In August this year, the Asia Pet Expo in Shanghai set a new record in scale, with nearly 30,000 brands participating, and over 40% of them being first-time exhibitors. Against the backdrop of economic downturn and declining birth rates, the pet industry has emerged as a resilient and growing sector in consumer markets.
亚宠展
Not long ago, Gambol（乖宝宠物） made its debut on the Shenzhen Stock Exchange, briefly setting an IPO record for the pet industry, reigniting enthusiasm within the field. As a dominant force in the pet market, how can pet food companies transform themselves from traditional processing and export-oriented industries to participate in global competition with a fresh approach? In a market crowded with multinational giants, how can Chinese pet food industry leaders and newcomers break through? This article will provide an in-depth review and outlook on the journey of pet food going global.
Pet food is the largest segment within the pet industry, with the Chinese pet food market accounting for approximately 50.70% of the overall pet industry's size. As of August 2023, there are four pet food companies listed on the A-share market, including China Pet Foods（中宠股份）, Peidi（佩蒂股份）, Luscious（路斯股份）, and Gambol, all of which have international business operations. Additionally, the Shenzhen Stock Exchange-listed company, Tianyuan Pet, has also ventured into related businesses. These companies operate their businesses in the form of "self-owned brands + contract manufacturing." Companies such as Nature Bridge（比瑞吉）, Care Pet Food（好主人）, Fubei（福贝宠物）, Zhongheng Pet（中恒宠物）, and Seek Pet（帅克宠物）have also disclosedtheir intentions to go public.
Looking at the financial data from 2022, it can be observed that the overseas revenue ratios of these listed pet food companies range from 40% to 90%. Notably, Peidi's overseas revenue ratio is as high as 84.10%, amounting to CNY 1.456 billion ; China Pet Foods' overseas revenue ratio stands at 75.88%, totaling CNY 1.590 billion ; Luscious's overseas revenue ratio reaches 65.78%, with revenue of CNY 222 million ; while Gambol has the lowest overseas revenue ratio at 39.65%, equivalent to CNY 1.347 billion .
Currently, the primary destination for A-share pet food companies' overseas expansion is North America and Europe. Gambol' revenue from the U.S. market once accounted for as much as 79.56% of the company's overseas income. According to a report by Grand View Research, North America held a 43.11% share of the global pet food market in 2022, making it the largest in the world. Europe followed with a 27% share.
Chinese pet food companies exhibit strong regional distribution characteristics, with a concentration in Shandong and Hebei provinces. According to the "2022 Panorama of Big Data for Chinese Pet Food Enterprises," as of the end of August 2022, there were a total of 850 pet food companies in Shandong and 415 in Hebei. These two provinces also lead the nation in pet food-related patent applications, with 71 and 17 companies holding relevant patents, respectively.
Looking at the distribution of pet food companies venturing overseas, Shandong, Zhejiang, Liaoning, and Jiangsu are the primary hubs. Shandong continues to lead the pack, with 82 export-oriented pet food companies, accounting for over 60% of the national total.
Contract manufacturing has been the main business model through which Chinese pet food companies have initially grown, and it remains a significant source of revenue for some companies today. Some companies entered overseas markets through contract manufacturing, expanded their presence in the domestic market, and then diversified by establishing their own brands for both domestic and international business.
Taking Petie, the first pet food company to go public on the A-share market, as an example, Petie used to manufacture high-quality items like dental sticks and chew toys for retail giants and brands such as Walmart, Costco, and Spectrum Brands. Its domestic sales once constituted only around 5%. In contrast, China Pet Foods, which went public in the same year as Petie, primarily produces highly automated retail and main pet food.
The disadvantages of a heavy reliance on contract manufacturing have become increasingly evident as the pet food industry in China matures. Under this model, products tend to be similar, innovation is lacking, and the lion's share of profits goes to overseas customers. As the domestic market gradually develops, Chinese companies are realizing the importance of building their own brands. Leading companies like China Pet Foods initially manufactured pet snacks like chicken jerky for Japanese brand owners. Despite expanding their scale, they faced factors such as trade barriers and thin profit margins. Starting in 2018, China Pet Foods began to establish its own brand, creating a brand matrix centered around "Wanpy"（顽皮）, "Zeal"（真致）and "Toptrees"（领先）.
