- August 5, 2022
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- 60 minutes read
Quickfire roundup of the pet industry – what investors need to know – Hargreaves Lansdown
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HL’s Lead Equity Analyst, Sophie Lund-Yates, shares her quickfire thoughts on shares with exposure to the pet industry.
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4 August 2022
The pet industry boomed over lockdown. Millions of us in the UK alone got a pet. Now as with most consumer trends, certain companies got a boost from this change.
But a surface level spike in demand doesn’t mean all companies with exposure to the pet sector are on equal footing. It’s important to understand where these companies stand now. We think there’s ongoing opportunity, but there are a few things to keep in mind.
This article isn’t personal advice. If you’re unsure if an investment is right for you, seek advice. All investments can go down as well as up in value, and you could get back less than you invest.
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This one doesn’t need too much introduction, it’s the pet store chain with almost 460 shops throughout the UK. As you can imagine, the pet boom during the pandemic meant Pets did very well. Even as things were uncertain, all those new puppies and kittens needed their supplies. As these animals grow, they become long-term sources of repeating revenue.
What’s very interesting with Pets at Home is its hybrid approach. 41% of omnichannel revenue involves input from a store colleague, so think of that in terms of things like click & collect or ordering something in store. 57% of the group’s shops also have a vet practice or grooming salon – offering services in this way is a great way to encourage repeat custom and massively increases cross-selling. That’s also true of Pets at Home’s VIP club, with over seven million members, its users are more likely to shop across more than one of the group’s channels.
I certainly can’t knock momentum but there are some things it’s prudent to mention.
The valuation shows the market has high hopes for the group, but that does mean there’s more pressure to perform. Keeping up with the market’s expectations is a tough ask at the moment. Pet spending is more resilient than other forms of spend – we’re going to keep feeding our dogs no matter what happens, but customers are more likely to rein in spending on accessories and extras. I think it’s likely Pets at Home’s margins are going to come under some pressure.
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From a pet superstore to a vet group. CVS Group has over 500 veterinary branches across the UK, Ireland and the Netherlands, plus a handful of diagnostic laboratories and pet crematoria. They’re supported by the growing Animed online veterinary pharmacy. As we shift to a more digital world there’s reason to think this division will only build scale and become more profitable. Offering services across the broad spectrum of pet needs helps CVS capture as much revenue from owners as possible.
That also feeds into another point, similar to Pets at Home, which is that cats and dogs go to the vets more than once in their life. On a business level that equates to reliable revenue, especially as all the lockdown animals age, which is a morbid way to look at things but true nonetheless.
As is also the case with Pets at Home, CVS Group’s valuation is anticipating high growth levels. But what I would say is this has come down a lot from the very frothy days of a few months ago. That means there’s more breathing room from the market’s perspective than there has been, but at 19.5, the price-to-earnings ratio still suggests the market has high hopes.
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Nestle’s known for making KitKats but the reality is, Nestle is also responsible for a wide range of brands including Purina Petcare, whose products saw revenue rise by double digits last year. What’s interesting, and a potential growth lever of the longer-term, is the rising success of the group’s science-based brands and vet products.
As the world becomes more pet-obsessed and all these new owners continue to humanise their furry friends, spending more on specialist food is a trend that should progress. Of course in the immediate term with inflation biting this might not play out fully.
The larger contributor to Nestle’s organic growth tends to be its coffee products, it looks after Starbucks at-home drinks too. But as an option that offers exposure to the booming pet trade, while offering other goods, Nestle is an interesting one.
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Content for this article comes from a recent episode of HL’s Switch Your Money On Podcast. For further insights to sector and market news you can listen to all available episodes now.
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Susannah Streeter: Hello and welcome to Switch Your Money On from Hargreaves Lansdown. I’m Susannah Streeter, I’m a senior investment and markets analyst here at Hargreaves Lansdown, and, as usual, I’m with Sarah Coles, our senior personal finance analyst. So, Sarah, I hope you’ve been enjoying the sunshine, at least the rising temperatures mean we can turn down the dial of worries about heating our homes for now, but you know who I feel sorry for in this weather? It is our furry friends. It’s not like they can discard a layer of insulation.
Sarah Coles: No, absolutely. I mean, we’ve been taking our dog down to the river for a swim instead, which he absolutely loves but now our house does rather smell of wet dog, I’m afraid.
