The pet stock bubble
One of the great feel-good stories of early COVID was animal shelter’s emptying out. Bored at home, or inspired by The Secret Life of Pets 2, 23 million American households adopted an animal during the 2020 lockdowns. Reliable pet population data is hard to come by, but a combination of surveys and experts seem to suggest the total number of American pet dogs increased by more than 10% in 2020 and the year-on-year growth in dogs adopted at least doubled. This was a mania, an absolute boom in pet ownership, and it led to Hollywood moments like this:
Shelters weren’t the only part of the animal industry booming. Sitters, walkers, pet insurers, vets, groomers, toy makers, drug makers and food makers all saw their kibble bowls overrun. It was a great time to be in the pet business. And, a great time to be an investor in a pet business:
These stocks absolutely ripped. It’s easy to see why: pets live, on average, ten years. They need to be fed, brushed, belly-rubbed and have their insufferable personal instagrams zealously maintained that whole time. The huge spike in pet adoption wasn’t a one-year bump to revenue, it was a 10+ year bump. It’s hard to imagine a better situation for the pet industry. Take it from Chewy’s CEO at their fiscal year 2020 earnings call:
We've seen a 35% increase in creation of pet profiles for puppies and kittens. And a 40% increase in pet profiles for adoption. I think what makes the category attractive to us, is the fact that pet sales are mostly recurring in consumables and healthcare, and the puppy is going to grow up and eat more food and shred more toys and require greater healthcare needs. And we are here to service all of them. So any kind of impact that we're seeing right now, we do believe, ultimately, there's sustainable momentum.
That’s corporate speak for “oh hell yeah, son.” Being in the pet business in 2020 was like being in the guillotine business in 18th century France. Sometimes business is all about right time, right place. And so, pet stocks rode off into the sunset, making everyone involved a fortune. Right? Right?? Ehh…no.
Pet stocks tanked in 2021 and 2022, giving back all of their 2020 gains. When one stock crashes, it can be for any number of reasons. But when a group of stocks all exposed to the same endmarket engage in a correlated crash, that says something about the endmarket. In this case the big negative surprise was that the pet companies didn’t make as much money as everyone thought they would. What happened to all those pets? What happened to the sustainable momentum? Chewy’s CEO answered that question, obliquely, in 2024:
For the first time since 2022 we observed a positive balance between adoption and relinquishment.
The CEO of the Canadian Pet Valu (PET.CA) made a similarly vague statement:
Our channel checks suggest surrender rates have returned to pre-pandemic levels.
In other words, a lot of those COVID pets seemed to disappear, or at least their owners stopped buying pet related goods & services. Vox has a great article outlining what happened to all the COVID pets: a significant proportion were returned to shelters, abandoned, became quasi-strays or otherwise disappeared. Some people couldn’t handle the behavior issues. Others couldn’t make it work with the drastic lifestyle shift of reopening. Many could no longer afford pets when inflation hit in 2022. Pet executives did not directly address this trend reversal, after all what could they say? Now that lockdowns are ended, our beloved customers are tossing out their pandemic pets like sourdough yeast. Probably not the best PR. Hence the euphemisms like “surrender rates” or “relinquishments.” But their reported financial data supports the Vox article’s argument that pets ownership trends reversed post-COVID. All of this led to a series of way less inspiring headlines:
Surprisingly, publicly available industry data doesn’t corroborate the reversal in pet ownership rates. This AVMA publication, suggests pet ownership was unchanged between 2020 and 2022. This recent NAPHIA survey makes no mention of declining rates. This could be because most of the public data is survey-based. People are probably ashamed to admit, even anonymously, that they weren’t able to take care of their animals. There could also be a lot of street animals, especially cats, who technically belong to an owner, but that owner doesn’t provide anything, i.e., a pet owner who doesn’t buy pet food or services. Or it could be that the providers of this data - like pet insurers and pet food brands - are incentivized to downplay a pet abandonment crisis because it might discourage prospective pet owners (bad for business). Whatever the reason, following the money gives a much clearer answer: the pet market shrank post-COVID. This is a case where publicly reported, audited financial data backs up testimony from industry insiders (like animal shelter owners). The golden age of pet ownership ended far faster than anyone anticipated. That’s the overlap between our money and our world (and the tagline for this newsletter!).
Thanks for reading.