China's total pet food exports have seen rapid growth since 2012. According to data from 2021, China ranks seventh globally in the export of cat and dog food. However, alongside the significant increase in export volume, the prices of pet food exports have continued to decline, with a 21% drop in average export prices per kilogram in 2021 compared to 2017. This illustrates the need for overseas pet food companies to establish new competitive advantages, as the road to independent innovation and branding remains challenging.
Thanks to their earlier contract manufacturing businesses, China's leading pet food companies have accumulated extensive production experience. They continuously iterate their production techniques and expand their supply chains globally. Simultaneously, some companies, with a long-term perspective, have embarked on the path of fostering their own brands.
R&D Upgrades: Building Core Competencies
A prevalent situation in the Chinese pet food industry is the clustering of companies engaged in contract manufacturing, inevitably leading to severe issues of homogeneity. Recognizing this problem, some pet food companies have begun to increase their research and development (R&D) investments, foster technical innovation, and gradually establish research barriers in foundational areas.
Take Peidi as an example. As one of the top three players in the Chinese pet food industry, Petie's R&D investment is over a dozen times the industry average. To date, they have acquired 32 domestic and international invention patents.
China Pet Foods, on the other hand, established the country's highest-standard pet food R&D center back in 1998, covering new product development, research on pet nutrition and health, and pet testing, among other areas. Their R&D team includes professionals with expertise in food, veterinary science, animal welfare, nutrition, and other related fields. They have also engaged national-level experts from the United States, Germany, Canada, New Zealand, and China as R&D advisors. Financial reports indicate that China Pet Foods' R&D investment in 2022 reached CNY 34 million , representing an 80.17% year-on-year increase. The compound annual growth rate of R&D investment from 2018 to 2021 was 54.45%.
Local Production: Establishing a Global Supply Chain
To better cover the global market and reduce quality issues caused by moisture during shipping, Chinese pet food companies are establishing a global production footprint. Companies such as China Pet Foods, Peidi, Gambol, Luscious, VETRESKA（未卡）, and Tianyuan Pet（天元宠物） have ventured to Europe, North America, Australia, or Southeast Asia to either acquire or collaborate in setting up manufacturing facilities, thereby increasing their localization of production.
In 2015, China Pet Foods invested USD 28 million to establish the largest pet snack factory in the United States, pioneering the move of Chinese pet food companies to set up factories in the U.S. In 2021, China Pet Foods further acquired the New Zealand pet canned food company, PetfoodNZ, and established the PFNZ Pet Food Factory. As of 2022, China Pet Foods has created 20 modern high-end pet food production facilities globally, manufacturing pet dry food, snacks, canned food, wet food, and other products. These facilities are located in various countries, including China, the United States, Germany, Canada, New Zealand, and Cambodia.
Gambol, which recently went public this year, has partnered with major pet food production hubs worldwide, sourcing premium ingredients directly from nine global sources and establishing a production base in Thailand. Peidi has adopted a decentralized production base strategy, with ingredient supply systems and large production facilities spanning countries such as New Zealand, Canada, Vietnam, Cambodia, Uzbekistan, and Malaysia. This approach allows them to source locally while reducing logistics and tariff costs.
Initial Branding Success, But a Long Road Ahead for Branding Abroad
According to Euromonitor statistics, as of 2021, the market share of the Chinese pet food market remains relatively decentralized, with the top ten brands collectively holding approximately 24% of the market. Mars from the United States alone holds around 8%, and Nestlé holds about 2.8%. However, the market share of the top three companies in that year has decreased to 13.1%. This is primarily due to the rise of Chinese domestic brands, which have gained market share from foreign brands.
After decades of development and maturation, the Chinese pet food industry is gradually moving towards branding, professionalism, and standardization. In 2012, only three domestic brands were among the top ten brands in terms of sales in the Chinese pet food market. By 2022, domestic brands have claimed five of the top ten positions. These brands include Nature Bridge,Myfoodie（麦富迪）, PureNatural (伯纳天纯), Wanpy, and Luscious, showing the initial success of efforts to upgrade the pet food industry. Brands like Bile（比乐）， Aibei（爱倍） and Pinzhuo（品卓） launched by Fubei have also achieved relative success. Currently, their own brand revenues account for approximately 40% of the total revenue.