Susannah Streeter: I think that’s why we seem to have had a flurry of hamster escapes in this part of the world, seeking some cold relief deep in the crevices of houses. My friend accidentally hoovered up her hamster after it popped out from a hole in the wall, after having fled its cage for colder climes. Thankfully, it escaped with just a grazed nose but it then went on the run again and I think she’s now regretting spending a small fortune on the cage, bedding and toys and a hamster run, when all it wants to be is free-range.
Sarah Coles: Well, it is always hard to resist spending money on a pet when it’s become, like, a well-loved member of the family. So, I mean, I can’t have been the only one who was eyeing up things like cooling mats and freeze-able toys just as soon as it started getting hot. Of course there are even more of us with pets now, as demand, kind of, rocketed for them during lockdowns. So, there’s actually a lot of money being spent on everything from food to things like pet fashions. It begs the question of exactly what we’ll do now, now our budgets are so much tighter and whether we’ll still consider this to be man’s best spend. I’m sorry, I couldn’t resist that. In an episode we’re called ‘from wags to riches’.
Susannah Streeter: Okay, you are on a roll with puns today. I am not a pet owner myself right now and I am in the minority, I know, but a collision between a fox and our roam-free rabbit has left too many scars, I’m afraid. Anyway, in this podcast we will be finding out if this surge in pets and all the accessories and services which come with them is set to continue or, as we head back to the office a bit more, we might be a bit more reluctant to welcome new additions to the household and margins may be hit on pet-food and products from all those inflationary pressures.
Sarah Coles: Well, to get a bird’s eye view of this, we’ll be talking to Richard Lambert, who’s Finance Director at Dragonfly Products. So, hi, Richard, I imagine pet purchases have been booming. So, what are your best sellers at the moment?
Richard Lambert: Booming, yes, would be the right word. Best sellers, I would say, are natural treats, own brands of dog food that we run our own brand, harnesses, leads. There’s a whole spectrum of things out there that are selling really, really well in the current climate of the boom that has taken place within the dog industry and the canine industry as a whole due to the pandemic.
Susannah Streeter: Richard, looking forward to getting a lot more detail coming up from you. We’re also going to be chatting to Sophie Lund-Yates, who can give us the low-down on some of the businesses in the sector, including Pets at Home and pet food manufacturer, Nestlé. She’ll be exploring whether the industry will still look like it’s the cat which has got the cream or if it could all end up looking a bit more like a dog’s dinner.
Sophie Lund-Yates: Great to be back again. Hopefully, nothing’s going to be quite looking like a dog’s dinner but we’ll have to see what I have to say a bit later on.
Susannah Streeter: Plus we’ll catch up with Emma Wall, our head of investment analysis and research, who’s been speaking to Dan Green, co-manager Franklin Templeton UK mid-cap fund, and we will, of course, have the quiz and we’re talking, of course, all things pet-related, which means, Sarah, if you have a dog, surely you’ll be wagging your tail by the end of the show?
Sarah Coles: Oh, I don’t know, I’ll probably be in the dog house again but, do you know, as long as there are questions on the appetites of greedy spaniels, then I’m completely covered.
Susannah Streeter: Well, before we start looking at the pulling power of pets, let’s get a wider snapshot of the environment that these companies are operating in right now, and with inflation soaring and recession looming, it’s certainly not perfect conditions for any retailer.
Sarah Coles: Yes, so the Bank of England’s been raising the base interest rate, so it rose again to 1.25% in June, and as we record this, markets think that rates are more likely than not now to rise 0.5 percentage points in August, and that’s a level we haven’t seen in more than thirteen years. Now, the idea is, as rates move higher, people won’t want to borrow so much, so demand for goods is going to fall, which will help bring prices down.
Susannah Streeter: Inflation rates being a slow poison for the economy, so the Bank of England is trying to take an antidote now by raising interest rates. It was thought it would only have to take a small dose at a time but the last reading on the economy came in more positively than expected, with May’s GDP data showing the economy expanded by 0.5%, rather that flatlining as expected. So, now the chances of a steeper rate rise this summer are thought to have increased. However, it’s still not expected to follow the prescription written by the US Federal Reserve, of the more potent medicine of an even steeper rate hike due to fears a recession could follow. The US Central Bank hiked rates by 0.75% at the June meeting, more than it had initially planned, given the worries of spiralling prices, and expectations have been growing that an even more aggressive policy will be pursued this summer by the Fed. Given what’s happening in the US, there are worries that, given inflation in the UK is expected to soar to 11%, the Bank of England may be behind the curve in attempts to bring it down.
