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Pet Care in Chile

Industry Overview | 16 Jul 2015

EXECUTIVE SUMMARY Strong pet humanisation trend boosts sales in food and Other pet products Despite the onset of a deceleration in the economy and GDP growth in Chile at the end of 2014, historically low unemployment and a strong pet humanisation trend in the Chilean public continued to fuel pet care current value growth in Chile in 2014. Chileans increasingly feel comfortable treating their pets to not only higher quality food but also snacks and accessories as pet humanisation was helped by wide and constant media coverage of government campaigns fighting street dog population through encouraging the public to act in a more responsible way with their pets, as well as coverage of animal rights issues. Rising demand prompted investment in the market by both domestic and multinational firms as these players try to exploit the growth. In addition, the percentage of Chileans that serve prepared food to their pets instead of table scraps continues to grow. Furthermore, demographic and lifestyle changes fuelled pet population growth as young professionals are increasingly postponing having children to focus on their careers. Mid-priced and premium players take share from economy players Manufacturers of economy brands continued to suffer from the premiumisation trend in Chile. The value share of dog and cat food in the cheapest price segment declined since 2006 and is not expected to recover in the near future. The trend is especially dangerous to manufacturers that have a large portion of their brands within the economy price band. Nevertheless, there is a way to maintain or increase sales share based on innovation and marketing. While multinationals were ready for the surge in demand for mid-priced and premium products, domestic companies had to evolve. As of 2015, results are mixed. For example, Champion struggled but both Cannes and Nutripro were able to reformulate their strategies as well as their products in order to adapt to the new reality. Rapidly-changing lifestyles and urbanisation determine consumer pet preferences Rising urbanisation, increasingly busy lifestyles and demographic trends such as shrinking household sizes bolstered the development and evolution of Chilean pet care. Premium segment food and small pets continued to record fast total volume and current value sales growth in 2014. While this was partly due to the increasing demand for small pets due to space constraints, full time employment and urban lifestyle meant less time to dedicate to care, determining a preference for pets that can stay long hours alone, such as cats. Chileans are also spending more on pets such as small mammals or fish as they make good first pets for families with young children in an urban context. Furthermore, smaller breeds of dogs are increasingly preferred over larger ones while the cat population is growing more quickly than the dog population. Nutripro maintains its position as the leading player within a growing pet care market Nutripro continued to lead pet care in Chile in 2013. The locally-owned

company was able to navigate an evolving market that increasingly prefers higher quality and value added products as well as new product developments and innovations. The company has an early mover advantage in key areas as well as an extensive distribution network and a longstanding reputation for offering a range of products at competitive prices. Sustained investment in innovation as well as highly effective marketing activities helped to ensure that Nutripro remained Chile’s leading pet care player. Moderate but healthy growth expected despite economic deceleration cycle The outlook for pet care in Chile is positive. However, the economic slowdown which is expected to hamper GDP growth until 2017 in Chile will dampen the potential dynamic growth and moderate growth seen over the review period. At the same time, social and demographic trends will be factors behind the growing pet population, such as pet humanisation and new lifestyles, and therefore space for healthy growth is still expected. At constant 2015 prices, growth is projected to be slower than over the review period, mainly due to increasing price competition. Rates will remain positive, however, as the humanisation trend continues to bolster demand for higher quality and more expensive products that can improve the health and happiness of pets. Innovation and increased investment in promotional activities will also help to sustain the positive development of the entire market.

KEY TRENDS AND DEVELOPMENTS Number of smaller pets continues to grow rapidly amid changing demographics and lifestyles Increasing urbanisation in Chile is leading consumers to re-think the care a pet might need. Smaller pets such as small breed dogs, cats and small mammals are on the rise in the country. Urbanised Chileans who have pets must weigh factors such as space, longer working hours, apartment buildings and condominium rules, and awareness of the pets’ best interests in order not to suffer from their owners’ busy lifestyle. Therefore, more Chilean pet-owning decisions are influenced by avoiding pets that will require constant timeconsuming care and can adapt to smaller urban spaces with dwindling large green areas. For example, cat pet population is growing faster than dog pet population as the former require less space and exercise than dogs and are thus much better suited to living in small urban apartments. Moreover, cats are much more independent if left at home alone for long periods while their owners are at work or out. Healthy growth in the pet cat population along with pet humanisation trend remained the most important factors underpinning the positive development of cat food in 2014. Consumer lifestyles in Chile became increasingly hectic in recent years and, in line with on-going urbanisation, living spaces were becoming more confined. Nevertheless, aspirational Chileans continue to want the whole experience and the family pet is very much a part of this. Small urban apartments, however, are not the ideal living space for large dogs. Traditionally, Chileans lived in houses in mostly residential areas and the traditional breed of choice, a German Shepherd, was used equally as a security device as much as a companion for the family. The dog would be fed table scraps, bones or an economy brand prepared dog food bought in bulk and would sleep outside in

