ANIMAL INSTINCTS

A few listed counters have limited exposure to pet stores, but the sector is a robust niche

“A Euromonitor report suggests the estimated value of the local pet industry could grow to more than R8bn by 2024

The JSE’s retail sector has been severely tested during the past two years, and some specialist groups took serious strain during the lockdown.

While investors normally keep their distance from the “dogs” of the JSE, it is ironic that one retail niche that has collared remarkably steady returns during these lean times are pet shops.

Humans have long pampered their pets. But the socalled “humanisation” of domestic animals now stretches beyond letting the dogs and cats sleep on the bed.

Pets have become an integral part of the family. They are fed nutritious meals, afforded the best health care, spoilt with all kinds of accessories — from comfy baskets to exercise toys — and even covered by health and life insurance.

There are no proper entry points for local investors to this vibrant niche at present; only a few listed counters, having limited exposure to the pet sector.

Remgro-controlled RCL Foods offers an entrée to the pet food sector by means of brands such as Epol, Bobtail, Dogmor, Canine Cuisine, Bonzo and Yapper.

But these operations are small compared with RCL’s mainstay businesses in groceries, poultry and sugar.

Pharmaceuticals company

Ascendis has a Phyto-Vet segment with a handful of animal health brands.

Again, this segment is relatively small compared with the group’s main business in general health-care products.

Investment company RECM & Calibre (RAC) has a controlling stake in Outdoor Investments, a large-format retailer which owns the fledgling Family Pet Centre.

A pending restructuring at RECM, in terms of which Outdoor

Investments would be bundled into RAC-controlled Astoria Investments, might bring the Family Pet Centre more to the fore … though still as part of a larger specialist retail offering.

In the US, the pet market is more mainstream, with expenditure on pets topping $75bn a year in that country. Investors are able to participate meaningfully via companies like Merck & Co (vaccines and animal health), PetMed Express (pet medication), CVS Health (pet foods, toys and grooming equipment) and Trupanion (pet insurance), to name a few.

There are already exchangetraded funds like ProShares Pet Care ETF and the Gabelli Pet Parents fund.

Even food brand manufacturers have leashed opportunities in the pet food sector — including large companies such as General Mills and JM Smucker, which both delved into the pet food market.

Speaking to some of the main bigger players in the local pet sector makes it clear that it’s probably unlikely that a standalone business could bound onto the JSE any time soon. Most believe the pet sector is more suitable for private investors — either private equity or investment consortiums — that are seeking steady returns based on measured growth prospects.

The JSE has, in recent years, hosted a fair number of niche retailers — ranging from agribusiness Kaap Agri to catalogue retailer HomeChoice as well as health-care retailer Dis-Chem and mini-market group Choppies. But highly focused niche retailers are nonexistent — and counters like Dial-a-Bed, Arthur Kaplan Jewellery, Midas, Incredible Connection, Blochs, Aroma Liquors, Dial-a-Movie, Mathieson & Ashley, Hicor, Bergers, Metro Cash & Carry, Sweets from Heaven and Redgwoods have been taken over by larger retailers, gone private or fallen by the wayside.

That said, the pet sector looks like it could prove a boon for investors as the fragmented local market starts to consolidate or “corporatise” (for want of a better word). Most of the dedicated pet shops in SA are small operators — or “Mom and Pop” stores.

RAC executive director Jan van Niekerk says the investment company’s recent move into pet stores followed the firm’s successful investment into niche stores for hunters (through the Safari Outdoor brand). “We also know that pets’ needs are now high on the hierarchy … especially in urban areas, where people spend on food and parapherna

lia for pets.”

Van Niekerk says Family Pet Centre is following Safari Outdoor’s “big box” model, with large stores situated away from urban centres and large shopping malls. “The margins in the pet sector are very attractive, and the industry is unregulated … so far. Stock levels are manageable.

“Much of the merchandise is locally produced, so stock can be turned relatively quickly.”