Sarah Coles: Of course, if higher interest rates persuade people to tighten their purse strings, that’s going to have a knock-on effect on retailers, and according to the British Retail Consortium, spending fell in June for the third consecutive month and new homewares fell off shopping lists as people concentrated on what they need, not just what they want. There’s also evidence people are trading down to cheaper brands, an attempt to stop the price of goods in the weekly shop from spiralling. So, going back to our main focus on the podcast today, the pulling power of pets, what will this mean for the industry if shoppers become more cautious? Well, the good news is that pet ownership has soared in recent years, so according to the Pet Food Manufacturers Association, over 4.7 million people got a pet during the pandemic. It means there are now a record 35 million furry, feathery and scaly additions to the UK homes, including 12 million cats and marginally more dogs. So, it means that almost two thirds of us now own a pet.
Susannah Streeter: Yes, and spending on pet food and pet-related products and services has been estimated at 6.3 billion, with around two fifths on food, two fifths on vets, and the rest split between grooming and accessories. Now, this means the pet sector is worth twice as much as the baby and toddler category, and, of course, people spend longer in the sector because our pets never grow up. It’s not just that the number of pets is rising, the industry notes that we’re also increasingly concerned about nutrition and are willing to spend more on high-quality diets. We’re also interested in the appearance of our pets, so we’ll spend on grooming, and we want the best for them, so we’re prepared to splash out on accessories too. While every part of the market is growing, it’s spending on vets which is rising fastest. Now, part of this is developments in veterinary science and the resulting medical inflation, which means more treatments are available at a higher cost – those cat scans don’t come cheap – and part is also the expansion of pet insurance. Still fewer than half of pet owners have pet insurance but those who picked up a pet during the pandemic were more likely to have bought it, just over half of them did, and dog owners were particularly likely to do so. Now, all this should continue to be a tail win for the industry but there are still plenty of potential pressures ahead.
Sarah Coles: Yes, the squeeze on our incomes, it’s affecting every area of our finances, and those areas which people consider to be luxuries are under particular pressure. Of course, once you’ve welcomed a pet to your home, it often stops being a luxury and becomes a member of the family that you’d never consider giving up, although a worrying 3.4 million people gave up their pet in the past year. What’s more likely is that we start cutting back on some of the ‘nice to haves’ for our pets, so whether that’s ditching fresh food for dried or buying it in bulk or thinking twice about expensive pet insurance premiums, everything is under consideration. What’s particularly interesting was a study a few years ago that showed people were about as likely to cut back on spending on themselves as they were to spend less on their pets.
Susannah Streeter: So interesting, so what does all of this mean for the industry? Well, with us, we have Richard Lambert, Finance Director at Dragonfly Products. So, Richard, really great to have you on the programme. Tell us a little bit more about your business. Where are you based and what kind of products are you finding particularly popular right now? You mentioned a few of them earlier but are there any particular trends?
Richard Lambert: We’re based in Huddersfield in West Yorkshire and we’re a fairly new business. So, we’ve gone through a period of quite rapid growth and now we’re beginning to have a small pinch on people’s income, we’re certainly starting to see a few trends occurring. People are very, very happy to continue spending on high-quality products. So, for instance, a very high-quality dry food or a wet food or a raw food, people are not stopping paying for that right now. They are more than happy to buy a high-quality product because they realise that if they buy a poor-quality, for instance, dry food, (a) obviously the nutritional value to their pet isn’t great, it may be full of nasties and fillers like meat-meal and derivatives and things like this. But also, when you really get down to the nitty-gritty of the cost, when you look at a poor-quality food and cost per kilo, where you actually end up using more of it per day, versus a higher-quality food, where you’ll actually feed less per meal, actually the cost saving is not that great by going for a poorer quality food. I think that, tied to the fact that people are very much more nutritionally aware anyway about what they feed themselves and also their pet, is leading people into still being very happy to spend money on a good-quality food.
