Covid-19: The impact on the pet and veterinary industry

As the lockdown continues in many countries across the globe, pets will be pleased to have the unwavering company of their owners. Whilst this can only be a good thing for pets, as with the majority of sectors, Covid-19 has had a significant impact on revenues in the broader pet market. Non-medical services in particular have been hit hard: with travel cancelled, kennels are empty, working from home means dog-walking services are no longer required and grooming services are shut as non-essential. Veterinary practices remain open but following the Prime Minister’s address on 23rd March, vets have had to reduce face-to-face contact, meaning: Provision of in-person emergency care only; Fulfilment of urgent prescriptions; and Maintaining the food supply chain. Practices have rapidly developed new ways of working and launched video links and phone services to provide continued access and assurance to pet owners. However, short-term revenue reductions appear unavoidable. Pet food appears to be the most resilient sub-sector, with revenue growth reflecting demand from pet owners worried about access to future supplies. Sales have been robust across both branded and own-brand categories, and through supermarket and direct-to-consumer channels. However, the strongest growth, which has also been seen in other retail sub-sectors, has been in direct-to-consumer brands with customers flocking to delivery options straight from the supplier. As with human grocery staples which also report increased sales rates, it is likely that sales will soften as the end of the crisis approaches and consumers become more confident in ongoing supply. However, brands that have adapted to the more direct consumer market are set to gain in the long run from this period. Having established new relationships and supply chains directly with consumers, it’s likely that sales will continue to take place via this route and a sense of brand loyalty may develop. Of course, strong sales are the not the only story. The pet food industry has faced – and will continue to face – a number of challenges, but the nature of these will differ depending on each company’s business model and its ability to adapt to these unprecedented times. Manufacturers have had to work hard to reconfigure production lines to accommodate social distancing. Higher levels of sickness and absence amongst the workforce (due, for instance, to childcare commitments with schools closed) have meant production scheduling is more complex. There is also a balancing act between meeting the increased demand and operating at a reduced rate and crucially, trying to avoid breakdowns at a time when engineers are scarce. Businesses with UK-focused sourcing are generally finding supply chains resilient at the moment. Businesses that are reliant on long overseas supply chains are exposed to higher risks, including volatile exchange rates, which are likely to erode margins for some UK brands. These businesses may also encounter longer and reduced delivery times. Prior to the start of the crisis the pet food sector was poised for a spate of M&A activity focused on premium brands. Covid-19 will no doubt delay this, but the resilience of the sub-sector in recent weeks and enduring appealing macro dynamics mean delays are likely to be shorter than in other sectors. Nestle Purina’s acquisition of UK based Lily’s Kitchen on 1st April 2020 is testament to that and is a good example of a strategic investor being able to look past the current crisis and see the medium to long-term picture. If investors are brave and look at the macro picture, we could expect more activity to continue and at the very least, post-crisis there will undoubtedly be a flurry. In conclusion, whilst COVID-19 has caused significant challenges to the pet and veterinary market, the sector remains resilient and a fundamental service and supplier to households across the country and one which will retain its attractiveness to investors. Jonathan Broom is a Director in Eight Advisory’s Transaction Services team

Covid-19: The impact on the pet and veterinary industry

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