Zhongtong Finance has learned that Debon Securities has released a research report stating that driven by both spiritual needs and consumption levels, the future market space for pet food is broad. Compared with the difficult-to-defend and easy-to-attack beauty industry, the pet food industry is easier to defend and harder to attack. This is because the pet food industry invests heavily in research and development, capital expenditures on factories and supply chains, and has a higher level of consumer trust, leading to a more concentrated market structure and stronger profitability for pet food compared to beauty products. Currently, pet food is still in the stage of rapidly increasing e-commerce penetration and shaping big single-product strategies. Domestic brands are more flexible in online operations, and channel changes are accelerating the process of replacing foreign brands. At the same time, domestic leading brands are seizing overseas brand share with better cost-effectiveness and operational capabilities.

Driven by both spiritual needs and consumption levels, the pet food market has a long-term market space of more than 140%. Splitting volume and price, Debon Securities believes that the long-term market space for the pet food market is US $17.3-21.4 billion, which has a growth space of 141.43%-219.47% based on the market size in 2023: 1) Volume: The core driving force behind the per capita pet ownership indicator is core indicators such as urbanization rate, single rate and elderly rate. Debon Securities believes that the residents' spiritual needs are the core driving force. 2) Price: Consumption level is the core factor. In 2022, China's average annual pet food consumption was only 0.12 compared to the US, and based on the current per capita income and the 2035 long-term guideline, the expected annual consumption in the long-term is expected to increase to 2/5 of the average level in the UK and the US in 2022.

Overseas review: fixed pattern, easy to defend and hard to attack. (1) Horizontal comparison: Looking at different regions, the CR10 of mature markets such as the United States and South Korea is between 35% and 45%, while under the fierce competition in emerging market countries, the global CR10 remains stable at around 30%; as for different categories, the beauty industry has more reference significance. Compared with the difficult-to-defend and easy-to-attack beauty industry, the pet food industry is harder to attack and easier to defend. This is because the pet food industry invests heavily in research and development, capital expenditures on factories and supply chains, and has a higher level of consumer trust, leading to a more concentrated market structure and stronger profitability for pet food compared to beauty products. (2) Overseas review: In the US market, Nestle and Mars account for nearly half of the market share. Through mergers and acquisitions, full supply chain layout and single-brand card position in a single subdivided raceway, the pattern solidifies. On the other hand, the Chinese market is still in a fierce competition with internet brands and new e-commerce channels.

Looking forward to the domestic market: the initial stage of e-commerce penetration + transformation into big single-product strategy, and domestic brands substituting for cost-effectiveness.

(1) Brand perspective: There are currently three major domestic pet food brands, while foreign brands remain stable in the high-end and segmented efficacy positions. Domestic leading brands rely on R&D and factories, and focus on cost-effectiveness. New internet brands achieve brand breakthroughs through OEM and high growth through e-commerce channels. The domestic market is still in a fierce competition stage.

(2) Product perspective: Beauty companies are gradually transitioning from channel-driven to product-driven. Sustainable performance = ability to shape large single products + new product matrix. Leading company Proya successfully transformed through its major single-product strategy, based on consumer insight and organizational structure. Currently, the pet food raceway has relatively dispersed products. With the advancement of pet food technology/equipment, product forms/functions are gradually upgraded, and brand competition is shifting from snacks to higher-end staple foods. Take the leading brand Guaibao as an example. They have achieved market recognition through their popular big single-product strategy, and have strengthened their product matrix through a series of sub-brands and multiple brands, targeting high-end customers.

(3) Channel perspective: Similar to the beauty industry, the industry experienced three stages: explosive growth, rapid expansion, and slowed growth. Benefiting from the boom in online channels and live streaming, it is entering a new round of growth after 2020. Debon Securities believes that the pet food industry is currently in a stage of rapid e-commerce development, and domestic brands are more flexible in online operations. Channel change has accelerated the process of domestic brands replacing foreign brands. At the same time, there are also many private label brands emerging. However, specialized channels represented by pet hospitals have weaker substitutability.

Investment advice: The raceway is expected to maintain high growth. Domestic companies rely on supply chain capabilities for transformation, and the added bonus of new e-commerce channels. By deepening large single-product strategies and multi-brand strategies, they are expected to continuously seize overseas market share with cost-effectiveness products in the future. Key recommendations are Guibao Pets, and pay attention to Yantai China Pet Foods, Petpal Pet Nutrition Technology, Yiyi Co., Ltd., and Guangdong Tengen Industrial Group.

Risk warning: increased competition in the pet industry, slower-than-expected brand development, increased foreign trade friction, large fluctuations in exchange rates, and large fluctuations in raw material prices, etc.