Other little trends that we’re seeing, I would see that people are changing their habits a little bit with regards to maybe treats. Some people are looking for longer-lasting treats, rather than things that may last not so long. From a personal point of view, in our store, when it comes to accessories, people are really happy to spend money on a good-quality brand when it comes to, say, a harness or something like that, which may not be a cheap product. It might be £50, £60 for a harness, but people are more than happy to do that because it’s a quality product backed by a very good guarantee or warranty, whereas that middle ground, people are, sort of, shying away from and once they make their mind up that they’re not happy to buy the expensive item, they’re dropping right down to something that’s actually quite a cheap product. There are still lots of people out there who are more than happy to spend because, as you’ve already said, once they’ve welcomed that pet into their home, it’s not so much seen as an expense after a short period of time, it’s just something that has to be paid for on a weekly basis.
Susannah Streeter: Do you think there’s a link, Richard, between the cost of the actual pets to buy them in the first place and how much people are prepared to spend on these accessories?
Richard Lambert: Yes, definitely. I know, from my own experience, we have two dogs at home. The breeds that we have literally doubled in price during the pandemic. We’re talking about people paying maybe £2,000, £2,500 for a dog. If you’re going to spend that kind of money, you’re not going to be wanting to feed poor-quality food, poor-quality treats. We’ve all seen things like spates of thefts and things like that of dogs, so people are then thinking, ‘Well, I’ll have a harness that’s really secure. I don’t want my dog being taken’, and then it leads into the whole insurance thing and insuring your dog. So yes, I mean, I suppose it’s just like us, isn’t it? If we spend good money on ourselves on something, we want to look after it, no matter what that may be, and you’re certainly going to do that with your dog.
Sarah Coles: One of the things that’s, sort of, come across from the whole of the retail sector really is that the costs are rising in terms of your purchasing. Are you having to change the way that you source products?
Richard Lambert: We’ve gone through a period of change this last two years, I would say, on probably 20% to 30% of our products. We deal with a number of suppliers, who we very much value our relationships with, and we understand that the cost of raw materials has gone up with some of our products in the food sector. We have certainly changed the way that we buy from some of our suppliers when it comes to things like training treats and chews and things like this, where if there’s been a bulk purchase offer on, we’ve certainly tried to take advantage of that to try and maintain our wholesale prices that we’re purchasing at because we don’t want to get into this pattern of where we’re constantly raising prices. We try to, obviously, offer the best value we can do but certain products have had rises and we have had to pass those on to the consumer but when you’re searching for products and you’re searching for suppliers, it’s not just the price of the product that you’ve got to take into account. The cost of a container from Europe is now almost three times more expensive than it was last January. Even if you can source the product at a good price, all of the shipping and everything else has also risen, as well as the actual product itself.
Susannah Streeter: So, very challenging, and is it changing the ranges that you stock? I suppose you’ve also got to take into account this change in tastes, as you mentioned, this demand for more of the luxury ranges as well.
Richard Lambert: Just like humans, dogs are so, so, so fickle in either what each dog likes or different breeds having perhaps allergies to certain proteins. So, we offer still a very, very, very large spectrum of items.
Sarah Coles: You have a, sort of, manufacturing side of your business as well, so how have you dealt with rising costs in that side of things?
Richard Lambert: It’s difficult. I’m not the only employer in the UK who’s seen a large increase to their wage bill in the last period of a year to eighteen months. We’re also seeing National Insurance hikes. We run freezers 24 hours a day, 7 days a week for storing of raw dog food, which has to remain frozen all the time, which our electricity bill is now 40% higher. We’ve gone through similar issues, obviously, we all saw the issues that happened around the financial crisis in 2008, 2009. We’re going to pass on costs where we really desperately have to but if we don’t have to, we’re prepared to ride these things out and to allow things to get back more onto an even keel, which may take a year, eighteen months. We may continue to still turn good numbers over but it can have an effect on your profit margins.
Susannah Streeter: Yes, we’ll just have to see what happens but in the meantime, interesting that you say that pets are so fickle. Do you think that we’ve really seen this growth of the humanisation of pets and do you think this will provide a bit of a tailwind?
