfoodmarketinAustraliagrewatanannualizedrateof16.6%between2010and2015,comparedtoannualizedgrowthofjust1.7%forthetotalpetfoodmarketduringthesameperiod.

• Establishedin2011,PetCircle isthelargestonlinepetsupplyretailerinAustralia,accordingtothecompany.

• INTHEBLACK says Pet Circle’s revenues in the year ended June 2015were A$145million (US$123million) and that the company expectsannualgrowthof15%overthenextthreeyears.

• PetCircleoffersanAutoDeliveryserviceat lowercost forcustomerswhoorderregularproductdeliveries.

ChinaConsumer research company KantarWorldpanel reports that raising petshasbecomeincreasinglypopularinChina,duetourbanizationandchanginglifestyles.E-commerce’sshareofpetproductsalesisrelativelyhighinChinacomparedtomostotherregions.GfKestimatesthate-commercewillgrowitsshareoftotalpetproductsalesinthecountryfrom38%in2015to43%in2016.

• Tmall isabusiness-to-consumerplatformforcompaniessellingdirectly toconsumers. Also owned by Alibaba Group, Taobao is a consumer-to-consumerandbusiness-to-consumeronlinemarketplace.

• According to China Daily, Nestlé, which sells on Tmall and Taobao,reports that pet food is one of its fastest-growing e-commercecategoriesinChina.

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GermanyEuromonitorInternationalestimatesthatthetotalvalueoftheGermanpetcaremarketwill reach €4.3 billion (US$4.8 billion) in 2016, up 9.4% from2011. According to pet product e-tailer Zooplus, around one-third ofGermanhouseholdsownoneormorepets,andkey trends in thecountryinclude the “humanization” of pets, increased spending on them and petproducte-commerce.

• Establishedin1999inGermany,ZooplussaysitistheleadingonlinepetsupplyretailerinEuropeintermsofsales,shippingto28countries.Thecompany also says it is the third-largest pet supply retailer in Europeoverall,includingbrick-and-mortarchains.

• The company’s net sales increased by 30% year over year in 2015,reaching€742.7million(US$824million).

UKAccordingtotheUK’sleadingpetspecialistretailer,PetsatHome,thetotalvalue of pet retail and services in theUK grew by 7% between 2012 and2014,takingthemarketto£6.1billion(US$10.0billion).Onlinesalesofpetproductsover the sameperiod grewby24.6%, to represent 8.6%of totalcategorysalesin2014.

RetailresearchgroupConluminoestimatesthatthetotalpetcaremarketintheUKwill growby9.3% from2014 to2019and that theonlinepet caremarketwillgrowby43.6%duringthesameperiod.

• PetsatHome,whichhasover400storesintheUKplusanonlineshop,isthecountry’smarket-leadingpetspecialistretailer.Thecompanyhada19.6%marketshareoftotalpetcaresalesintheUKin2014,aheadofTesco(16%)andAsda(9.5%),accordingtoConlumino.

• In 2015, Pets at Home accounted for 45% of UK pet retail onlinetraffic,accordingtowebsite-monitoringcompanyHitwise.

• PetsatHome reports that itshomedelivery servicehasbeenmorepopular than its click-and-collect service (which is available at over400 of the company’s stores), but that the latter is growingsignificantlyfaster.

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INFOCUS:ONLINEGROCERYHELPSDRIVEPETE-COMMERCE

As an everyday CPG, pet food is, for many consumers, a grocery storepurchase.Thatmeansthegrowthinpetfoode-commerceistiedtosomedegreetothegrowthingrocerye-commerce.Petfoodproductsrepresentagoodfitwithonlinegroceryshoppingbecauseoftheirambient,brandednatureandthefactthattheyareoftenheavyandhardtogethomefromthestore.

Grocery retailers account for major shares of offline pet-food salesalready: as we noted above, supermarket chains Tesco and Asda are insecond and third place, respectively, in theUK pet caremarket. And, inmarketssuchasFranceandtheUK,whichhaveestablishedonlinegrocerysectors,weexpectgroceryretailerstoaccountforasizableshareofonlinepetfoodsales.

IntheUS,whichisanascentmarketfore-grocery,onlinegrocerysalesareexpectedtorampupincomingyears,andthatgrowthshoulddrivemoreofAmerica’spetfoodspendingonline.

Figure 6. E-Commerce’s Share of Fast-Moving Consumer Goods Sales,SelectedCountries,2014

Source:KantarWorldpanel

So, the battle in e-commerce is not just between brick-and-mortar petchainsandpure-playpetspecialists;groceryretailerswilllikelyaccountforagrowingshareofpetproducte-commerce,too.

KEYTAKEAWAYS

• Millennials alreadyownmorepets thananyotheragegroup in theUS,andthedemographicisknownforvaluingconvenienceandbeingwillingto lookforgooddeals—bothofwhichare likelytoboostpetproducte-commercesales.

• Globally, pet product e-commerce growth rates have beenimpressive, albeit from low base figures: in 2014, e-commerce’sshareoftheglobalpetfoodmarketwasonly4.4%,andeveninmanyleadingeconomies,itisstilllessthan10%.

0.8%

1.2%

1.4%

4.3%

6%

US

Spain

Germany

France

UK

Growthinpetfoode-commerceistiedtosomedegreetothegrowthingrocerye-commerce.

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• Chinahasamajorleadinpetproducte-commerce:43%ofpetproductsalesinthecountryareexpectedtobemadeonlinethisyear.

• Chewy.com and Amazon have both increased sales throughsubscription services that allow customers to buy pet productsregularlyinordertosavemoneyinthelongrun.Otherpetspecialistretailerswithphysicalstores,suchasPetco,haveaddedsuchservicestotheirofferings.

• Subscription services appear to be a good fit for the pet foodcategory,giventhatpetfoodistypicallyaroutinepurchaseforwhichshopperscanpredicttheirneed.

• Sincepetfoodisagrocerypurchaseformanyshoppers,thegrowthin online grocery sales is contributing to the migration of petspending online. In the US particularly, grocery e-commerce isgrowing rapidly, from a small base,whichwillmean thatmore petproductspendingwillshifttotheInternet.

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJohnMercerSeniorAnalyst

JanneEhoResearchAssistant

HONGKONG:10thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223002470LONDON:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NEWYORK:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017FBICGROUP.COM

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Global Pet E-Commerce - Deborah Weinswig...although both online retailers also sell pet supplies. 15.2% 15.0% 5.0% 4.7% Pet Care E-Commerce E-Commerce Retail Pet Care $24.0 $15.9 $15.0