Canadian Pet Market Outlook, 2014

Canadian Pet Market Outlook, 2014 January 2014 Packaged Facts 11200 Rockville Pike Rockville, Maryland 20852 800.298.5294 t 240.747.3095 f www.packagedfacts.com

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About the Author Shannon Brown Shannon Brown is a veteran market analyst for Packaged Facts with expertise in myriad consumer packaged goods markets and a regular contributor of market insight to major business media. Ms. Brown has written dozens of published reports on CPG markets, including the U.S. pet market. Her recent titles include Pet Food in the U.S., 10 th Edition (July 2013), How Cause Marketing Helps Pet Retailers Connect (March 2013), Oral Care Products in the U.S., 8 th Edition (February 2013), Ethnic Hair, Skin and Cosmetics Products in the U.S., 8 th Edition (June 2012), Cosmeceuticals in the U.S., 6 th Edition (April 2012), Fats and Salad/Cooking Oils in the U.S. Market (October 2011), and Snack Foods in the U.S., 4 th Edition (June 2011). David Lummis About the Editor David Lummis is the senior pet market analyst for Packaged Facts and a regular contributor of articles and market insight to major business media. He is the author of Pet Product News International s monthly Market Outlook column and Petfood Industry s quarterly Market Report column. Mr. Lummis has written dozens of published reports on pet-related markets including Pet Supplements and Nutraceutical Treats in the U.S., 4th Edition (February 2013), Natural, Organic and Eco-Friendly Pet Products in the U.S., 4th Edition (November 2012), Pet Supplies and Pet Care Products in the U.S., 8th Edition (August 2012), Pet Market Outlook 2012-2013 (April 2012), Pet Product Retail Channel and Consumer Shopping Trends in the U.S. (February 2012), Pet Medications in the U.S., 2nd Edition (October 2011), and Pet Market Outlook 2011-2012 (April 2011).

CANADIAN PET MARKET OUTLOOK, 2014 January 2014 Canadian Pet Market Outlook, 2014 has been prepared by Packaged Facts. We serve consumer product and service companies and allied businesses in the United States and internationally with a complete line of research publications. Packaged Facts market intelligence reports are designed to aid the executive decision-maker by providing essential data and concise analysis with a focus on marketplace trends, consumer insights, and emerging opportunities. Vice President of Publishing Don Montuori Research Director and Publisher David Sprinkle Author Shannon Brown Editor David Lummis Marigny Research Group, Inc. Publication Date January 2014 LA5083184 All rights reserved. No part of this report may be reproduced without permission of the publisher. Copyright 2014 Packaged Facts

Canadian Pet Market Outlook, 2014 Table of Contents Table of Contents Canadian Pet Market Outlook, 2014 Chapter 1: Executive Summary... 1 Introduction... 1 Scope and Methodology... 1 Report Methodology... 1 Market Trends... 3 Pet Industry Advances... 3 Table 1-1: Total Canadian Retail Sales of Pet Products and Services, 2008-2013 (in millions of dollars)... 4 Market Share by Category and Animal Type... 4 Pet Owners Still Spending Despite Slow Economy... 4 Table 1-2: Level of Agreement with Statements Regarding Attitudes Toward Spending on Pet Products, 2013 (percent of Canadian pet owners)... 5 Trends in Pet Acquisitions: Shelters in Favor... 5 The Aging Pet Population... 6 Overweight and Obese Pets Keep Costs Up... 6 Veterinary Costs Drive Canadians South... 6 Industry Trends... 8 Market Structure... 8 M&A and Investment Activity: Pet Health and Natural Products Star... 9 Premiumization... 9 Humanization... 10 Globalization... 10 Retail Trends... 11 Pet Shoppers Say Let s Make a Deal... 11 Figure 1-1: Level of Agreement with Statement: I look out for lower prices, special offers, and sales on pet products, 2013 (percent of Canadian pet product shoppers)... 12 Industry Mainstay: The Premium Shopper... 12 Pet Owners Shop at Supermarkets, Supercenters for Pet Supplies... 12 Pet Ownership Trends... 14 57% of Canadian Households Own Pets... 14 Figure 1-2: Canadian Ownership Levels for Selected Dog- or Cat-Owning Classifications, 2013 (percent)... 14 Single Pet Ownership Higher Than Multiple... 15 January 2014 Packaged Facts i

