Double-digit growth evaporates in Latin American pet food and pet care products but market remains stable

Author: Lee Linthicum

Date published: 2 Jul 2009

In spite of Mexico's economic woes, the Brazilian economy is weathering the global economic downturn comparatively well, helping the pet food and pet care products market to continue to grow across the region as a whole.

Mexican and Brazilian markets diverge sharply

In spite of the fact that most Latin American economies appear to be performing slightly better in a global context than North America or Europe, Euromonitor International predicts that the annual rate of growth in value sales of pet food and pet care products will ease from 11.4% in 2008 to 8.4% in 2009. The large Brazilian market (forecast to account for 58.9% of regional sales in 2009) remains strong, but Mexico, the region's second biggest market (predicted to account for 14% of regional sales in 2009), represents a major source of weakness.

The weakness of the Mexican market is largely due to two large exogenous shocks it has received recently. Firstly, it has been significantly adversely affected by the woes of the US economy, its main trading partner and a significant source of remittances. For example, automotive production in Mexico was down almost 40% year-on-year in May 2009, largely due to weak US demand (around 70% of cars manufactured in Mexico are exported to the US). Revenues from oil exports (one of the country's largest sources of foreign currency) have also been badly hit, although they have bounced back recently as the price of oil has recovered to exceed US$70 a barrel. Furthermore, in April 2009, remittance payments from the US plunged by 18% year-on-year, to US$1.7 billion. Almost 12 million Mexicans live in the US, and Mexico is the world's third largest receiver of remittances after India and China.

Secondly, the effects of the global downturn have been exacerbated by the outbreak of swine flu in Mexico during April, which resulted in around 100 deaths, disrupted the lives of millions of Mexicans for weeks and severely damaged the country's tourist industry. As if these factors were not enough on their own, economic activity is also being disrupted by a surge of violence as the government attempts to crack down on the country's powerful drug trafficking gangs. This has led some to claim (rather dramatically) that the country is in danger of becoming a 'failed state'. As a result of all these events, the Mexican government's forecast of a 5.5% contraction in GDP during 2009 now looks distinctly optimistic. Moreover, average annual disposable household income in Mexico is predicted to fall by 3.9% in 2009, to just over US$21,600.

Premium and wet products worst hit

In the circumstances, Euromonitor International's prediction of a 2.9% contraction in value sales of pet food and pet care products in Mexico in 2009 is relatively modest. Premium dog and cat food are predicted to be the worst affected segments of the market, with declines of 16.8% and 12% forecast, respectively. Consumers are trading down from premium brands to mid-priced and economy dog and cat food products as their disposable incomes are squeezed. Sales of mid-priced and economy dog food products are predicted to increase by 0.7% and 1.2%, respectively, in 2009. However, many less affluent consumers are choosing to exit the market entirely and substitute table scraps for packaged pet food. Volume sales of dog and cat food are forecast to drop by 7.5% in 2009.

Wet products will also be disproportionately affected. Sales of wet dog food are forecast to contract by 13.2%, while sales of dry dog food are predicted to slip by just 2.7%. This is largely a result of the fact that wet products have higher unit pricing than dry products, making them more vulnerable to inflationary pressure, which is a long-running problem in the Mexican economy (consumer prices increased at an annual rate of 6.2% in April 2009, at a time when many other economies are flirting with deflation).

Brazilian consumers bounce back

In contrast to Mexico, the Brazilian economy is weathering the downturn relatively well, with GDP contracting by an unexpectedly small 1.8% quarter-on-quarter during the first quarter of 2009. During the final quarter of 2008, the country's economy had shrunk by 3.6%. Private consumption, which had fallen by 1.8% quarter-on-quarter during Q4 2008, grew by 0.7% in the first quarter of 2009 as consumer confidence recovered. As a result, average annual disposable household income is predicted to shrink by a mere 1.9%, to just under US$15,400, in 2009.

While growth in value sales of pet food and pet care products in Brazil is forecast to more than halve between 2008 and 2009 (from 19.7% to 8.4%), volume sales growth is predicted to be more modest, at 3.8%. This indicates some leakage at the bottom of the market, as some hard-pressed consumers revert to feeding their dogs and cats leftovers.

At the other end of the market, growth in value sales of premium dog food is forecast to ease from 16.5% in 2008 to 9.2% in 2009, while growth in the mid-priced segment is predicted to fall to 8.1%. Meanwhile, growth in value sales of economy dog food products is forecast to slip only marginally, from 11.4% to 10.5%. This is indicative of a weakening of the premiumisation trend, with fewer consumers seeking to trade up to more expensive pet food products. However, as levels of disposable income begin to rise again in 2010 and beyond, this trend is likely to build up steam once again.

Long-term socio-economic trends remain significant growth drivers

Volume growth in Brazil is predicted to be particularly strong in the economy segment during 2009, with an increase of 5.1% forecast. This is largely a function of long-term socio-economic trends, particularly rising rates of urbanisation. Between 2003 and 2008, Brazil's urban population grew from 149 million to nearly 165 million, while its rural population declined from nearly 33 million to just over 29 million. Urban consumers are more likely to give their pets prepared pet food than their rural counterparts, mainly due to the fact that they tend to lead faster-paced lifestyles. According to Euromonitor International estimates, the percentage of dogs fed industrially prepared pet food in Brazil grew from 34% in 2003 to 43% in 2008, whilst the percentage of cats rose from 35% to 44%.

Another factor still driving growth in Brazil (and many other countries in the region) is the emergence of a broad-based lower middle class. The proportion of Brazilian households with an annual disposable income of more than US$10,000 expanded from 15.7% to 53.9% between 2003 and 2009, while the percentage of households with an annual disposable income in excess of US$25,000 grew from 3.8% to 18.3%. Millions of Brazilians have thus been lifted out of absolute poverty, enabling them to purchase pet food and pet care products for the first time.

US recovery should lift Mexican market

The outlook for most of the region's other major markets is closer to Brazil than Mexico. Value sales of pet food and pet care products in Argentina, Chile and Colombia are forecast to expand by 9.2%, 9.9% and 7.1%, respectively, in 2009. Moreover, if (as many expect) the US economy begins to emerge from recession during late 2009 or early 2010, the Mexican economy is likely to recover, which should help to revitalise demand for pet food and pet care products in that market, boosting the region's overall growth rate.

For more insight, please contact Lee Linthicum – Head of Global Food Research at Euromonitor International – on lee.linthicum@euromonitor.com