some type of basic kennel or dog house. The current profile of an average pet in Chile in 2014 is very different from this. Among dog owners, for example, there is a growing preference for smaller breeds, with the small dog population increasing at a faster rate than both the medium and large dog populations. As Chileans are increasingly living in more urban areas, they are finding security in high rise apartments instead of German Shepherds. Similarly, the pet cat population is growing faster than the total pet dog population. The fact that cats require less space and exercise than dogs makes them better suited to urban living. Moreover, since cats are much more independent than dogs, they are less likely to become depressed or anxious and engage in destructive behaviour if left home alone for long periods while their owners are at work. Table scraps and economy brand pet food are increasingly being replaced with mid-priced dog products that are specifically developed to provide optimal nutritional benefits for smaller breeds. Moreover, the increasing popularity of small breeds continues to support strong growth in wet dog food volume sales as small dogs, particularly so-called “toy breeds” like Bichons and Chihuahuas, are more likely to be given wet food than dry food. This evolution also prompted growth in other pet products such as grooming items like shampoo as well as an increased awareness of flea and tick treatments as these pets will spend much of their lives inside. Outlook Over the forecast period, increasingly busy lifestyles and rising urbanisation will continue to see Chileans favour smaller pets that are easy to care for. Demographic trends such as population ageing and the rise in the number of single-person households will also help to sustain the general preference for smaller, less demanding pets. Accordingly, the small dog population is expected to grow much faster than both the medium and large dog populations while growth of cat and other pet populations will outpace the growth of the total pet dog population. As total dog food volume is expected to be undermined by preference of smaller dog breeds that eat less, growth of 2015 constant value sales will continue to be bolstered by rising demand for more advanced products that are specially developed for smaller breeds, age, and diet specific needs. Cat food and other pet food meanwhile are both expected to show robust growth in volume sales as busier lifestyles, urbanisation and related trends encourage more Chileans to keep cats, birds, fish, small mammals or reptiles instead of dogs. Steady growth in the cat and other pet populations will also strengthen demand for related pet products like cat litter, aquariums, cages etc. In addition, the launch of new treats products is expected as small dogs and cats are among the pets most likely to be treated like human children and frequently spoiled or pampered by their owners. As more Chileans opt to keep birds, fish, small mammals and reptiles, other pet food should also witness the launch of higher quality products that offer optimum nutritional benefits for specific pet types or breeds. At the same time, other pet food manufacturers will work to develop new products and packaging formats that provide greater convenience for owners. Product innovation drives value and is crucial to attract consumer

demand Intense competition and the consolidation of the premiumisation trend over the review period saw manufacturers expand and diversify their portfolios via the launch of specialist and added value products for customers who are increasingly informed and aware of their pets’ health needs and at the same time are more sophisticated in their purchase decisions. This is underpinned by a pet humanisation trend and consumers who are much more willing to spend more on pet care in return for better quality. New product developments continued to be most evident in dog and cat food, where ways to spoils and pamper the pets through food products was the main platform for innovation. Most notably, several companies introduced treats and mixers in new premiumised packaging both flexible and in tin cans. Companies also introduced new health and wellness products, such as fortified/functional foods that offered advanced nutrition and health benefits for specific breeds, animals of different sizes or at different life stages, pets suffering from common ailments such as allergies, indigestion, bone and joint problems etc. In particular, many companies focused on introducing new products that were specially developed to improve the health of senior dogs and cats as life expectancy rates for these animals improved in recent years due to better public education about pet healthcare and advances in veterinary science. Similarly, dog food saw the launch of several new products specifically for smaller breeds, which are proving increasingly popular in Chile due to rising urbanisation. At the same time, dog and cat food also witnessed greater variety in terms of product flavours and textures. One of the most visible trends in this respect was the growing availability of gourmet-style products made from high quality ingredients. In addition, popular Chilean dishes and flavours were introduced. Chilean pets have the same tastes as their owners. For example, cats in the US prefer tuna while in Chile they prefer salmon. Similarly, dogs in the US prefer BBQ while in Chile they prefer carne mechada. Another notable trend in this regard was the launch of economy and mid-priced dry dog and cat food products with water-activated sauces. Along with food, demand for other pet products constituted a factor of innovation for traditional pet ownership in Chile. For example, non-essential accessories and items like toys and games, special collars, better beds, premium food and water bowls/bottles, clothing, beauty and grooming products for pets are enjoying increasing sales which reflect a search of sophistication by Chilean owners. Demand for such non-essential products was particularly strong among owners of dogs and cats. This was partly because these animals are more likely to be “humanised” than other types of pets, meaning they are more likely to be pampered and treated like family members. New product developments and improvements in quality standards for these products also contributed to their positive performance. Outlook Increasing competition, a strong pet humanisation trend and more informed consumers will sustain the trend of greater innovation in Chilean pet care over the forecast period. As was the case during the review period, segmentation will be most visible in dog and cat food, where health and wellness will remain