Table of Contents Canadian Pet Market Outlook, 2014 More $100K+ Pet Households... 15 Dog and Cat Ownership Rates by Age... 15 Impact of Boomers and Graying Population... 16 Role of Gen Xers and Gen Ys... 16 Chapter 2: Highlights... 17 Chapter 2: Market Trends... 18 Market Performance... 18 Pet Industry Advances... 18 Table 2-1: Total Canadian Retail Sales of Pet Products and Services, 2008-2013 (in millions of dollars)... 19 Table 2-2: Canadian Pet Market Retail Sales by Category: 2012 vs. 2013 (in millions of dollars and percent)... 19 Table 2-3: Total Canadian Retail Sales of Pet Products and Services, 2013-2018 (in millions of dollars)... 19 Market Share by Category and Animal Type... 20 Figure 2-1: Percentage Share of Canadian Pet Market Retail Sales by Category: 2013... 20 Table 2-4: Share of Canadian Pet Market Sales by Category and Animal Type: Dog, Cat, Other, 2013 (percent)... 20 Market Drivers... 21 Consumers Cautiously Optimistic about Economic Future... 21 Pet Owners Still Spending Despite Slow Economy... 22 Table 2-5: Canadian Household Final Consumption Expenditure, by Commodity Type: 2008-2012 (dollars in billions)... 22 Table 2-6: Canadian Household Final Consumption Expenditure Percent Change, by Commodity Type: 2008-2012 (percent)... 23 Table 2-7: Level of Agreement with Statements Regarding Attitudes Toward Spending on Pet Products, 2013 (percent of Canadian pet owners)... 24 Price Sensitivity May Affect Premium Purchases... 24 Table 2-8: Level of Agreement with Statement: If natural/organic products were more affordable where I shop, I would buy them more often, 2013 (percent of Canadian pet owners)... 25 Most Pet Owners Are Not Big Spenders... 25 Table 2-9: Amount Spent on Pet Products in Last 30 Days, March 2013 (percent of Canadian pet owners)... 25 Table 2-10: Pet Product Purchasing by Price Level: Food vs. Nonfood, 2013 (percent of pet owners)... 26 Trends in Pet Acquisitions: Shelters in Favor... 26 Table 2-11: Level of Agreement with Statement: People should adopt pets from shelters and not purchase them from shops/breeders, 2013 (percent of Canadian pet owners)... 27 PetSmart Charities Spurs Pet Adoption... 27 Pethealth Inc. (TSX:PTZ) Releases Second Annual PetPoint Report... 28 ii Packaged Facts January 2014

Canadian Pet Market Outlook, 2014 Table of Contents The Shift to Smaller Dogs... 28 Table 2-12: Size of Dogs, 2013 (percent of Canadian dog owners)... 29 The Aging Pet Population... 29 Table 2-13: Age of Dogs and Cats, 2013 (percent of Canadian pet owners)... 29 Overweight and Obese Pets Keep Costs Up... 30 Table 2-14: Level of Agreement with Statement: I have an overweight pet, 2013 (percent of Canadian pet owners)... 31 Figure 2-2: Share Of Dog Owners Who Walk Their Pets, 2013 (percent of Canadian dog owners)... 31 Pets Are Family The Kind You Pamper... 33 Table 2-15: Level of Agreement with Statement: I enjoy purchasing pet products that pamper my pet, 2013 (percent of Canadian pet owners)... 33 Pets as Family Trend Bolsters Pet Health/Wellness Spending... 33 Figure 2-3: Share Of Pet Owners Purchasing Health/Wellness-Related Foods And Treats, 2013 (percent of Canadian pet owners)... 34 Veterinary Costs Drive Canadians South... 34 Figure 2-4: Growth in Canadian Veterinary Expenditures vs. Growth in Canadian Pet Expenditures Overall, 1997 vs. 2009 (dollars per household)... 35 Figure 2-5: Share of Canadian Dog and Cat Owners Using Veterinary Services in Past 12 Months, 2013 (percent)... 36 Figure 2-6: Share of Canadian Pet Owners Who Carry Pet Health Insurance (percent)... 36 Pet-Positive Media Exposure... 37 Illustration 2-1: NatGeo Leader of the Pack Web Page... 38 Industry Emphasizes Pets Human Health Enhancement... 38 Illustration 2-2: HABRI Central Home Page... 40 Figure 2-7: Level of Agreement with Statement: My pet has a positive impact on my health, Physical vs. Mental, 2013 (percent of Canadian pet owners)... 41 Cause Marketing... 42 Pet Food Regulation and Oversight... 42 Chapter 3: Highlights... 45 Chapter 3: Industry Trends... 46 Introduction... 46 M&A and Investment Activity... 47 Merrick Acquires Castor & Pollux... 47 VCA Antech Acquires Associate Veterinary Clinics... 48 CanAm Pet Treats Acquires Darford Pet Treats... 48 Perrigo Acquires Sergeant s... 49 Radio Systems Corporation Gets Into Pet Waste Management... 49 January 2014 Packaged Facts iii

