1. Overview of the Pet Market

1.1 Introduction to the Pet Market

Currently, the global pet market is growing at a rate of approximately 5%.
According to the distribution of the global pet industry output value, North
America remains the largest pet market, accounting for 37% of the total output
value, followed by Europe and Asia, each accounting for around 23%. The scale of the U.S. pet industry reached about $60.28 billion in 2015, with
a compound annual growth rate of 5.77% in the past decade. Total pet-raising
spending in the U.S. amounted to $72.56 billion in 2018. In contrast, Japan's pet
market has stabilized, with few new pet additions, and growth is driven by rising
average consumption. Japan's pet industry market size was about 92 billion RMB
in 2017, with a year-on-year growth rate of only 1%. China's pet industry has grown significantly over the past decade, with the market
size approaching 134 billion RMB in 2017 and a compound annual growth rate
of 27% from 2010 to 2017. The *2019 China Pet Industry White Paper* shows that
China's cat and dog pet consumption market exceeded 202.4 billion RMB in 2019,
with the market sizes for pet dogs and cats reaching 124.4 billion RMB and 78 billion
RMB respectively, among which the pet cat market grew rapidly at a rate of 19.6%.

1.2 Composition and Analysis of the Pet Market

The pet market can be analyzed from three dimensions: the number of pets,
the proportion of pet-owning households, and pet consumption expenditure.
By understanding each aspect, we analyze the stock and increment of the pet
market and predict future development trends. The American Pet Products Association (APPA) is the most influential organization
in the U.S. pet industry, collecting data on pet feeding, care, products, and services.
It has gathered pet-related data for more than 30 years, which is highly valued by
the global pet industry.

1.2.1 Analysis of Pet Population

According to APPA data, the U.S. had 94.2 million pet dogs and 89.7 million
pet cats in 2017. Based on the *2017 China Pet White Paper*, China had 49.9
million pet dogs and 37.56 million pet cats, roughly half of the U.S. figures.
Weighted by total population, China's cat and dog population is less than
one-eighth of that in the U.S., indicating considerable growth potential. Estimated from the perspective of per capita GDP, China's per capita GDP
was $8,836 in 2017, similar to that of the U.S. in 1980. The earliest research
data from APPA dates back to 1988, when the total number of pets in the U.S.
was 120 million, compared with only about 100 million in China in 2017.
In addition, urbanization rates in developed countries show a positive correlation
with the scale of the pet industry. Driven by GDP growth and a large population
base, China's pet market is expected to expand further in the future. In countries with high aging rates, the elderly are the main pet owners. In Japan,
people aged 40 and above account for 62.5% of pet owners, including 33.1% aged
60 and above. China's population aged 65 and above exceeded 10% for the first
time in 2014, entering an aging society. The companionship value of pets for the
elderly will become a growth driver for the pet industry. Besides population aging, the rising average age of first marriage has led to an
increase in single people keeping pets in recent years. Data shows that people
aged 18-30 account for more than 50% of total pet owners, and unmarried
people make up about 40%. Currently, the pet industry is mainly driven by the
elderly and single groups, as pets can relieve work and life stress, provide
companionship, reduce loneliness, and bring joy.

1.2.2 Analysis of the Proportion of Pet-Owning Households

According to APPA data, approximately 67% of U.S. households own at least
one pet, with the total number of pet-owning households reaching 84.6 million.
In contrast, China has 59.12 million pet-owning households, far lower than the
U.S. pet penetration rate. Thus, the rising proportion of pet-owning households
will boost the market. In terms of living space, small pets will become a major
growth area, with the per-household ownership of pet dogs having a 33% growth
potential and pet cats doubling.

1.2.3 Pet Consumption Expenditure

APPA statistics show that the average annual consumption per pet dog
in the U.S. was $1,549 in 2017, and $988 per pet cat. In China, the average
annual consumption per pet dog and cat was about $969 and $727
respectively. With consumption upgrading, there is room for further growth.

1.3 Investment Status of the Pet Industry

Capital inflow has accelerated the development of the pet industry, with
many related companies listed on the New Third Board, and Petty Group
and Zhongchong Group as A-share listed companies. According to VCSaaS data, 45% of China's pet industry enterprises are at
the angel round, followed by 20.83% at the Series A round, and only 0.83%
have completed IPO. Geographically, Beijing accounts for the largest share
at 27.59%, followed by Shanghai at 18.10% and Guangzhou at 15.23%. In the current market structure, companies with terminal retail sales exceeding
1 billion RMB (such as Royal Canin, Mars, and Birigui) account for about 16%
of sales, companies with sales between 100 million and 1 billion RMB account
for only 13%, and the largest proportion (71%) are companies with sales below
100 million RMB.