Richard Lambert: People are still going out and buying dogs. I don’t see a drop in the number of dogs in the UK. I think it’s going to continue and continue and continue but the care that they’re being offered is just a better quality because people are more aware and I think that there’s much more good knowledge and advice out there, whether it be through blogs or forums or whatever it is on the Internet, and people want to do their best by their animal. As much as I see a small bump in the road at the moment, it’s going to continue to be a strong sector because it’s not about wants, it’s about needs. You need to feed your animal. You need to have it groomed. You need to take it to the vet’s. It needs to have its booster injections.
Sarah Coles: In terms of, sort of, some of the changes that happened during the pandemic, obviously we saw lots of growth in things like buying things online and, sort of, out of town shopping. Are those the sorts of things that affect pet sales as well, or is it something about the experience of coming to a pet shop that’s different?
Richard Lambert: Well, we’re a multi-channel retailer, so we have a bricks and mortar store, we have a, sort of, warehouse, bricks and mortar store where we do some of our production, we also have a large presence online with our own website and with Amazon, and they’ve all seen large growth during the pandemic, when everybody decided now was the time to take the plunge and get their first dog or other dogs. There are people who, once they’ve purchased online and had a good experience online, they will happily shop that way, whereas you are going to have those people who really want to come in store and like that interaction. They like to come and meet us. They like to come and spend some time and get some advice on how they’re feeding maybe or different things that they can try in their dog’s diet or behavioural issues or all these different things, whereas you have customers, for instance, our Amazon customers, who just want to go on their mobile phone, buy a product and then they’re not bothered, the fact that they don’t get to talk to anybody about it. So, being multi-channel, there are different patterns. So, our customer base in our store, it’s the same people week in, week out. Internet, not quite as much, you might have a larger customer base and they’ll buy slightly less often, and then something a little bit faceless, like Amazon, where someone might buy from you twice a year. So, there’s lots of variation in the way that people buy in whatever channel they come to buy from you.
Susannah Streeter: Do you think this means that it’s even more important that you have your own USP, that you can offer something that perhaps the Amazons of this world don’t?
Richard Lambert: I think that’s a definite thing. What I would say, from our point of view, is that I suppose we developed a USP based on Amazon because we solely retailed on Amazon at the start and we became aware that our customers bought from Amazon because (a) the delivery was nice and fast, (b) their customer service is absolutely superb. So, we kind of took that when we started retailing online and then opened a little bricks and mortar store that, do you know what? We are going to have a USP that is absolutely superb, nice, fast delivery and then we’re going to develop another USP that’s going to be really, really, really high quality products and then the next thing we’re going to go for is we’re going to offer absolutely amazing customer service in-store when it comes to the point of advice and knowledge. So, really well-trained staff, staff who are happy to spend half-an-hour, 45 minutes in-store with a customer. With staff being your biggest expense within a business, a lot of retailers don’t want a member of staff tied up for a period of time dealing with X, Y or Z, and certainly in my experience in some stores I go in, but we’re more than happy to do that. We’ll work with you for your dog because we’re not interested in just being sales people because that dog is not with you for this week or this month, like buying a new dress or a pair of trainers that are worn out in six months, or what have you. That dog is going to be with you for six, eight, ten, twelve years and it’s about forming a relationship with that customer and with that dog. We completely and utterly adore all of our customer’s pets when they bring them into store and it’s the best part of the day and we want a relationship with them and we just see people returning time after time, after time and hopefully it’s because we’ve been able to create a USP but part of it actually, yes, is derived off the big thing that is Amazon that actually a number of people hate but they do have a superb USP because we all know what their USP is and we have tried to copy it a little bit.
Susannah Streeter: Interesting to find out how you’re trying to keep your customer’s tails wagging as well as their pets themselves. So, thank you so much, Richard, it’s been really fascinating to hear all about your business.
Richard Lambert: Thank you so much. It’s been a pleasure.
Susannah Streeter: Clearly the UK’s reputation as a pet-loving nation is keeping the industry really busy, even now. So, it’s time to bring in Sophie Lund-Yates, our lead equity analyst here at Hargreaves Lansdown. Sophie, you’ve been looking at some of the listed companies operating in the sector, we can’t not talk about Pets At Home, can we?