Table of Contents Canadian Pet Market Outlook, 2014 Del Monte Foods and Natural Balance Pet Foods Merge... 50 Nestlé Purina Acquires Petfinder... 50 Pethealth Acquires PurinaCare Pet Insurance... 51 Pfizer Spins Off Animal Health Division... 51 Cross-Market Trends... 52 Consolidation... 52 Premiumization... 52 Humanization... 53 Illustration 3-1: Burt s Bees New Line of Pet Care Products... 53 Globalization... 54 The Veterinary Channel... 55 Sales Opportunity: Therapeutic Foods... 55 Pet Insurance Expansion Benefits Veterinary Services... 56 Non-Medical Pet Services... 57 Pet Superstores Advance... 57 Figure 3-1: PetSmart Services Sales by Type and Cumulative Rate of Growth, 2006-2012 (percent and dollars)... 58 Other Stores Beef Up Services Offerings... 58 Table 3-1: PetSmart Global Sales of Pet Services, 2001-2012 (in millions of dollars)... 59 Illustration 3-2: Petland s Pet Spa Website Banner Ad... 59 Franchises Help Grow the Industry... 60 Pet Products... 61 Continued Interest in Premium, Natural Products... 61 Table 3-2: Select New Pet Product Releases in Canada, 2012-2013 (by marketer and brand)... 62 Figure 3-2: Level of Agreement with Statement: Natural/organic brand pet products are often better than standard national brand products, 2013 (percent of pet owners)... 66 Hill s Science Diet Goes Natural... 67 Illustration 3-3: Hill s Science Diet Ideal Balance (early name and packaging)... 68 Illustration 3-4: Hill s Science Diet Ideal Balance (revamped name and packaging)... 69 Illustration 3-5: Science Diet s Better Life Comparison... 71 Pet Health on Everybody s Agenda... 71 Cross-Channel Migration Puts Squeeze on Pet Specialty... 71 Human-Style and Human-Grade Pet Food... 73 Illustration 3-6: Brew Buddies Malted Barley Dog Treats... 74 Illustration 3-7: Weruva Website Banner Ad... 75 Grain-Free Gains Ground... 75 Illustration 3-8: Loblaws President s Choice Nutrition First-Premiere... 76 Illustration 3-9: Horizon Pulsar Grain-Free Food... 77 iv Packaged Facts January 2014

Canadian Pet Market Outlook, 2014 Table of Contents Raw Pet Food Hits the Mainstream... 77 Illustration 3-10: Brad s Raw for Paws Dog Treats... 78 Freeze-Dried and Dehydrated... 79 Illustration 3-11: Nutrisca Freeze Dried Dinner Bites... 81 Refrigerated Pet Food Propels Forward... 81 Illustration 3-12: Freshpet Pet Food and Treats Brand Lines (Website Screenshot)... 82 Specialized Diets Continue to Proliferate... 83 Illustration 3-13: Hill s Prescription Diet Metabolic Pet Food Line... 84 Illustration 3-14: Wellness Small Breed Senior Recipe and Petite Treats... 85 Nonfood Pet Supplies... 85 Nonfood/Food Cross-Over... 85 Illustration 3-15: Better Than! Gnawin Forever Treat/Toy... 86 That Pet Has Style... 86 Illustration 3-16: Fou Fou Dog Poochy Pouch... 87 Illustration 3-17: Catswall s Multi-Cat Raised Feeder... 88 Illustration 3-18: Bow Wow Couture s Mod Dog in Navy Collar/Bow Tie... 88 Travel Products... 89 Illustration 3-19: Kurgo s Auto Grass Keeps Fido Off Center Console... 89 Illustration 3-20: H2Fido s Portable Pooch Hydrator Super Weiner Style... 90 Chapter 4: Highlights... 91 Chapter 4: Retail Trends... 92 Pet Shoppers Say Let s Make a Deal... 92 Figure 4-1: Level of Agreement with Statement: I look out for lower prices, special offers, and sales on pet products, 2013 (percent of Canadian pet product shoppers)... 93 Figure 4-2: Level of Agreement with Statement: I shop for pet products at a variety of stores, 2013 (percent of Canadian pet product shoppers)... 93 Industry Mainstay: The Premium Shopper... 94 Figure 4-3: Level of Agreement with Statement: I am willing to spend extra to ensure the wellness of my pet, 2013 (percent of Canadian pet product shoppers)... 94 Pet Owners Shop at Supermarkets, Supercenters for Pet Supplies... 95 Table 4-1: Canadian Channel Choices for Pet Product Shopping in Last Three Months: Pet Food, Other Pet Supplies and Pet Medications, 2013 (percent of Canadian pet product buyers)... 96 Private Label Shows Strength and Weakness... 96 Figure 4-4: Usage Frequency vs. Opinion of Store Brand Products, 2013 (percent of Canadian pet product shoppers)... 97 January 2014 Packaged Facts v

