Seizing the "other economy" and entering the era of "collaborative research" in the pet food industry

Despite the significant impact of the epidemic on fast-moving consumer goods last year, the pet race track still achieved high single digit growth. According to the 2022 China Pet Consumption Report, the size of the urban pet (dog and cat) consumption market in China in 2022 was 2706 billion yuan, an increase of 8.7% compared to 2021. Among them, staple foods, snacks, nutritional supplements and other food products are still the main consumer market for pets, with a market share of 50.7%.

At the same time, local pet consumption brands are also accelerating their capitalization, aiming to leverage the power of capital to achieve further development. After Zhongchong Co., Ltd. and Petit Co., Ltd. successively entered the capital market, in March of this year, the application of domestic pet food company Fubei Pet for IPO on the main board of the Shanghai Stock Exchange was accepted. According to the prospectus, Fubei Pet plans to raise 568 million yuan for pet food expansion projects, intelligent warehousing and distribution center construction projects, marketing and management information construction projects, and research and development center construction projects.

The competition among domestic pet food brands has been "internalized" and has continued to invest in research and development. In addition to Fubei Pet, another domestic pet food brand, Weishi, previously announced that the Pet Nutrition Research Institute established in 2021 has invested a total of 80 million yuan. Starting from 2021, Weishi is expected to invest a total of 1.8 billion yuan in the construction of its own factory in the production end.

The ultimate competition for pet food still relies on the supply chain, and it is also a concept of a large supply chain, including factories, raw materials, research and development, sales, and other links. Why do we spend so much energy on research and development now? We hope that it can establish a brand moat in the future. In the view of Wei Shi President Lv Shaojun, the biggest gap between China's pet industry and foreign countries currently lies in the lack of basic research, The development of China's pet industry requires infrastructure, which can lead to more research, more output, and better products.

Compared with mature overseas markets, the concentration of China's pet food industry is still relatively low, while facing problems such as incomplete evaluation systems, lagging standards, and relatively overcapacity. However, in recent years, with the entry and promotion of various types of capital, China's pet food market has ushered in a new pattern. On the one hand, domestic substitution has been accelerating, and on the other hand, many local brands have also begun to exert efforts in pet scientific research, seizing the commanding heights of future pet food market competitions.

The rise of its economy against the trend

With the rapid development of the national economy, the number of pet owners in China has been increasing year by year. According to incomplete statistics, the number of pets in China has exceeded 100 million, and the pet ownership rate has reached 17%. With the continuous increase in pet ownership, the corresponding demand for pet food market has also skyrocketed.

According to Nestle's annual report, despite being plagued by the pandemic last year, China's Greater China region still recorded sales of 5.4 billion Swiss francs, with an organic growth rate of 3.5%. Among them, "From the perspective of product categories, the Purina Pet Food business is the 'largest growth contributor' of the group, mainly derived from its high-end brands Purina PRO PLAN, Purina ONE brand series and Zhenzhi, as well as prescription food products

In terms of the number of pets, China is already the world's largest, with a stock of nearly 120 million pets, and there are still new ones added every year. Last year, due to the pandemic, it may have been affected, but the new number is also close to 7 million, making it the world's largest stock market and the highest incremental market. "Chen Xiaodong, head of Nestle's Prima Pet Food business in Greater China, pointed out.

In the first half of 2022, Forbes Pets, which launched this sprint IPO, recorded revenue of 525 million yuan and a net profit of 95.763 million yuan. Last year, Zhongchong Group (002891. SZ) achieved a revenue of 1.59 billion yuan, a year-on-year increase of 26.42%; The net profit attributable to the parent company was approximately 68295300 yuan, a year-on-year increase of 12.62%. During the same period, Jianhe Group (01112.HK) had a revenue of 1.53 billion yuan in its Pet Nutrition and Care Products (PNC) business last year, a year-on-year increase of 20.9%. Another pet food company, Petit Holdings (300673. SZ), is expected to have a net profit attributable to shareholders of the listed company of 138 million to 175 million yuan during the reporting period, an increase of 129.93 to 191.58% compared to the same period in 2021.

Under the promising market prospects, capital has entered one after another. It is reported that Wei Shi's parent company Shanghai Pet Food Co., Ltd. has received multiple rounds of financing, including Tencent Investment and Singapore Temasek, with a total financing amount of over 1 billion yuan. Fubei Pet also completed nearly 300 million yuan of B-round financing earlier, with financing institutions including Zhongbi Haifu Capital, Shenzhen Venture Capital, Jinding Capital, etc. According to research data from iResearch Consulting, there were a total of 35 financing events in the Chinese pet industry in 2022, 20 financing events for foreign pets, and a total of 5 domestic financing events exceeding one billion yuan.

However, there are also many problems behind the rapid rise of its economy. It is understood that the overall development of China's pet industry has only been about 30 years. Compared with developed countries such as Europe, America, and Japan, China's pet food industry is still small in scale, relatively backward in technology, and severely lacking in research and development capabilities.

At the same time, the competition pattern for domestic pet food is still very scattered, with a market concentration of only 24% in CR10, and the leading market share in Mars is only 7.9%. Pet food alone has thousands of brands, and no mature industry needs so many. "Pet food CR3 in the United States is nearly 40%, while in China, CR3 is only a little over 16%, and the market maturity needs to be improved.