Pet food companies with a global trade background, rooted in the domestic market, are also committed to taking their brands worldwide. Crazy Puppy（疯狂小狗）, a subsidiary of Jijia Pets（吉家宠物）, took the first step in expanding their pet food brand overseas. In May 2018, they registered the "CRAZY PUPPY" brand in the United States and entered the Amazon e-commerce platforms in the United States, Canada, and Mexico. They also initiated a warehousing project in the United States to optimize their product sales strategy in North America. Nevertheless, when faced with stringent food safety standards and intense competition in developed markets, Chinese brands still grapple with the dilemma of low-end brands having no market and high-end brands yielding little profit. Brand expansion overseas still has a long way to go.
Amid the current search for pathways in the pet food industry, the industry's existing problems cannot be underestimated, with the drawbacks of previous extensive development gradually becoming apparent. At present, leading Chinese pet food companies have a high dependency on overseas major customers, which binds their corporate risks to these major customers, making their revenues somewhat passive. A lack of brand recognition is also the biggest challenge for pet food companies as they establish their own brands. Furthermore, some leading companies have encountered setbacks in their journey to go public, with no clear timeline for their IPOs.
Dependency on Overseas Major Clients Highlights Revenue Issues
In the current landscape of the pet food industry, the industry's problems should not be underestimated, as the challenges of previous extensive development are gradually emerging. Currently, leading Chinese pet food companies are facing revenue challenges, with a decline in revenue growth and continuous drops in net profits.
In 2022, China Pet Foods achieved a net profit of CNY 106 million , a year-on-year decrease of 8.38%, marking two consecutive years of decline. In the first quarter of 2023, their revenue fell by 11% to CNY 710 million , with a net profit of CNY 15.66 million , a significant drop of 33.06%. Peidi, on the other hand, experienced a loss in the first quarter of this year, with a net loss of CNY 38 million .
The main reasons for the declining performance of these companies stem from external market adjustments. In the latter half of 2022, European and American brands and retailers entered destocking cycles, significantly reducing their purchases from companies supplying overseas markets over the long term. This led to a reduction in ODM business, resulting in varying degrees of revenue and profit decline.
Despite facing the impact of the pandemic, global economic downturn, and weakened consumer demand, Luscious has experienced significant growth due to its successful expansion in the domestic market. Additionally, the sales of their own brands have made important contributions to the performance of Luscious and Gambol. In contrast to the struggles of China Pet Foods and Peidi, Luscious reported a revenue income of CNY 339 million in the first half of 2023, representing a year-on-year growth of 37.17%. Furthermore, their non-GAAP net profit reached CNY 36.75 million , reflecting a 170% year-on-year increase. During the same period, Gambol achieved an operating income of CNY 2.066 billion , a year-on-year increase of 22.44%, surpassing their full-year revenue in 2020. Their non-GAAP net profit amounted to CNY 204 million , an increase of 51.51% year-on-year.
The performance disparity of leading domestic pet food companies in domestic and international markets reflects the risks of over-dependence on large overseas customers. Continuously diversifying revenue channels will be a key focus for these companies.
Setbacks in Going Public Raise Compliance Concerns for Pet Food Companies
Many Chinese pet food companies in the waiting line for IPOs, including companies like Nature Bridge,Care Pets Food , China Pet Foods, and Seek Pets, have disclosed their plans for going public. However, the road to an IPO is not as smooth as envisioned, with some companies undergoing multiple rounds of the IPO process without success.
On July 8, 2023, the Shanghai Stock Exchange terminated the IPO review of Shanghai Fubei Supplies Co., Ltd., marking the second failed attempt for Fubei. Back in 2019, Fubei had planned to enter the capital market through a collaboration with China Pet Foods. However, the significant asset restructuring between the two companies was announced as terminated in less than half a month. This year, the IPO process for Fubei was once again terminated due to discrepancies between the content of their responses to IPO review inquiries and the factual situation.
Established pet food company Nature Bridge initiated its IPO plans back in 2016. In November 2016, Nature Bridge signed an IPO advisory agreement with CICC（中金公司）. In 2019, according to progress reports on the IPO advisory work disclosed by the Shanghai Supervision Bureau of the China Securities Regulatory Commission, Nature Bridge faced issues concerning third-party payments. To date, Nature Bridge's IPO is still uncertain.