Table of Contents Canadian Pet Market Outlook, 2014 Mass-Market Trends... 98 Supermarkets Draw Largest Portion of Pet Product Shoppers... 98 Walmart Claims Lion s Share of Pet Supplies Sales... 98 And Launches Pet Insurance in Canada... 99 Target Takes on Walmart... 99 Costco Expands its Reach... 100 Illustration 4-1: Costco Website Pet Supplies Ad... 101 Pet Supercenters Make Strides... 101 Table 4-2: Top Canadian Pet Superstore Chains, 2013... 102 Global Pet Foods... 102 Illustration 4-2: Global Pet Foods Brand Selection... 103 Canadian Pet Retailer Global Pet Foods Crosses U.S. Border... 104 Pet Valu... 104 Illustration 4-3: The New Look of Pet Valu... 105 PetSmart... 105 Illustration 4-4: PetSmart-Exclusive Top Paw Muppet Bandana... 106 Mondou... 106 Online Shopping... 107 Pet Shoppers Not Fully Embracing Online Shopping... 107 Figure 4-5: Level of Agreement with Statement: I am buying pet products online more than I used to, 2013 (percent of Canadian pet product shoppers)... 107 Figure 4-6: Time Frame for Most Recent Online Purchase of Pet Products, March 2013 (percent of Canadian online pet product shoppers)... 108 Up and Comers... 109 Veterinarians... 109 Natural Supermarkets... 110 Dollar Stores... 110 Drugstores/Convenience Stores... 111 Illustration 4-5: Walgreens Pet Shoppe Store Brand Pet Collars and Leashes... 112 Agricultural/Feed-Seed Stores... 112 Home Improvement Stores... 112 Chapter 5: Highlights... 113 Chapter 5: Pet Ownership Trends... 114 Methodology... 114 57% of Canadian Households Own Pets... 114 Figure 5-1: Canadian Ownership Levels for Selected Dog- or Cat-Owning Classifications, 2013 (percent)... 115 Single Pet Ownership Higher Than Multiple... 116 Table 5-1: Canadian Ownership Levels for Dogs and Cats by Number of Pets, 2013 (percent)... 116 vi Packaged Facts January 2014

Canadian Pet Market Outlook, 2014 Table of Contents More $100K+ Pet Households... 116 Figure 5-2: Canadian Pet Market Consumer Base: Households Earning $100,000 or More vs. Households Earning Under $100,000, 2013 (share of ownership)... 117 Table 5-2: Canadian Pet Market Consumer Base: Pet Ownership by Household Income, 2013 (percentage of pet owners)... 117 Dog and Cat Ownership Rates by Age... 118 Table 5-3: Canadian Pet Ownership Rates by Age Bracket, 2013 (percent)... 119 Senior Growth Rate Outpaces Population at Large... 119 Figure 5-3: Observed and Projected Population Increases: Canada vs. Select Developed and Developing Countries (percent)... 120 Figure 5-4: Canadian Population 65 and Over, Historical and Projected, 1971-2061 (percent of population)... 121 Impact of Boomers and Graying Population... 121 Role of Gen Xers and Gen Ys... 122 Table 5-4: Indexes for Selected Canadian Pet-Owning Classifications: By Generational Cohort, 2013... 122 Households With Kids... 122 Figure 5-6: Reported and Projected Fertility Rates of Select Countries, 1950-2050 (children per woman)... 123 Figure 5-7: Canadian Pet Ownership Rates by Household Composition, 2013 (percent)... 124 Table 5-5: Canadian Pet Ownership Rates by Age of Children, 2013... 125 Table 5-6: Canadian Pet Ownership Rates by Age of Children, 2013 (index)... 125 Half of Pet Owners Live in Urban Areas... 125 Table 5-7: Share of Canadian Pet-Owning Population by Location of Residence, 2013 (percent)... 125 Table 5-8: Canadian Pet Ownership Rates by Location of Residence, 2013 (index)... 126 Pet Ownership Across Ethnic Groups... 126 Table 5-9: Canadian Pet Ownership Consumer Base: White vs. Minorities, 2013 (index of pet-owning households)... 126 Table 5-10: Canadian Pet Ownership by Ethnic Origin, 2013 (percent of pet-owning households)... 127 Table 5-11: Growth of Visible Minorities in the Canadian Population, 2006-2011 (number and percent)... 127 Figure 5-8: Immigrant s Share of Canadian Population Growth: Recorded and Forecast, 1992-2055... 128 Table 5-12: Demographic Snapshot of the Canadian Population, 2011 (number and percent)... 129 Table 5-13: Select Indexes for Pet Ownership, 2013 (Canadian Households)... 130 January 2014 Packaged Facts vii

