The “epidemic puppies” that you go for a walk around the neighborhood have been a huge boon to the pet industry. But unlike other booms, the inevitable decline in demand can be mitigated by two separate factors in this situation. The first is that pets will continue to demand food and care, which drives spending in the future. Second, when pets become dear members of the family, their owners are more inclined towards buying expensive foods, sweets, and services. Together, this means that spending on pets is expected to normalize at a higher level. “Before the pandemic, there wasn’t much fluctuation in the growth of dog and cat populations,” said Ann Scott Livingston, research analyst at Euromonitor. But the desire for companionship during the early days of the Covid health crisis led to a boom in pet adoptions in 2020 and 2021, she said. Media reports at the time said some animal shelters had been completely emptied of dogs and cats. While this initial explosion has eased — and shelters are inevitably filling up again — people are still adding new pets to their homes at a greater rate than they were in 2019, Livingston said. “It is clear that some level of consumer mobility has returned, but a lot of Companies created work-from-home or hybrid models, so a lot of consumers realized, ‘Oh, I’m going to spend more time at home than I was in 2019,’ which helped drive adoptions even more this year and last year,” Livingston said. Euromonitor expects the pace to return to normal next year, but the ripple effects are already evident. Morgan Stanley estimates that there are about 5 million more pets in the United States today than there were in 2019. But that roughly 4% increase in pet ownership has led to an 11% increase in spending on each pet, according to bank research. In a recent research note, analysts led by Simeon Guttmann said that a large portion of new parents of pets are younger adults, who tend to spend more on their companions. “Millennial mothers and fathers have smaller families or are late in having children,” the analysts said. Many have just moved into their first home, ready to shower their animals with affection—and candy and toys. This creates a tailwind that will help accelerate the sales growth of the pet industry in the coming years, according to Gottman. Average annual pet-related spending is expected to grow at an accelerated pace of about 8% from 2019 to 2030. This would boost industry sales to $277 billion by 2030, according to the company’s baseline forecast. Notably, this momentum is outpacing the compound annual growth rate (CAGR) of nearly all other retail sub-sectors, the company said. But, Morgan Stanley’s pet industry’s top picks may not be the first names that come to mind. Rather than choosing retail names like Petco Health and Wellness and Chewy, Gutman expects investors would do well to play the pet market by focusing on providers. A bet on the power of veterinarians Morgan Stanley named Zoetis, a specialty drug company that makes heartworm prevention and other drugs and vaccines for animals, as their top pick in space. She also loves Idexx Laboratories, a leader in diagnostic tests used by veterinarians. The bank has an overweight rating on both stocks. For Zoetis, his price target is $264, which is about 60% up from where the stock closed Thursday. Shares have lost nearly a third of their value since January. For Idexx shares, Morgan Stanley set a target price of $603, which translates to a profit of about 63% from Thursday’s close. While food and treats make up the largest part of a pet owner’s budget, vet services are a close second and, according to Morgan Stanley, are the fastest growing segment. Also, while spending on cat toys, a luxurious dog bed or elaborate aquarium can be discretionary, once consumers fall in love with their pet, regular veterinary care is seen as essential. Morgan Stanley consumer surveys have shown that the majority of pet owners visit vets for routine care and place a lot of value in their medical expertise. Currently, many of these visits do not include a blood test for preventive diagnostic tests, but Gottman expects that to change over time. “While we believe that wellness testing should expand over time, we expect penetration in the near to medium term to expand at a more measured pace, as preventive care protocols, training of veterinarians, and education of pet owners about the importance of these procedures will take time, ” he wrote. Guttmann also expects the use of Zoetis’ Simparica Trio, a next-generation blend of flea, tick and heartworm pesticides, to increase over time. The product, launched in 2020, generated $168 million in global sales in its first year. Morgan Stanley said more vets are recommending the product over other options, so sales should grow from that base. Even pet product retailers have recognized the importance of veterinary care in their business models. Petco has repositioned itself as a health and wellness company. Chewy recently added CarePlus, a suite of pet insurance and wellness plans to its existing health offering, which already includes an online pharmacy, telehealth services and an online marketplace geared specifically for veterinarians. Both merchants see pet health as a way to compete against Walmart and Amazon, which have expanded their reach in the pet care aisle. Walmart, which leads in-store sales for pet supplies, and Amazon can compete aggressively on price, so Petco and Chewy are trying to claim their field as experts in the field. Having the voices of highly trained vets by their side, can enhance this image. Online channels are especially important for pet products, said Euromonitor’s Livingstone, which focuses on food and nutrition. She said about a third of the industry’s sales are generated online. Switching to “human grade” food Pet owners like to order items like pet food through online subscription, which has contributed to the trend, according to Livingston. Most major retailers of pet products offer some form of this service. In an earnings call on Wednesday, Petco management spoke about the importance of the premium pet food brands it sells — some exclusively — to drive repeat visits from shoppers. She said that shoppers who purchase pet food and other consumer products generate about 30% more lifelong value than customers who do not shop these categories with Petco. Also Wednesday, the retailer announced a complete recipes for Fresh Heart, a human-grade frozen meal set for dogs. According to Livingston, the new brand is in the mainstream. The owners were “humanizing” their pets. They want to give them foods that are packed with the same kinds of healthy nutrients that they’re looking for in their food, even if it comes with a hefty price tag. “People really do view their pets as valuable family members, and many of these people will cut costs in other areas of life before they cut back on pet food,” she said. Sales of pet supplements are also on the rise, according to Euromonitor. Petco’s premium pet food and Vital Care program, which had 282,000 members as of the second quarter of the fiscal year, sees ways to build loyalty and increase sales. The recently revamped program allows customers to get discounts on vet exams as well as products and services like brushing and trimming nails for a monthly fee of $19.99. On the company’s earnings call, CEO Ron Coughlin said the program urges customers to shop more frequently in its stores and boosts their spending by “double digits.” “We captured a much larger share of the portfolio, with about 30% of Vital Care customers new to food with us, and 40% new to services, both versus Vital Care 1.0, [the original version of the loyalty program]He said the growth in the program — up 180% from the same period last year and 28% from the first quarter — has been helped by the addition of members of Thrive Pet Healthcare, a veterinary network it acquired earlier this year. In a research note, Goldman Sachs analyst Kate McShane said Vital Care could be very attractive to clients looking to save in the current inflationary environment. Meanwhile, Petco benefits from recurring revenue from membership fees as well as higher spending levels for its members. Petco said it estimates that Vital Care customers have 3.5 times greater lifetime value than the average shopper. However, Petco shares fell 8.8% on Wednesday as investors responded to lower expectations for fiscal year 2022. Demand for more discretionary items weakened. McShane has a buy rating on Petco, but cut its 12-month price target by $1 to $20 to account for lower earnings estimates. It said it continues to view the stock favorably and expects its strategies to increase revenue and margin in the long term. Petco shares closed Thursday at $15.23, down 23 percent since January. Next Tuesday, Chewy will announce his results. Analysts will pay close attention to customer volatility. The fear is that the company will need to spend more on marketing to attract new customers. Wedbush analyst Seth Basham lowered Chewy’s rating to neutral in late July. One of his concerns was that search rates for pet-related products had fallen, and Apple’s privacy changes made it difficult to target potential customers online. Upcoming quarterly results will show whether these trends have affected Chewy. As of Thursday’s close, the stock is down 31% year-to-date. However, Chewy’s strength comes from its dominant position among customers who purchase staples such as pet food online. Since these purchases are so essential, Chewy has a strong position. Livingstone said history offers some reassurance here. During the Great Recession, from 2008 to 2009, spending on pets actually rose, she said.