Domestic emerging enterprises are increasingly emerging in decentralized markets

Considering the characteristics of pet foods (mainly meat protein and grains), their entry barriers are relatively low. The pet industry is relatively fragmented, with a total market share of less than 30% among the top 10 companies, with a variety of practitioners, including agricultural enterprises, multinational companies focused on protein and consumer goods, consumer goods startups, and OEM/ODM companies. So, how to seize market share in this rapidly rising market? Goldman Sachs Research believes that it will depend on a combination of product content, channel execution, brand positioning, and capital strength.

Although the industry as a whole will not achieve integration soon, some companies, especially domestic leading enterprises, may still seize market share in the next 3-5 years. Over the past five years, due to poor implementation of omnichannel and social media channel marketing for the younger generation, international companies, including Mars and Nestle, are gradually losing market share in China. In contrast, domestic companies are investing to gain brand equity and strong sales support from offline pet stores.

The primary task of these companies is to seize market share in the next 2-3 years. Considering the stable cash flow of their overseas OEM products, Goldman Sachs believes that these domestic leading enterprises will have more buffers and resources when investing in the highly competitive Chinese market. In the long run, the trend of pet food upgrading will drive up gross profit margin and bring stable operating profit margin (possibly in the range of single digits to low tens), which is still lower than the operating profit margin level of over 20% of global peers by 2020.

In terms of products, Goldman Sachs Research Department found that 95% of pet owners pay more attention to the nutritional value, natural health, and product efficacy of products when purchasing pet food, such as gastrointestinal conditioning. Although global brands have significant advantages and lead product innovation, we have seen domestic leading enterprises also enhance product content through acquisition of overseas brands or establishment of overseas factories. New products focus on freshness, nutritional value, and meat sources. For OEM companies, the overseas market will usher in double-digit stable growth, and the pet industry is also one of the fastest growing key areas in the consumer goods market in the United States and Europe.

In general, the market growth and pet penetration rate accelerated due to the extension of people's home time during the COVID-19 epidemic. Goldman Sachs expects the single/elderly population to drive future growth. Goldman Sachs' global consumer goods research team predicts that the combined annual growth rate of sales in the US and European markets will both reach 5-6% in 2021-26, with sales volume and average product prices constituting key drivers. Many Chinese companies export pet food and snacks to the United States, so they also believe that Chinese companies have an advantage over Southeast Asian competitors. Therefore, despite the recent impact of exchange rates and freight rates, Goldman Sachs expects the overseas market growth of Chinese enterprise OEM business to reach 10-20% in the next five years, reflecting the rapid growth of major customers, including Pinpu, and the ability to explore new customers.