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'Booming' Chinese Pet Care Industry Faces Challenges

Aug 21, 2018 by A. Alfaro
'Booming' Chinese Pet Care Industry Faces Challenges

After a hard day’s work, several Chinese are back home only to be bugged by some questions: does the cat have enough food? Does the dog need a walk? Who will take care of my pets if I have a business trip?

Interestingly, their concerns are creating a USD 19.5 billion industry in China which is already attracting investors’ attention, several companies claim.

This industry, that includes A-share companies such as Petpal, Pet Nutrition Tech and Yantai China Pet Foods Co., caters to a comprehensive range of pet issues ranging from breeding, food, toys, medical treatment, hairdressing, training and other services, a National Business Daily research reveals.

Others such as Ruipeng Pet Healthcare Group or Luscious are listed over the counter.

A 2007 white paper on China’s pet industry published by the dog portal Goumin observes that pet food and pet healthcare are the largest sub-markets of the industry.

The prospects of the industry seem to be further bolstered by the behaviour of the domestic consumer base. Many Chinese pet lovers don’t mind spending less on themselves in order to afford a better buy for their pets.

According to the 2016 Chinese Consumers’ Report, around 60% of pet owners spend between USD 14 and USD 73 per month. More than 40% of them spend more than USD 73 on their animals.

Buoyed by these factors, many companies felt encouraged to get listed. These companies insist that investors are enthused about the industry and are ready to pump in big money.

However, the truth about the Chinese pet industry is not as rosy as these data would have one believe.

In fact, several industry insiders consulted by 36kr, advise against jumping the gun. They warn that the industry is still at a very nascent stage and could be up against several challenges in the near future.

Watched from close quarters, the cynics seem right after all.

True, the local industry has experienced a rapid the growth. But that pace has come at the cost of quality. This means that while Chinese brands are popular on the mid-to-low range, it’s the foreign brands who are the kings of the high-end market.

Such shortcoming invariably means that despite being listed, several of these Chinese companies are actually limping.

In 2016, a cat sandbox designed by the Shanghai-based cat supplies startup Pidan Studio won the prestigious Red Dot Design Award. Despite the international attention, Ma Wenfei, Pidan’s founder, declared in July: “This industry is in a very difficult path.”

He complained that manufacturers failed to match the quality his product demanded. As a result despite having a great idea, he was incapable of manufacturing it.

A source from a pet clothing company consulted by 36kr also expressed similar frustration. According to him: “As soon as we launch a design, it is instantly copied by others who also set a much lower price.” This hits the original designers’ profits.

An investor from Jiuding Capital expressed disappointment to National Business Daily: “Most of the leading companies are doing OEM work (sub-contract work).”

For Petpal Pet Nutrition Tech and Yantai China Pet Foods Co, the two companies that are listed on the A-share market, it is their sub-contract work for foreign companies accounts for more than 70% of their income. This limits their ability to produce and popularize their own products.

Zhang Tianli, the co-founder of Hosen Capital, explained to National Business Daily: “It is not that Chinese companies are incapable of making high-quality products, it is just that at this development stage of the market, their products are considered by the public as low-end merchandise”.

Zhang explains that most local companies first focus on covering the animals’ most basic needs, such as food. Few of them initially focus on higher quality products. As a result, it becomes hard for them to reposition themselves later. Zhang says that the domestic industry is still in an early development stage, but Chinese consumers are becoming more and more globalized. As a result, companies are forced to try to keep up very quickly.

However, there is one front on which the industry seems to be doing well—e-commerce.

The 2007 White Paper on China's pet industry says e-commerce was the channel for 73% of pet product sales in China. In 2016, the US accounted for only 9% of pet products sales through e-commerce a research by Packaged Facts revealed.

Interestingly, as Goumin CEO Jia Tong pointed out to National Business Daily, the e-commerce figures come despite the fact that pet care is 100-year-old industry in the US. “In China, the industry is barely 30 years old and it has grown along e-commerce”, Jia said.

However, 95% of the e-commerce transactions are completed either on JD or Alibaba which allows the two behemoths to control the vast majority of the data flow and site traffic. This makes it difficult for pet companies to establish a vertical e-commerce strategy, Jiang Binbin, a marketing expert of pet products, says.

While many manufacturers in the sector are toying with launching their own direct sales platforms, Alibaba and JD constantly conduct sale promotions, discounts and offers. These two factors contribute to shrinking profits in the industry.

Jiang Binbin observes that the industry lacks a branding effort as most players only focus on sales volume. “Strategies such as sale promotions and discounts should be temporary, but they are becoming the common behaviour for these companies. This will inevitably lead to a bottleneck in which neither e-commerce platforms nor brands will make any money.”

The current net profit margin on e-commerce platforms is 4%, according to the pet industry analyst CR Media. Fewer than ten brands have an annual sales figure of more than USD 10 million. “All the players are currently fighting for survival. The industry’s unicorn has not appeared yet”, said Jiang Binbin.

A source who works in the marketing department of a major pet company is more optimistic. He declared to National Business Daily: “Although this industry does not get much attention, some people are getting rich in it.”

A. Alfaro

A. Alfaro is a Beijing-based freelance reporter. He focuses on China's politics, culture and society. He can be reached at varofaro@gmail.com. 

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