Huachuang Securities Research Report pointed out that in 2022, the pet staple food market accounted for nearly 70% of the pet food market share, which is a key area for domestic and foreign pet food enterprises to compete for. Currently, enterprises represented by Zhongchong, Petty, and Guaibao are accelerating their main grain production capacity layout. Zhongchong and Petty have long-term plans for main grain production capacity of 218000 tons and 120000 tons respectively. Guaibao plans to raise 58500 tons of main grain production capacity based on the current main grain production capacity of 126200 tons.

According to industry estimates, there are currently over 3000 domestic pet food brands, and from the perspective of supply and demand, there has been a slight overcapacity in the market. Taking Guaibao Pets as an example, the production capacity utilization rate of the company's main grains has been decreasing year by year in recent years. The utilization rates from 2019 to 2021 were 96.99%, 80.97%, and 67.40% respectively, which is less than 70%.

From the perspective of China's production capacity, the current output is slightly higher than demand because there are more people flocking to this industry. Additionally, many companies used to use OEM factories, but more and more brands have built their own factories, and some OEM factory capacity has been released. "Wei Shi's CEO Lv Shaojun predicts that as top brands continue to develop, some conventional brands will become weaker, The long tail part will gradually be eliminated, and future acquisitions and mergers will definitely occur

Domestic substitution needs to be broken

In fact, with the youthfulness of China's pet raising population, their channels of obtaining information are more diverse, and their acceptance of domestic brands is also higher. Therefore, in recent years, the proportion of domestic grains has become increasingly high. According to the White Paper on the Chinese Pet Industry, among the many pain points in pet food consumption, the decrease in "trustworthy domestic brands" is the highest, with a decrease of 4.8 percentage points in 2021 compared to 2020. It can be seen that the trust of "shovel officials" in domestic brands is gradually increasing.

In Lv Shaojun's view, this is partly due to the increasing demand from consumers for products. For example, adding fresh meat, pursuing the ultimate freshness of products, and so on, "imported brands are difficult to achieve. In addition, it is also related to the attributes of the manufacturing industry, and domestic brands have a latecomer advantage, "because equipment is always the newer and more advanced

In addition, another important reason is that the domestic pet food market is becoming increasingly popular, with a much higher frequency of updates compared to imported brands.

However, foreign brands are not willing to be outdone. On April 4th of this year, the first phase of Mars' third pet food factory project in Tianjin was completed and accepted, with an estimated annual production capacity of over 250000 tons. On the following 15th, Nestle's new high-end pet wet grain canned production line in Tianjin was officially put into operation, achieving the first localization of pet wet grain production. According to Chen Xiaodong, "Currently, the Tianjin factory has Nestle's advanced dry and wet main grain production lines globally, which can cover the full range of production processes for mainstream pet food categories

At present, the overall scientific research strength of China's pet industry is still in the initial stage of development. There is still a significant gap between supply and demand and room for development and improvement in pet nutrition science research, industry science education, and professional talent cultivation.

In Lv Shaojun's view, the development time of the domestic pet food industry is relatively short, and compared to foreign countries, there is a lack of basic research. Research driven should become the current competitive force of domestic pet food enterprises.

It is understood that due to the lack of specialized disciplines in the field of pet food segmentation in China, and the inability of existing achievements in human food research to be directly applied to pet food, a series of issues such as the construction of pet food detection methods and the establishment of quality standards have become more urgent.

Looking at the current situation of the domestic pet food industry, most of it focuses on formula research, and there is a serious lack of more in-depth basic and applied research. Regarding this, Zhong Shiquan, the head of Weishi Pet Nutrition Research Institute, who has been engaged in pet nutrition research for a long time, admits that scientific research on pet health is still in a very early stage, with certain deficiencies in research directions, talent teams, basic reagents, testing systems, experimental platforms, and other aspects. The industry as a whole is still in a state of confusion. Huachuang Securities also pointed out in its research report that currently, domestic staple foods are often promoted based on their compliance with international standards, mainly due to the lack of a system for local pet food standards and low consumer trust.

In Zhong Shiquan's view, it is very necessary to establish a suitable testing system and experimental platform for R&D in order to fundamentally enhance the competitiveness of domestic brands.

Recently, the public welfare project "Dog and Cat Cell Line Preservation Center PETCC" created by Weishi Pet Nutrition Research Institute was officially launched. It is reported that PETCC is currently the world's first large-scale cell line preservation center for dogs and cats, and will conduct pet health research from the perspectives of cell biology and molecular biology. As of now, PETCC has collected and cultivated a total of 1392 monoclonal cell lines and mixed cells representing 157 tissue parts of dogs and cats.

We not only hope to conduct research on the nutritional physiology of dogs and cats, but also to explore the nutritional metabolism mechanism of dogs and cats at a deeper level from the perspective of cell biology. "said Ma Haile, Chief Scientist of Weishi Pet Nutrition Research Institute, Academician of the Russian Academy of Natural Sciences, and Dean of the Food Physics Processing Research Institute of Jiangsu University. Prior to this, Su Li Gao collaborated with universities to establish the "Pet Nutrition Research Center" and released the "No Care Original" last year ™ Research on the Effects of Proteins on the Intestinal Health and Immunity of Cats; Douchai collaborates with universities to build a pet gastrointestinal probiotic factory

It can be foreseen that with the continuous upgrading and improvement of domestic research and development technology and evaluation system, as well as the introduction of new national standards, the overall quality level of China's pet food industry will be further improved, and the industry is expected to accelerate its reshuffle and move towards maturity. Regarding the future direction of the industry, Lv Shaojun predicts that "the pet food market will continue to maintain a high growth rate in the next few years, but industry competition will also intensify, and it will enter an era of competitive research