2. Pet Food Market

2.1 Penetration Rate of Commercial Pet Food

Commercial pet food penetration rate refers to the proportion of pets fed
commercial pet food. In 2017, the rate was about 10% for pet dogs in China
and 20-30% for pet cats, compared with 90% in the U.S. As pet owners become younger, pet-related knowledge spreads, and people
pay more attention to pet consumption, commercial pet food is increasingly
accepted over human food and leftover household meals. Pet food companies
continue consumer education, and the internet-driven communication will
gradually increase the penetration rate of commercial pet food.

2.2 Unit Price of Pet Food

There are two main profit directions for pet food. The first is staple pet food,
which has weak price-increase logic, no obvious technological barriers,
slow unit price growth, fierce competition, and low gross profit margin,
so it is not the core driver of market expansion. From 2004 to 2017, the retail unit price rose from 24.7 RMB/kg to 34.23 RMB/kg,
while retail sales volume of China's pet food industry increased from 59,500 tons
to 323,000 tons. The price of staple pet food is expected to remain stable in
the future.
Another breakthrough for unit price lies in product upgrading and brand
positioning. High-end or customized pet food targeting specific groups
can raise prices and improve profit margins, but faces challenges such as a
small consumer base and insufficient market education.

2.3 Pet Food Intake

Daily food intake per pet is determined by body size and biological
characteristics. Calculated by staple food, annual intake per pet cat
is about 25 kg; for dogs, it is 45 kg for small dogs, 100 kg for
medium dogs, and 200 kg for large dogs.

3. Production and Sales Channels of Pet Food

3.1 Pet Food Production Chain

The upstream of the pet food industry covers agricultural and sideline
products such as agricultural products and meat, while the downstream
consists of pet food sales channels. Upstream industry chain: Dry pet food is mainly made of grains, while wet
food and pet snacks use meat as raw materials. Raw materials account for
about 70% of pet food costs, and pet food manufacturers have weak
bargaining power over upstream suppliers due to their smaller procurement scale. Downstream industry chain: Downstream includes pet product distributors,
retail stores, pet hospitals, and end consumers, with obvious consumer attributes.
The industry chain also involves OEM and ODM. Developed countries in Europe
and America have a long history of pet industry development but high costs,
giving rise to many Chinese OEM enterprises for foreign pet snack brands,
such as Petty, Zhongchong, and Gaobao (Myfoodie).

3.2 Classification of Pet Food Raw Materials

Pet food includes staple food for daily energy and nutrition, and snacks for
attracting pets and adjusting taste. In 2015, staple food accounted for
about 58% of pet food sales, and snacks accounted for 18%.
Staple food is divided into dry and wet food by form and processing,
while natural food is a high-end product focusing on natural ingredients.

3.2.1 Dry Pet Food

Made of grains and meat protein, it features comprehensive nutrition,
convenient feeding, and time efficiency, making it the mainstream pet
food. It is suitable for large-scale mechanized production, bringing cost
advantages to enterprises in industrialized regions with large labor forces,
such as Mars, which has produced pet food since 1935.

3.2.2 Wet Pet Food

Wet staple food preserves freshness and safety of high-moisture fresh
meat, offering good taste and nutrition, but is more difficult to produce
and store. Future R&D will focus on fresh meat with cold chain supply.

3.2.3 Natural Pet Food

Mostly made of fresh meat, natural food advocates unprocessed grains,
free of preservatives, synthetic ingredients, and 4D ingredients
(Dead, Dying, Diseased, Disabled) and by-products such as internal
organs and fur, making it nutritionally beneficial for pets.

3.2.4 Pet Snacks

Used to enhance the bond between owners and pets, including dried
meat, strips, chews, and dental bones. Pet snack production has low
automation and high labor costs, requiring extensive manual processing,
so regions with low labor costs have cost advantages.

3.3 Marketing Models and Channels

In 2017, online and offline channels accounted for 57.8% and 42.2%
of China's pet food sales respectively. Foreign brands have advantages
offline, while domestic brands mostly break through online. Foreign brands started offline with rich channel experience; Mars has
better offline channels in China than most domestic brands,
with Birigui performing well offline. Domestic brands such as Gaobao
and Crazy Dog have risen rapidly online. Chinese enterprises account for 57% and 23% of online sales of dog
and cat staple food respectively, and 86% and 48% of online sales of
dog and cat snacks. Myfoodie is a leading domestic brand.