Table of Contents Canadian Pet Market Outlook, 2014 Pet Owner Psychographics... 132 Health-Related Sentiments and Practices... 132 Figure 5-9: Pet Ownership Influence on Health, 2013 (percent of Canadian pet owners)... 132 Table 5-14: Health-Related Psychographic Indicators by Type of Pet Owned, 2013 (percent of Canadian pet owners)... 133 Table 5-15: Health-Related Psychographic Indicators, by Pet Ownership: 2013 (index of Canadian pet owners)... 134 Shopping-Related Sentiments and Practices... 135 Figure 5-10: Attitudes Towards Spending on Pet Products: 2013 (percent of Canadian pet owners)... 135 Table 5-16: Shopping-Related Psychographic Indicators, by Pet Ownership, 2013 (percent of Canadian pet owners)... 136 Table 5-17: Shopping-Related Psychographic Indicators, by Pet Ownership: 2013 (index of Canadian pet owners)... 136 Food Labeling and Ingredients Sentiments and Practices... 136 Figure 5-11: Attitudes Towards Natural/Organic Pet Products: 2013 (percent of Canadian pet owners)... 137 Table 5-18: Food Labeling and Ingredient-Related Psychographic Indicators, by Pet Ownership, 2013 (percent of Canadian pet owners)... 138 Table 5-19: Food Labeling and Ingredient-Related Psychographic Indicators, by Pet Ownership, 2013 (index of Canadian pet owners)... 139 Technology-Related Sentiments and Practices... 140 Figure 5-12: Internet Browsing and Shopping Behavior (percent of Canadian pet owners)... 140 Table 5-20: Technology-Related Psychographic Indicators, by Pet Ownership: 2013 (percent of Canadian pet owners)... 141 Table 5-21: Technology-Related Psychographic Indicators, by Pet Ownership: 2013 (percent of Canadian pet owners)... 141 Purchasing Patterns... 142 Pet Food Purchasing Patterns... 142 Treat Purchasing Patterns... 142 Cat Litter Purchasing Patterns... 143 Flea/Tick Control and Heartworm Prevention Purchasing Patterns... 144 Figure 5-13: Canadian Pet Food Purchasing Patterns (percent of dog and cat owners)... 145 Table 5-22: Dog Food Purchasing Patterns by Demographic Indicator, 2013 (percent of Canadian dog owners)... 146 Table 5-23: Dog Food Purchasing Patterns by Demographic Indicator, 2013 (percent of Canadian dog owners)... 148 Table 5-24: Cat Food Purchasing Patterns by Demographic Indicator, 2013 (percent of Canadian cat owners)... 150 Table 5-25: Cat Food Purchasing Patterns by Demographic Indicator, 2013 (percent of Canadian cat owners)... 152 viii Packaged Facts January 2014

Canadian Pet Market Outlook, 2014 Table of Contents Figure 5-14: Treat Purchasing Trends, 2013 (percent of Canadian dog and cat owners)... 154 Table 5-26: Dog Treat Purchasing Patterns by Demographic Indicator, 2013 (percent of Canadian dog owners)... 155 Table 5-27: Dog Treat Purchasing Patterns by Demographic Indicator, 2013 (index of Canadian dog owners)... 157 Table 5-28: Cat Treat Purchasing Patterns by Demographic Indicator, 2013 (percent of Canadian cat owners)... 159 Table 5-29: Cat Treat Purchasing Patterns by Demographic Indicator, 2013 (percent of Canadian cat owners)... 161 Figure 5-15: Cat Litter Purchasing Trends, 2013 (percent of Canadian cat owners)... 163 Table 5-30: Cat Litter Purchasing Patterns by Demographic Indicator, 2013 (percent of Canadian cat owners)... 164 Table 5-31: Cat Litter Purchasing Patterns by Demographic Indicator, 2013 (percent of Canadian cat owners)... 166 Figure 5-16: Flea and Tick Control Purchasing Patterns, 2013 (percent of Canadian dog and cat owners)... 168 Figure 5-17: Heartworm Prevention Purchasing Patterns, 2013 (percent of Canadian dog and cat owners)... 168 January 2014 Packaged Facts ix

Canadian Pet Market Outlook, 2014 Chapter 1: Executive Summary Chapter 1: Executive Summary Introduction Scope and Methodology This report analyzes Canadian pet market retail sales and trends during the 2013-2014 forecast period, overall and for these four categories: veterinary services, pet food, nonfood pet supplies, and non-medical pet services. It examines the most important developments shaping the market and their implications, including external and internal market drivers, industry trends (mergers and acquisitions, marketing, new product development, etc.), retail channel trends, and trends in pet ownership. Report Methodology The information contained in this report was obtained from primary and secondary research. Primary research includes national online consumer polls of Canadian adult pet owners (age 18+) conducted by Packaged Facts in March 2013, to measure purchasing patterns and attitudes with regard to pet products and services. With a sample size of approximately 500, these surveys are based on national online research panels that are census representative on the primary demographic measures of age, gender, geographic region, race/ethnicity, and household income. Our primary research also includes interviews with pet market experts; participation in pet industry events including the American Pet Products Association s Global Pet Expos (2004-2013) and Petfood Industry/Watt Publishing s Petfood Forums (2004-2013); on-site examination of retail and service provider venues; and Internet canvassing including blogs. Secondary research includes information- and data-gathering from consumer business and trade publications including Pet Age, Pet Business, Pet Product News International, Petfood Industry, and Veterinary Practice News; company profiles in trade and consumer publications; and information culled from Packaged Facts extensive pet market research database and report collection. Our estimates of market size and company performance are based on reported revenues of pet product manufacturers, retailers, and pet services providers; consultation with industry January 2014 Packaged Facts 1