Branding Is a Long-Term Battle: Chinese Companies Need to Grow and Strengthen
Leading pet food companies have accumulated leading technology and production capabilities over the years, primarily due to their contract manufacturing business. However, they are now venturing in different development directions driven by factors such as the trade war, the search for a second growth curve, and the pursuit of emerging markets. Among them, the companies that have chosen the path of branding are going through a long and challenging transformation.
As the world's largest pet market, in 2022, 66% of American households owned pets. The pet food market reached USD 136.8 billion, making it the largest category in the U.S. pet market. American households spent USD 58.1 billion on pet food, a 16.2% year-over-year increase. According to Euromonitor, the concentration of the U.S. pet food industry has remained around 25% in recent years, with market share primarily held by the five major brands: Blue Buffalo, Purina (owned by Mars), Fancy Feast (Nestlé), Pedigree (Nestlé), and Hill's. Mars and Nestlé Purina have a strong global brand presence.
Europe is the world's second-largest pet food market with a market size of approximately USD 31.1 billion in 2022, generating sales of USD 3.11 billion. It is expected to maintain an average annual growth rate of 4.5% from 2023 to 2028. The European pet food market has a high concentration, with Mars and Nestlé Purina holding dominant positions. Local brands such as Agrolimen SA, Vitakraft, Inspired Pet Nutrition, Heristo AG, Focus100, and Bob Martin also play important roles.
Contract manufacturing companies, due to a lack of brand equity, often choose to expose their new brands to highly mature overseas markets through online channels. However, in recent years, customer acquisition costs on platforms like Google, Apple, and Amazon have been increasing, while social media marketing has certain entry barriers. This presents substantial challenges for brand expansion.
Furthermore, traditional companies primarily engaged in contract manufacturing often lack the organizational genes for branding. During the transformation process, they must undergo multiple rounds of organizational adjustments and iterations, testing the company's long-term commitment to brand development. Introducing a brand to overseas markets also involves building and managing a multinational organization, which is not an overnight process.
Under the challenges of long-term investment mentioned above, companies also face the dilemma of limited and gradually shrinking profit margins. Taking China's Central Pet as an example, its overseas business mainly adopts an "order-based production" model. It faces challenges in basic research in canine and feline nutrition, as well as gaps in core formula development, advanced equipment, and state-of-the-art processing when compared to international leading companies. Factors like exchange rates, tariffs, industry cycles, and resource allocation pose complex challenges.
In the face of intense market competition and a continuous influx of new players, the pet food industry will continue to undergo reshuffling in the future. The domestic market will become an even more important growth platform for pet food companies, leading to increased market concentration. In the future, the international expansion of pet food companies will shift gradually from primarily focusing on contract manufacturing to a multi-faceted approach that includes contract manufacturing, supply chain localization, and the development of proprietary brands.
Top-tier Competitive Landscape Gradually Clarifies, Room for Survival in Niche Categories
Currently, the concentration of the Chinese pet food market is only 24%, and due to the diversity of niche categories and a wide range of products, the competitive landscape remains highly fragmented. Even the top player, Mars, only holds a market share of 7.9%. It is estimated that there are over 3,000 pet food brands in the domestic market, with most of the market share being divided among small and medium-sized enterprises.
However, with the influx of capital in recent years, leading pet food companies have successively gone public and expanded their production capacity, leading to a clearer competitive landscape among the top players. These large enterprises have been building strong barriers through economies of scale in procurement, production, and quality control, upgrading their research and development capabilities, and offering refined services. Despite facing periodic fluctuations, their leading positions remain relatively stable, and they are all actively exploring new avenues through diversifying product categories, expanding into new markets, investing in research and development, and developing proprietary brands.
However, outside of the main categories like pet food and snacks, there is still room for new players in niche categories. Take pet health products, for example. As the category with the highest average unit price in the pet market, it has high research and development barriers and low market penetration. Compared to pet food and snacks, it is still a blue ocean, with a growth rate exceeding 25% in 2022. Companies like DearDeal（宠爱）, Chowsing（宠幸）, and PartnerPet（帕特诺尔） have secured multiple rounds of financing in this context. Emerging pet health product company Beizhenbao（倍珍保 was founded in 2019 and, after just four years, entered the mid-to-high-end market through collaborations with Huazhong Agricultural University and the Qingdao Center for Disease Control and Prevention. In 2022, it was also selected as a star brand at the 24th Asia Pet Expo.