Sophie Lund-Yates: This one doesn’t need too much introduction. It’s the pet store chain with almost 460 shops throughout the UK. The pet boom during the pandemic meant pets did very well, even as things were uncertain all those new puppies and kittens needed their supplies. Now, as these animals grow they become long-term sources of repeating revenue and that is something I know only too well being one of the millions of people that got a pet during lockdown. Now, what’s very interesting with Pets At Home is its hybrid approach. 41% of its omnichannel revenue involves input from a physical store colleague. So, think of that in terms of things like click and collect or ordering something in-store. Now, 57% of the group’s shops also have a vet practice or grooming salon, offering services in this way is a really great way to encourage repeat custom and massively increases cross-selling. That’s also true of Pets At Home’s VIP club membership with its millions of users more likely to shop across more than one of the group’s channels. You know, I can’t knock momentum but there are some things it’s quite prudent to mention. The group’s valuation shows that the market has high hopes for the group but that does also mean that there’s more pressure to perform and keeping up with the market’s expectations, it is a tough ask at the moment. Pet spending is more resilient than other forms of spend, you know, we’re going to keep feeding our dogs no matter what happens. The customers are more likely to rein in spending on accessories and extras, don’t tell my dog. I think it’s likely that Pets At Home’s margins are going to come under some pressure.
Susannah Streeter: We talked about the importance of the vet sector to the whole industry, so tell me a bit about CVS Group.
Sophie Lund-Yates: Yes, from a pet superstore to a vet group, CVS Group has over 500 veterinary practices across the UK, Ireland and the Netherlands, plus a handful of diagnostic laboratories and pet crematoria. They’re supported by the rapidly growing Animed, which is an online veterinary pharmacy and as we shift to a more kind of digital world there’s reason to think this division will only build scale and become more profitable. Offering services across, you know, the broad spectrum of pet needs helps CVS capture as much revenue from owners as possible. Now, this does also feed into another point similar to what I said about Pets At Home which is that cats and dogs go to the vets more than once in their life, especially for all the worriers out there like me. On a business level that equates to reliable revenue, especially as all the lockdown animals age, which is a morbid way to look at things but is true nonetheless. Now, CVS Group’s valuation has reduced from the very frothy days of a few months ago, that means there’s more breathing room from the market’s perspective, although as ever nothing is guaranteed.
Susannah Streeter: Finally, what’s your take on Nestlé?
Sophie Lund-Yates: So, Nestlé is known for making KitKats and coffee so our listeners are probably wondering why I’m talking about it on a pets episode. The reality is that Nestlé is responsible for Purina PetCare whose products saw revenue rise by double digits last year. Now, what I think is interesting and a potential kind of growth lever of the longer term is the rising success of the group’s scientific and vet products. As the world becomes more pet obsessed and all these new millennial owners continue to humanise their furry friends, spending more on specialist food is a trend that should progress. Of course in the immediate term, particularly with inflation biting, this may not play out fully. The larger contributor, perhaps unsurprisingly, to Nestlé’s organic growth tends to be its coffee products. It looks after Starbucks at Home drinks too. As an option that offers exposure to the booming pet trade while offering other goods, Nestlé is an interesting one. I also now really want a KitKat, so I’ll leave it there and go and grab one.
Susannah Streeter: Thanks very much, Sophie. So, it does look as though demand is holding up at least in some areas. You’re listening to Switch Your Money ON from Hargreaves Lansdown and if you’re enjoying this podcast, please do let us know what you think and do subscribe wherever you get your podcasts but now I’d like to bring in Emma Wall, our Head of Investment, Research and Analysis here at Hargreaves Lansdown, and she’s been talking to Dan Green, co-manager of Franklin Templeton UK mid-cap fund.
Emma Wall: Hi Dan.
Dan Green: Hi Emma.
Emma Wall: So, I’m going to kick-off with a really important question. Is spending money on your pets discretionary or staple when it comes to how you might think about a stock?
Dan Green: Yes, that’s, yes, a really interesting question. We own Pets At Home within the mid cap fund and I think quite a lot of pet owners wouldn’t see it as discretionary. When you look at Pets At Home as a business, a third of their earnings come from the vets side, so it can be argued that that’s not discretionary. If your pet needs to go to the vet, you take them to the vet and then on the retail side over 50% of its sales are food, again non-discretionary, but and also as well other consumables, about 25%, whether that’s hay for your rabbits or litter for your cats, so other things you need to keep replacing. So, 25% of what they sell are accessories, so these can be described as a bit more discretionary but I think what we’ve seen in this trend over the past couple of decades is the humanisation of pets and people willing to spend more and more on their pets, so whether or not that’s a luxury dog basket or making sure they’ve got the latest toy. People may pull back a bit in this area but in the main spending on pets I would say is pretty non-discretionary.