a focal point for companies seeking to achieve differentiation via new product development. Mid-priced dog and cat food in particular is likely to witness the launch of several new breed and age-specific products as well as products that reduce the risk or alleviate the symptoms of common health problems like obesity, indigestion, allergies etc. Most notably, companies are expected to launch more mid-priced products that were specially developed to provide optimal benefits for senior dogs and cats and small dog breeds. Segmentation will also be increasingly evident in economy dog and cat food, although the trend will remain strongest in the premium and mid-priced segments. It will become increasingly difficult for standard “one size fits all” products to compete in dog and cat food. For example, some companies may seek to distinguish their dog and cat food brands by using more natural or functional ingredients and fewer artificial additives and preservatives. Manufacturers of health-oriented or breed- and age-specific products are also likely to invest in new marketing campaigns that directly target breeders’ clubs and members of online forums dedicated to particular types of dogs and cats. At the same time, dog and cat food companies will work to improve distribution of such products via specialist channels like veterinary clinics and pet shops. Traditional grocery retailers channel continues to be a factor in overall market Other grocery retailers traditionally dominated pet care distribution in Chile. The channel consists of traditional grocery retailers that sell a variety of products from alcohol to packaged food and fresh commodities to pet food. These retailers are usually located within walking distance from consumers’ homes and allow them to purchase pet food loosely, which is traditionally viewed as an advantage because it can be bought more cheaply. For example, the retailer will purchase a few very large bags of economy and mid-priced brands and then sell it by the kilogram or less. Consumers appreciate this option as they integrate their pets’ food in their local grocery daily or weekly shopping, resulting in traditional grocery retailers accounting for half of sales. However, during the review period, modern grocery retailers such as supermarkets and hypermarkets saw increase in share due to the introduction of various packaging sizes, thus also offering consumers a cheaper alternative. Gains for modern grocery retailers were also partly due to the opening of new outlets, particularly within lower and middle class neighbourhoods, the stronghold for traditional grocery retailers. Along with modern grocery retailers, non-grocery retailer channels such as home improvement and garden centres, established pet shops and veterinary clinics gained share in pet care sales, as operators continued to expand their assortment of products and services. Many home improvement and garden centre outlets, for instance, moved beyond carrying basic dog and cat food assortments to offer broader selections of other pet food and pet products, as well as various types of pets (dogs, cats, birds, fish etc) and related services like pet grooming. Premium brands such as Royal Canin (Royal Canin Chile) and Eukanuba (Procter & Gamble Ltda) were heavily marketed via veterinary clinics, with recommendations from veterinarians helping to strengthen demand for both brands. Outlook

Increasing consumer exposure to innovative specialist and premium pet care products both via non-grocery retailer channels and via modern grocery retailers will help to strengthen the pet humanisation trend in Chile. However, as modern grocery retail channel distribution is well developed by the main players in pet care products, leading manufacturers are likely to look to develop closer relationships with pet shops, home improvement and garden centres and veterinary clinics operators, while also increasing investment in marketing campaigns and new product developments specifically for these channels. At the same time, leading pet shops and home improvement and garden centres chains are expected to invest in the expansion of their private label pet care ranges, focusing in particular on the development of more advanced dog and cat food products that offer optimal benefits for different breeds, pets at different life stages etc. Innovation, segmentation and increasing competition for shelf space in non-grocery retailers channel will in turn help to sustain the positive development of overall pet care in the medium term. It is expected that non-grocery retailers will make further value share gains at the expense of modern grocery retailers and traditional grocery retailers in pet care distribution over the forecast period. Gains for non-grocery retailers will continue to be underpinned by the opening of new pet shops, home improvement and garden centres and veterinary clinic outlets, especially chained outlets with the capacity to offer greater variety, lower prices and added value or related services. Promotional activities and the expansion of product ranges by established operators in these channels will also drive value share gains. Nevertheless, traditional other grocery retailers have the advantage of close presence in small neighbourhoods and less immediate cost for consumers as they sell pet food loosely by the kilogram or less, and are expected to maintain a sizeable share of the market over the forecast period.