Chapter 1: Executive Summary Canadian Pet Market Outlook, 2014 experts at the Pet Industry Joint Advisory Council of Canada (PIJAC Canada); surveys of independent and chain pet store retailers; government data including information collected by Statistics Canada; and figures from other market research sources. Our analysis of pet ownership trends primarily relies on cross-tabulations of data collected via Packaged Facts proprietary survey. 2 Packaged Facts January 2014

Canadian Pet Market Outlook, 2014 Chapter 1: Executive Summary Market Trends Pet Industry Advances The Canadian pet industry continues to chug along, growing at a slightly better rate in 2012 than it did in 2011. Although the pet market is a mature one, pet owners still have plenty of pet expenses that will only grow as the pet population expands. Total Canadian sales of pet products and services rose 4.0% in 2012, and sales are forecast to be up 4.4% in 2013. During 2012, Canadian pet industry sales totaled $6.3 billion, up from $6.06 billion in 2011, and 2013 sales are expected to reach nearly $6.6 billion. Sales of veterinary services are expected to rise 2.3% to $2.25 billion, and sales of pet food should reach $2 billion after a 5.3% increase. Pet supplies expected 5.5% increase will bring the category to $1.4 billion, and pet services 6.5% increase will result in sales of nearly $1 billion. As discussed later in this report, although the veterinary category accounts for one of the largest shares of pet market sales, the rise in expenditures can be at least partially traced to inflated veterinary costs, rather than an increase in the number of pet owners using veterinary services. In fact, approximately 40% of pet owners do not take their pets for annual visits, and many Canadians are looking south of the border for their veterinary needs. In the pet food category, much of the growth is coming from outside the core mass market, which has lost shoppers at both ends of the product pricing spectrum, with bargain-seeking shoppers migrating into lower-priced channels like The Real Canadian Superstore, Lowblaws, Walmart, dollar stores and wholesale clubs, and many other shoppers looking for premium and superpremium products. Compared with pet food, most nonfood pet supplies are more discretionary and less brand dependent, so this category has suffered in recent years, although it shows signs of rebounding. For their part, non-medical pet services continue to expand geographically, in terms of the needs they are meeting, and upwards price-wise. Looking ahead, all four pet market categories are expected to register equal or slightly improved performance in 2014. Considering the market as a whole, sales will rise to $8.3 billion by 2018, with annual increases between 4.5% and 5%. [Table 1-1] January 2014 Packaged Facts 3

Chapter 1: Executive Summary Canadian Pet Market Outlook, 2014 Table 1-1 Total Canadian Retail Sales of Pet Products and Services, 2008-2013 (in millions of dollars) Year Sales % Change 2013... $6,580 4.4% 2012... 6,300 4.0 2011... 6,060 4.5 2010... 5,800 4.2 2009... 5,560 3.8 2008... 5,360 3.8 Source: Packaged Facts Market Share by Category and Animal Type As of 2013, veterinary services the most directly health-related category leads in market share, at 34% of pet industry sales, followed by pet food at 30%, nonfood pet supplies at 21%, and non-medical pet services at 15%. By animal type, dogs dominate, at 66% of overall market sales, with cats at 30% and other pets at 4%. Because cats are professionally groomed, boarded and trained far less often than dogs, the canine share is highest in the nonmedical pet services category, at 90%. Pet Owners Still Spending Despite Slow Economy Thankfully, consumers diminished economic fortunes have not translated into reduced pet market spending. Based on Statistics Canada (StatCan) tracking of household final consumption expenditure (a measure of the market value of all goods and services purchased by households), overall household spending on both pets/pet food and veterinary/other pet services outpaced that of many other categories, including housing, and food and beverages, as well as household spending overall. Between 2008 and 2012, spending on pets and pet food grew by a CAGR of 4.3% and spending on veterinary/other pet services by 3.5%, compared with an overall CAGR of 2.6%. Growth in pets and pet food was highest in 2009, and growth in veterinary/other pet services was greatest in 2008. Packaged Facts own consumer survey also reveals that pet owners aren t scrimping when it comes to their companion animals. When asked if they were spending less on pet products due to the economy, only 26% agreed, and only 8% strongly agreed. However, this 4 Packaged Facts January 2014