Emma Wall: The reason I ask is because I think most forecasters are in agreement that next year growth, economic growth, is going to be muted at best. Many are pricing in a recession, so when it comes to stock selection either as an individual investor, or indeed a professional investor like you, are you thinking about where people are going to be spending their money? Not just on their pets but in general, the stuff that gets cut when money is tight is probably going to get cut in the next eighteen months, isn’t it?
Dan Green: Yes, absolutely. The consumer is facing a really challenging time and no wonder you’re seeing consumer confidence at the lowest levels we’ve seen since 2008 since the Financial Crisis. We’re looking at companies that probably are more resilient, even though they’re kind of classed as consumer discretionary and so we’ve got a couple of stocks in the portfolio, the likes of Games Workshop which is a global leader in table top gaming, sort of the hobby market. Going back as an investor you try to look back at history and the quote attributed to Mark Twain, ‘History doesn’t repeat itself but it often rhymes.’ So, we as a team are looking at what happened during the last recession, what happened during 2008, 2009? Where did spending get cut? Where was it a little bit more resilient? Hobbies generally are more resilient, not completely immune. Sales for Games Workshop did hold up in the Financial Crisis. It was a much smaller business at the time but for those that love playing Warhammer or just collecting the figurines and they’re quite fanatical about it. So, I think, kind of, the low ticket purchases like this will continue. We’ve also got Watches of Switzerland in there, so at the higher end. The likes of Rolex or Patek Philippe. This consumer is probably a bit more protected from utility cost increases, from other rises and also as well the supply demand dynamics within the luxury watch market mean that many of these have got a waiting list for many years. So, while we’re looking at these consumer discretionary stocks, I think you can’t make a generalisation.
Emma Wall: What about the stuff that does get cut back? I’m not just thinking about products themselves but also, sort of, services. It’s obviously been a very difficult couple of years for leisure and entertainment industry, you know, is this going to be another difficult couple of years for a slightly different reason, recession rather than pandemic this time but what does it mean for things like pubs, restaurants, cinemas?
Dan Green: I think there’s a bit of a pent up demand that we’ve had since the pandemic, people wanting to go out, people wanting to spend on leisure activities, people wanting to spend on holidays, so it has held up pretty well so far. It’s a bit of a mixed picture, so you look at the likes of a Wetherspoons which is seeing their sales haven’t quite got back to pre-pandemic levels but then a more premium offering like Youngs is seeing sales, sort of, 20% above. Again, different areas of the consumer, probably different demographics that they’re appealing to in terms of their customer base. You’ve seen recently that Netflix reported in terms of their subscriber numbers going down, so people are probably looking at their outgoings at the moment and thinking, ‘Maybe I’ve got one or two subscription services that I don’t need anymore,’ and starting to cut costs there. Deliveroo also reported that their growth was down, people cutting back on delivery of takeaways. We are seeing people cut back but, again, parts of the consumer, the top deciles will have a lot of excess savings that they’ve built over the pandemic which maybe are to cushion some of the decrease that they have in discretionary spending over the next couple of years. There’s definitely the demand out there, people want to go out, people want to go to restaurants, people want to go to the cinema and there’s that pent up demand. So, hopefully that will see them through but there are clear areas, people on lower incomes will be feeling this a lot harder than those consumers at the top end.
Emma Wall: Dan, thank you very much.
Dan Green: Thank you.
Susannah Streeter: Well, that was Emma Wall, our Head of Investment Research and Analysis at Hargreaves Lansdown talking to Dan Green, co-manager the Franklin Templeton UK mid-cap fund and that interview was recorded on the 20th July 2022. Please bear in mind that these are the views of the fund manager and are not individual stock recommendations.
Now though it’s time for the quiz and Sarah, your dog has been surprisingly quiet so far so perhaps talk of walkies will perk her up.
Sarah Coles: Oh, blimey. Don’t mention the W word. She’s a Spaniel so she actually does know what that word means so we can’t even spell it out anymore because she now recognises that it means exactly the same thing.