3.3.1 Online Sales

Online pet food sales grew slowly from 2004 to 2011 and boomed
after 2012, with a compound annual growth rate of 106% from 2010
to 2017. Channel share rose from 0.1% in 2005 to 42.3% in 2017,
and about 67.1% of enterprises profited from e-commerce channels.
This is due to the overlap of pet food and e-commerce development,
and relatively low domestic logistics costs for heavy pet food.

3.3.2 Offline Retail Sales

Traditional offline channels have shrunk, with retail and wholesale
channels (including supermarkets and grocery stores) dropping from
29.3% in 2004 to 11.5% in 2017.

3.3.3 Offline Specialty Store Sales

The share of pet specialty channels has declined slowly since 2004
and accelerated after 2013. Driven by capital-fueled chain development,
veterinary clinic channels rebounded rapidly in 2016 after five consecutive
years of decline. In 2017, pet hospitals grew by 67%, pet stores by 28%,
and supermarkets by only 8%.

3.3.4 Online-Offline Integrated Channels

E-commerce (55% growth) and pet hospitals (67% growth) are the
fastest-growing channels. Enterprises with offline channels often enter
low-threshold, high-growth e-commerce channels, forming a dual-channel
sales pattern.

4. Marketing Strategies

According to the *2017 China Pet Industry White Paper*, meeting
nutritional needs, good palatability, and high cost-performance are key
purchasing factors for staple food and snacks, considered by about 60%
of owners, followed by cost-performance (45%). Brand awareness and
values rank lower, indicating low brand loyalty among new pet consumers.

4.1 Transformation from OEM/ODM

Early Chinese pet food enterprises started with OEM/ODM for foreign
brands, accumulating customers and technology before launching
independent brands to improve gross profit margins through premium.
Most domestic OEM focuses on pet snacks, with low entry barriers and
opportunities for differentiated products amid new retail growth.

4.2 Brand IP Building

Emerging brands lacking channel and production advantages rise
by building brand IP, creating bestsellers with unique brand concepts.
Distinctive packaging, trendy pet IP, and brand stories help brands reach
target pet owners via traffic and promotion.

4.3 Brand Internationalization

A survey shows 91% of Chinese consumers care about brand origin
and prefer international brands, associating them with safe raw materials
and production. Domestic brands promote international positioning or
acquire overseas brands to enhance competitiveness, such as Zhongchong's
acquisition of New Zealand high-end brand Zeal in 2018.

4.4 Sales Channel Promotion

Enterprises with underdeveloped domestic channels offer first-level
distributors discounts below 60%, granting large profit margins to seize
the market quickly with price advantages.

4.5 Brand Positioning

With consumption upgrading, consumers prioritize safety and nutrition,
pursuing high-end products such as natural food and freeze-dried fresh
meat. Some enterprises target different life stages of pets, refining dietary
habits to meet customized demands.

5. Major Pet Food Enterprises

Foreign brands mostly adopt a platform strategy with multi-brand portfolios
covering high, medium, and low-end markets, including Mars, Birigui, and
Gaobao in China. Segment-focused enterprises monopolize niche markets, such as Blue
Buffalo and Pure & Natural specializing in natural food, and Petty focusing
on pet oral health. Channel and marketing-focused enterprises boost sales
via user interaction and cost-effective products, such as Crazy Dog. Since 2013,
domestic brands have gradually overtaken foreign brands in market share,
with emerging e-commerce reshaping the industry.

5.1 Foreign Enterprises

5.1.1 Mars, Incorporated (U.S.)

One of the world's largest food manufacturers and a typical platform enterprise,
with core strengths in diversified product lines and channel expansion.
Focusing on mid-to-high-end commercial food, it has a presence worldwide
with a market share of over 15%, especially in emerging markets. Mars acquired Royal Canin in 2002, an early entrant to the Chinese market
with sales of 1.07 billion RMB in 2017. Royal Canin built factories early to
reduce costs, established brand awareness, and developed pet hospital channels,
leading in segmented markets. Mars adopts a multi-brand strategy for its pet sector with dozens of brands.
In December 2019, it invested in Ruipai Pet Hospitals in Series C to layout chain
hospital channels.

5.1.2 Blue Buffalo (U.S.)

The fastest-growing pet food company in the U.S., with a compound annual
revenue growth rate of over 15% from 2006 to 2017. It promotes pet care
knowledge at distribution points, increased R&D investment since 2015
to enter therapeutic pet food, and launched the "Pet Detective" series.
Catering to the humanization trend of pets in the U.S., it focuses on the
mature market and natural, healthy segments.