Spot Prices are Rising
As the pandemic began to bite in 2020, millions of Americans turned to the ultimate form of creature comfort: four-legged companions. More than 23 million American households — nearly 1 in five — added a cat or dog during the pandemic to ease the sting of isolating lockdowns. 

Long before this adoption frenzy, pets were sinking their claws into American culture, with the internet serving as the primary catalyst. From influential corgis commanding millions of ‘followers’ on Instagram to entire YouTube channels designed to be watched by dogs and cats (think video streams of squirrels and birds), it’s a critter’s world and we just live in it.

The sacrifices that owners are willing to make for beasties — well beyond walks in the rain or the use of uncomfortably thin plastic bags — have only grown more stark. A stunning 37% of survey respondents in a Harris Poll said they would reduce retirement contributions to pay for pet expenses; another 27% said they would skip a credit card payment — and they may have to if they take their best friend to a newly opened San Francisco restaurant called Dogues, where a three-course meal designed just for your canine will set you back $75. Woof.

This trend, the growing instinct to shell out top dollar on everything from food, treats, toys, and healthcare for animals whose sole output is unmitigated affection, is broadly referred to as the “humanization of pets.” And it has inspired an epic dogfight among some of America’s largest and most powerful companies which have earmarked animal health as a strategic growth area.

And that’s what we’ll be unpacking today: the capitalistic animal spirits shaping your ever-swelling pet bill and the companies vying for wallet share.

So sit, stay, and dive in.

Pandemic Pet Stars Lose Their Sheen
With the surge in pet ownership during the pandemic came a boom for the consumer-facing names synonymous with companion animals today. Chewy — founded by WallStreetBets folk hero Ryan Cohen — completed its IPO in June of 2019 and was perfectly situated to capitalize on what would come next.

E-commerce penetration rates for pet food and supplies, which stood at just 7% in 2015, exploded to 30% in 2020 as covid-conscious shoppers avoided brick-and-mortar exposure. With this tailwind, Chewy reported its first-ever quarterly profit in March 2021 and pushed into new initiatives like a pet insurance partnership with Trupanion and the launch of a telehealth service called “Connect with A Vet.”

The company also spearheaded a data-first approach to collect so-called pet profiles to power its product recommendation engine. “We have 170m data points,” CEO Sumit Singh told the Financial Times. “Imagine the power of this data. We know if ‘Dave’ has a Labrador, and that Lab is six years old, at year seven it might display hip dysplasia, and that allows me to recommend Cosequin as a medical supplement.”

With fancy new initiatives in full display, giddy investors extrapolated the initial pandemic boost into perpetuity and Chewy’s share price climbed more than 500%. “That puppy is going to grow up, eat more food, shred more toys,” Sumit Singh helpfully explained on Chewy’s earnings call.

Doggie Hangover: With pandemic-era puppies growing out of their teething phase, retailers like Chewy and Petco are clenching their jaws. Supply chain woes, pressure from Amazon — which declared the sector a strategic priority in 2018 with the launch of its own brand of pet products — and the simple unwinding of pandemic demand have weighed heavily on results:

• Chewy logged a loss of $63.7 million in Q4 of 2021— nearly twice what analysts were expecting.
• Petco reported in August that even as essentials like pet food and cat litter continued to perform, the company is suffering a drop in higher margin discretionary categories as inflation put a damper on spending.

The result? Chewy’s share price is down 70% from its 2021 high, giving up the vast majority of its pandemic gains. Petco is down 40% from its IPO in early 2021. WOOF.

Quietly Beasting
While the animal retail space is suffering from a pandemic hangover, a different niche, one that receives much less fanfare, continues to purr along. Animal health, encompassing everything from diagnostics to pharmaceutical products and surgeries, is often heralded as one of the most economically durable spaces in the world.

There are only 30,000 veterinary clinics in the US  and becoming a “player” in animal health is not as easy as Amazon greenlighting a few additional SKUs and launching a pet-focused webpage. With relative scarcity and the ever-present need for service — dogs are just as likely to eat a bar of chocolate in a recession — comes pricing power. 

“If you look at animal health historically, it has proven to be recession resistant," Wetteny Joseph, CFO of animal health company Zoetis, told Yahoo Finance. “The demographics of pet ownership have trended towards millennials and Gen Z, and they place a higher premium on the health of their pets.”

Across the US, average revenue per vet clinic has nearly doubled to $1.8 million, according to data from Idexx, as the complexity and frequency of services offered by vets explodes. Vet offices have been turned into supercharged economic engines and have attracted the attention of very shrewd capital:

• The Mars confectionery family, famous for their ownership of Snickers and Twix (as well as their disdain for the estate tax) acquired VCA, an operator of 800 pet care hospitals, for $9.1 billion in 2017. The family, worth a reported $94 billion according to Forbes, has made strategic investments in animal hospitals in the UK, as well as in diagnostics and lab resources. 
• JAB Holdings, the German conglomerate and owner of Krispy Kreme, Peet’s Coffee, and Einstein Bros Bagels, acquired a majority stake in National Veterinary Associates, operator of 670 veterinary hospitals and 70 “pet resorts” across the US, Canada, Australia, and New Zealand in 2019. 

Dog Eat Dog Tactics
Veterinary clinics have emerged as a highly contentious battleground. In most US states, owners need a prescription from a vet to buy medication for their pets, and, out of convenience, many scripts are filled directly at a vet’s office. It’s a big business, accounting for ~25% of vet clinics’ revenue, according to investment bank Needham and Co.

This presents a challenge for companies trying to break into the market, setting off a serious catfight over customer access. In 2021 Chewy sued two veterinary software companies, Vetcove and Covetrus, accusing them of leveraging their access to confidential customer data to snub competitors. The lawsuit described an alleged “diversion scheme,” which included sending pet owners confusing and misleading texts to dissuade them from purchasing from Chewy. 

The “Fairness to Pet Owners Act,” a bill that would have required vets to automatically provide a free copy of a prescription to the pet owner, was introduced in both chambers of Congress but did not make it to a vote. The American Veterinary Medical Association opposed the bill.

Release the Antitrust Hounds: At the same time, regulators have taken notice of the intense consolidation happening at vet offices. As both the prescriber and purveyor of medicines, vets have significant power in the marketplace, and the Federal Trade Commission is starting to crack down, worried that too much consolidation will lead to price gouging:

• Earlier this year the FTC ordered JAB to divest vet clinics on two separate occasions in less than a month, alleging that two proposed transactions could have created monopolies. The antitrust regulator told JAB to sell 11 clinics before completing the purchases of Sage Veterinary Partners for $1.1 billion and Ethos Veterinary Health for $1.65 billion.
• The FTC also ordered that JAB must now obtain the regulator's blessing before acquiring a specialty or emergency veterinary clinic within 25 miles of any JAB-owned clinic in California or Texas. Quite a tight leash.

The FTC sent a clear signal that it’s keeping an eye out for other big players trying to hoover up clinics, with one spokesperson telling the FT: “We’re hoping it will have somewhat of a deterrent effect.”

Final Bark: With the animal health market expected to grow to $77 billion by 2030, the FTC will need cat-like reflexes to keep up. Until then, with each credit swipe at your vet’s office, you can expect to shed plenty of bacon for your precious golden retriever.

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