Canadian Pet Market Outlook, 2014 Chapter 1: Executive Summary continued spending does not correlate to a belief that pet products are affordable. In response to the statement, Many pet products are becoming too expensive, nearly two-thirds (63%) agreed, and only 9% disagreed. The expense of pets has driven many pet owners to look for ways to conserve on products. Among survey respondents, 68% indicated that they seek out lower prices, special offers and sales. [Table 1-2] Table 1-2 Level of Agreement with Statements Regarding Attitudes Toward Spending on Pet Products, 2013 (percent of Canadian pet owners) Statement Strong Agree Agree No Opinion Disagree Strong Disagree I am spending less on pet products these days because of the economy... Many pet products are becoming too expensive... I look out for lower prices, special offers, and sales on pet products... I am willing to spend extra to ensure the wellness of my pet... 8% 18% 31% 24% 18% 28 35 28 5 4 27 41 22 6 5 30 39 19 6 6 Source: Packaged Facts Survey, March 2013 Trends in Pet Acquisitions: Shelters in Favor Growth in the pet population depends on the availability pets, which may be obtained from many sources. But the tide of public opinion is moving away from pets purchased in stores or from breeders, and toward those obtained from shelters and other animal welfare organizations. As of November 2013, the Best Friends Animal Society listed 39 jurisdictions in North America with some form of retail pet sales ban, with 8 of them passing the laws since January 2013 (bestfriends.org). Six Canadian cities appear on the list, including Richmond, BC; Toronto, Ontario; and Rosemont-La Petite-Patrie, Quebec. Legitimate breeders, too, are facing increasing opposition due to bad publicity over the puppy mill type operations run by unscrupulous breeders, a trend reflected in declining CKC registrations. While there are plenty of above-board breeders, these are nevertheless signs of the times for the pet industry. With the industry having worked long and hard to elevate pets to child-like status in order to help justify the sale of higher-priced products, it s no wonder public opinion and legal rulings continue to shift in favor of regulating or eliminating any activity harboring potential for companion animal mistreatment. In Packaged Facts March January 2014 Packaged Facts 5

Chapter 1: Executive Summary Canadian Pet Market Outlook, 2014 2013 survey, three-quarters (73%) of pet owners agree that People should adopt pets from shelters and not purchase them from shops/breeders, with 37% in strong agreement. The Aging Pet Population Like the human population, the pet population is graying a potent driver of increased pet market spending in many areas. As of March 2013, 36% of dog owners have a dog age 7 or older, while 47% of cat owners have a cat in that oldest age bracket, according to Packaged Facts latest survey. Additional consumer survey data bear out the fact that the nation s pet population is getting older. In a 2011 report, Agriculture and Agri-Foods Canada s Internation Market Bureau revealed that the average age of cats in Canada was 5.7 years and the average age of dogs was 5.9, with both numbers forecast to rise in coming years. Overweight and Obese Pets Keep Costs Up As in the U.S., overweight and obese pets are a growing problem in Canada, going hand in hand with the obesity epidemic among humans. Canada s Pet Wellness Report, based on a study conducted in 2011 through a partnership between the Canadian Veterinary Medical Association (CVMA) and Hill s Pet Nutrition, confirms the magnitude of the problem. Surveys of Canadian pet owners and veterinarians, conducted for the CVMA and Hill s by Ipsos Reid, revealed that according to veterinarians, overfeeding is the most common mistake pet owners make in feeding their dogs or cats. Weight control/management was cited most often by veterinarians as one of the most important things pet owners can do to increase the length of their pet s life, yet fewer than 2 in 10 pet owners were found to feed their pet(s) the amount recommended on the pet food package. Pet owners surveyed admitted they are nearly twice as likely to buy a pet food based on what their pet likes to eat (60%) vs. what will actually meet their health needs (33%). Veterinarians also pointed out that pet owners are more likely to use price as the key factor in choosing a pet food (19%) than the food s ability to meet their pet s health (14%) or life stage (age) needs (8%). The combination of pet preference and cost contributes to poor food selection, which can contribute to weight gain. Veterinary Costs Drive Canadians South The cost of maintaining a pet is not limited to pet food and cat litter. As noted earlier, one of the main categories driving sales in the overall pet market is veterinary. Although emergency and sick visits factor into these costs, the vast majority of pet owners expenses on veterinary 6 Packaged Facts January 2014

Canadian Pet Market Outlook, 2014 Chapter 1: Executive Summary care revolve around routine visits and preventative care. However, pet owners are beginning to question the need for these expenses. For example, despite guidelines that recommend vaccinating dogs every three years, many veterinarians continue to push annual vaccinations, a trend that drives up the cost of routine visits (cbc.ca, October 4, 2013). In an effort to spare themselves some of the associated costs, some Canadian pet owners are seeking veterinary care for their pets south of the border. Especially for pet owners living close to the border, the U.S. presents an opportunity to save substantially. Radio Canada International reports in a recent story that Canadian pet owners can save upwards of $100 on simple vaccinations by traveling south. For more complex procedures, the savings can be even greater (rcinet.ca, July 26, 2013). Although some veterinarians are claiming the prices are lower because the quality of care is lower, many pet owners return satisfied with both the service and costs at U.S. clinics. As one pet owner noted, The services are probably equal, it s just the vet fees are really expensive in Canada. They have excellent service here, I can t complain (Watertowndailytimes.com, August 7, 2013). Some U.S. clinics are reporting that as much as one third of their clientele are made up of Canadian pet owners, and that the numbers grow each year. January 2014 Packaged Facts 7