There also appears to be some pricing power in the pet sector. Van Niekerk notes that for most customers pet spending is an emotional purchase. “Customers tend not to worry about prices too much.”

But Van Niekerk is not sure that Family Pet Centre could be a candidate for a standalone listing in the medium term. With strong cash flows and decent dividend flows, he says, a pet venture might be better as part of larger niche retail entity with similar metrics.

Local investment company Infinitus Holdings is already seeing encouraging progress from an investment made around five years ago in Absolute Pets.

When Infinitus made its initial investment, Absolute Pets was an eight-strong chain. Today it’s almost a 100-strong national store network — though Infinitus CEO Greg Heron points out that the stores are relatively small in size (ranging from 70m2 to 100m2). Heron, however, cautions about getting overly excited about prospects for the pet sector — but does say organic growth has been steady. “It’s a solid business with good growth prospects.”

Heron points to a Euromonitor report that suggests the estimated value of the local pet industry could grow to more than R8bn by 2024. The market was worth roughly R7.13bn in 2019.

Euromonitor’s report says the pet humanisation trend has continued to shape consumer behaviour and manufacturer strategies over the past few years.

The report says this trend has manifested on the demand side of the market, with the increasing willingness of consumers to choose more luxury and sophisticated dog and cat food, made from higher-quality ingredients.

This includes more humanlike pet trends, like frozen treats, as well as the increased availability of luxury pet hotels and day care centres.

At this juncture, in SA, the pet food category is dominant, with sales of R5.6bn in 2019. Most of these sales are still registered in large grocery retailers or supermarkets, with about 30% transacted via veterinarians and pet stores.

Heron also plays down the possibility of Absolute Pet listing. “The company is cash generative and does not need additional capital. It is well capitalised and as the stores are relatively small, huge capital expenditure is not required for further roll-outs.”

Petworld — launched in early 2014 — is also a relative newcomer to the market, but it already has a meaningful retail presence, with five Petworld

XXL stores (1,400m2), two Petworld Express stores (100m2) and an offshore outlet in Dubai.

The company owns two online webstores and a distribution centre for imported pet products in Cape Town.

Petworld’s niche is in exotic animals like snakes, reptiles, small animals, birds and fish rather than on top of an extensive range for dogs and cats.

Guy de Wieuw, GM of Petworld, says the pet market in SA is very stable, and is not unduly rattled by any economic shifts. He believes the pet store market can grow by 8% to 10% over the next three to five years. He points out that in Europe pet superstores and specialty stores account for 45% of the total pet market, compared with around 6% in this country.

“We see huge potential for 50 to 60 Petworld XXL all-inone stores in SA.”

De Wieuw also says Petworld can push for 10 Petworld city stores and 100 Petworld Express stores.

“At present the market is fragmented, with many smaller pet shops. We intend to roll out between five and 10 stores every year for the next 10 years.”

Petworld’s first XXL store in Goodwood (which opened in early 2014) turned over R25.6m in 2019, and the Somerset West store reached sales of around R31m. De Wieuw says gross profit margins are robust, coming in around 37%. Total sales are now in the region of R150m a year — encouraging progress from the R340,000 monthly take from first store opening in January 2014. Livestock only accounts for 4.5% of sales, with the bulk of revenue generated by food sales (45%) and pet accessories (34%).

De Wieuw is not ruling out a listing for Petworld in the longer term — pointing out that an outside investor took 50% of the company’s first shops for €2m investment.

He says Petworld was approached two years ago by an institutional investor keen to invest R300m in rolling out new stores. “This was probably a bit early for us.”

While it seems unlikely that ordinary investors will get a shot at this robust retail niche in the short term, the development of the local pet market is definitely worth monitoring.

The dour sentiment on the JSE will eventually lift, and investors will be looking for cash generative niches that can support reliable dividend flows.

So when the ducks do quack again … feed them.

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