Fierce Competition in Mature Markets: Emerging Markets, Including China, Offer New Opportunities for the Industry
Compared to Europe and the Americas, pet food markets in China, Southeast Asia, Latin America, and other regions are still in the developmental stage, providing opportunities for growth and a foothold for new players in related companies. The pet food market in Southeast Asia is currently worth only USD 3.71 billion, with an estimated growth to USD 6.07 billion by 2028, and an expected compound annual growth rate of 8.38% from 2023 to 2028. In contrast, the pet market in Latin America is valued at USD 12.38 billion and is still rapidly expanding. On one hand, the average price of pet food in the Chinese market is continuously rising, while on the other hand, Southeast Asia and Latin America still mainly offer budget-friendly products.
Many leading Chinese pet food companies have also begun to expand their business in these emerging markets. As early as 2013, Peidi established a subsidiary in Vietnam. In 2015, Gambol established a subsidiary in Thailand. In 2020, China Pet Foods invested in and established the largest pet snack factory in Southeast Asia in Cambodia. In July 2023, Luscious also set up a joint venture company in Cambodia, further advancing the company's international business development. Establishing pet food production facilities in Southeast Asia not only takes advantage of the cost-effective local production factors but also has significant value in servicing local markets and serving as a transit hub to Europe and the Americas.
However, emerging markets, compared to mature markets like Europe and the Americas, have issues such as smaller market capacity and lower price points. Latecomer companies can find their foothold in the industry by tapping into orders from emerging markets, but they still have to address challenges like lower profit margins and distribution difficulties. They must also focus on efficient operations across procurement, production, logistics, and warehousing to further reduce costs.
No One-Size-Fits-All Formula for Going Global: Many Paths Lead to Success
For global pet food companies, the challenging times have sparked new thinking: how can they take new strides on the path to internationalization? How can they enhance their position in the global division of labor and become larger and stronger? In the transition from contract manufacturers to truly global brands, Mar's experience in supply chain and distributor management, brand development, and localization remains worth considering.
Mar's former CEO once said, 'For Mars, the most important thing right now is to make the Chinese market the core of all our businesses. China is not one of the key objects, but China is the key.' This philosophy guides Mar's localization efforts in China.
Since entering China in 1993 with its brands Pedigree and Whiskas, Mars has continuously expanded its presence in the Chinese market. To mitigate various risks related to inspections of imported pet food, in 1995, Mars China established its first pet food factory in Huairou, Beijing, with an annual production capacity of around 70,000 tons. In 2008, Mars invested in and established a second pet food factory in Shanghai with an annual production capacity of 80,000 tons. In December 2020, Mars further invested in a new pet food factory in Tianjin.
In addition to localizing its supply chain, Mars has adopted a multi-brand strategy, acquiring and integrating renowned pet food brands and introducing them to the Chinese market. In March 2023, Mars Petcare announced the completion of its acquisition of Canadian pet food champion Champion Petfoods, successfully integrating the popular brands Orijen and Acana, which were previously well-received in the Chinese market, into its own pet food brand portfolio, further solidifying its leading position in the Chinese pet market.
For traditional manufacturing companies, building factories overseas, hiring talent, and promoting brands are all formidable challenges. However, it is these very challenges that can become barriers, and with a resolute strategy and sustained investment, companies may emerge from an industry shake-up, ensuring long-term success. Riding the crest of globalization is a vital mission for the Chinese pet food industry and various other industries in the next ten to twenty years.
China's pet food industry has gone through stages of foreign trade manufacturing, global expansion, and self-branding, accumulating considerable advantages from scratch. The past experience in contract manufacturing has provided valuable insights for the industry's journey towards deep globalization and exploring upstream sectors. Turning history into an asset rather than a burden, shifting our focus from current revenues towards the unpredictable changes in the coming decade. The next 'Mars' that belongs to the world might be currently undergoing challenging trial and error. Let's give enterprises facing the horizon and aiming for the stars and the sea more patience and time.
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