Susannah Streeter: It’s always tough when you’re outwitted by your own pet. Okay, Sarah, my first question is how far does the average dog walker walk their pets in a year? Is it 500 miles, 750 miles or 1,000 miles?
Sarah Coles: That definitely depends on the dog. So, Matty, who’s my dog, she come back from a massive walk and she’s just ready to go again but I do know a bulldog who doesn’t like to go beyond the end of his garden. I’m going to go down the middle and say 750 miles.
Susannah Streeter: You are right. It is roughly the equivalent of the distance from Plymouth to John o’ Groats. That’s according to a survey by the Ordnance Survey and it’s found that on average in Britain dogs are taken out for a walk six times a week with each trip lasting about 48 minutes. So, there we go. Now, we’ve talked about the number of dogs and cats we own earlier on in the podcast but what about rabbits? How many pet rabbits do you think there are in UK homes? Is it 500,000, 1 million or 5 million?
Sarah Coles: Well, I suppose one thing we all know about rabbits is that they breed like rabbits, so I’m going to go for the top one. 5 million.
Susannah Streeter: No, it’s actually 1.1 million. That’s according to Pet Keen. Another 330,000 rabbits were acquired over the past two years and now 2% of UK adults own a rabbit and in the US as well they’re the third most popular pet after dogs and cats. The average cost of a pet rabbit also increased during the pandemic and lockdowns by around 17%, so it’ll set you back on average £50 but if you take into account all the supplies a pet rabbit could potentially cost you in excess of £1,000 annually. That’s according to the Vet Times, so nothing is cheap, is it? Okay, moving onto pet food. Now, I know plenty of pampered pets who are spoilt rotten and treated with grilled fish and prawns but, as we know, tinned and pouched pet food is a huge business but I want you to tell me when was the first commercial cat food sold here in the UK? Was it in 1800, in 1860 or in 1930?
Sarah Coles: I haven’t a clue. Do you know, I have a vague notion that Victorian cats largely ate mice but that might just mean I’ve read too many children stories but it can’t be that early, so I’ll go for 1930.
Susannah Streeter: No, it was earlier than that. The first commercial cat food was sold in London from 1860 by the American entrepreneur, James Spratt. His Spratt’s patent cat food was filled, according to the company’s many advertisements, with ‘nourishing meat fibrine sourced from North American buffalo’. Now, that disrupted the pet food industry, which at that time was dominated by so-called ‘cats meat men’ who wondered the streets of London selling door-to-door and there were 1,000 cat meat sellers in London in 1861 serving around 300,000 cats. They sold mostly horse meat and these sellers remained quite a common site in London into the 20th Century, both street hawkers and those better off vendors who could open their own shops. So, there we are, pet food, the great disruptor. Okay, we’ll finish with royal pets, Sarah. Over the years the Queen has been well-known for having Corgis but which of these odd facts about the dogs is true? Do they each have their own butler? Do they have their meals prepared by a chef or did the Queen even take a Corgi on her honeymoon with her?
Sarah Coles: Well, I think all dog owners are a bit bonkers about their dog, so if I had the money the Queen has I can imagine considering all those perfectly reasonable things to do but do they have their own chef?
Susannah Streeter: You’re right in a way, it was all of them and as a non dog owner they sound completely ridiculous, so I had to put them in.
Sarah Coles: I don’t know, I think you wait. I think come back next time and you will have adopted a bunch of Corgis.
Susannah Streeter: I can’t see it but you never know.
Well, that’s all from us for this time but before we go we do need to remind you that this was recorded on the 22nd July 2022 and all information was correct at the time of recording.
Sarah Coles: Nothing in this podcast is personal advice, you should seek advice if you’re not sure what’s right for you. Investments rise and fall in value so you could get back less than you invest, past performance isn’t a guide to the future.
Susannah Streeter: Yes, this is not advice or a recommendation to buy, sell or hold any investment and no view is given on the present or future value, or price of any investment and investors should form their own views on any proposed investment.
Sarah Coles: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place including dealing restrictions, physical and information barriers to manage potential conflicts of interest presented by such dealing.
Sarah Coles: You can see our full non-independent research disclosure on our website for more information. So, all that’s left is me to thank our guests, Richard, Dan, Sophie, Emma and our producer, Elizabeth Hotson.
Susannah Streeter: Thank you so much for listening. We’ll be back again soon, goodbye.
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