Chapter 1: Executive Summary Canadian Pet Market Outlook, 2014 Industry Trends Market Structure The Canadian pet market comprises both products and services. Products further divide into pet food and nonfood pet supplies. Services further segment into veterinary services and non-medical services (grooming, boarding, training, etc.). Since the mid-1990s, however, this market structure has been gradually shifting in ways that will continue to redefine the pet industry through 2014 and beyond, including additional cross-over and partnering between retailers, product makers, and service providers and shelters, and with increasing overlap between marketers of food and nonfood products. Thousands of companies compete in pet services, ranging from massive national players like retail pet care services provider PetSmart and veterinary hospital operator VCA Antech, which just expanded its reach in Canada through the 2012 purchase of Associate Veterinary Clinics, to the individual dog groomer or trainer operating in a local market. The products side of the global pet market encompasses over 2,500 companies and counting. As of May 2013, the Pet Industry Advisory Council of Canada (PIJAC Canada) had over 500 members, including pet product manufacturers, importers, manufacturers representatives and livestock suppliers. The types of firms competing in the pet market are varied, reflecting their sheer numbers and the wide assortment of products and services offered. Although most of the largest players are public, the majority of market participants are privately held. Some market segments are dominated by one or two companies, but the market is so vast and diverse that most areas are still fragmented among numerous companies large and small. Broadly speaking, the competitive structure of the pet products market has not changed in quite a few years. On the pet food side, Nestlé Purina and Mars control a little over half of the business, with Del Monte (whose pet business is now owned by KKR and other investors see below), Iams (Procter & Gamble), Hill s (Colgate-Palmolive) and Lowblaws collectively garnering approximately one-quarter of sales. In nonfood supplies, overall market leaders, most fielding broad lines covering multiple categories and animal types, include Central Garden & Pet, Hartz Mountain, Rolf C. Hagen, Coastal Pet Products, Petmate (Doskocil), Sergeant s Pet Care (recently acquired see below), and Van Ness. 8 Packaged Facts January 2014

Canadian Pet Market Outlook, 2014 Chapter 1: Executive Summary As this partial list suggests, the nonfood side of the business is more fragmented than the pet food side, with the top four or five companies together accounting for less than half of overall market sales. In addition, the largest category flea/tick care products is controlled by the animal health divisions of global pharmaceutical companies, with Merial (Frontline) and Bayer Corp. (Advantage and K9 Advantix) leading the pack, although retail players Central Garden & Pet/Farnam, Hartz, and Sergeant s are also big in flea/tick products. M&A and Investment Activity: Pet Health and Natural Products Star Much of the recent M&A activity taking place in the past few years has not directly involved Canadian-owned companies, but there have been several acquisitions that impact the Canadian pet market just the same. Many of the key players in the global pet market pursued acquisition opportunities between 2011 and 2013. In June 2012, for example, Iams parent Procter & Gamble finalized its acquisition of natural/holistic pet food maker Natura Pet Products, and in November 2012, Del Monte agreed to be bought for $4 billion in cash by a group of investors including Kohlberg Kravis & Roberts (KKR). Both Del Monte and P&G are among the pet food industry s top five players, so the repercussions of the deals will likely be felt for many years. 2011 saw the sale of Doskocil Manufacturing Co., Inc. (dba Petmate) to Wind Point Partners, a move that has since led to an acquisition spree of sorts for Petmate. Other deals of note in 2011 included Cargill acquiring global animal nutrition company Provimi for $2.1 billion, and Japanese firms Unicharm taking a 51% stake in Hartz, a subsidiary of Sumitomo Corp. While many of the deals taking place in 2012 and 2013 were smaller, several significant deals stood out, especially as related to pet health. Premiumization In recent years, most of the dollar growth in the Canadian pet market has come from higherticket sales of products and services as opposed to volume gains. Fueling this trend is a steady stream of superpremium products and services, with natural and organic products especially important on the products side, and expensive high-tech medical therapies, new prescription pet medications, and luxury services especially important on the services side. January 2014 Packaged Facts 9

Chapter 1: Executive Summary Canadian Pet Market Outlook, 2014 Humanization Overlapping with premiumization and in force for several years now, the humanization trend has multiple facets. First, it s a natural expression of the pets as family trend, whereby pet owners treat their pets like children and are highly receptive to products similar to the ones they use for themselves. Not coincidentally, many of the services and products entering the market today are directly reminiscent of human fare, no doubt appealing to the pet owner as much as the pet. Examples include veterinary procedures like chemotherapy, MRIs, and hip replacements; pet supplements like glucosamine and omega 3s; human-grade pet foods containing superfruits or touted as gluten free; designer pet supplies, including Burberry apparel and Simmons Beautyrest pet beds; and luxury services including boarding options more like hotel rooms. Newman s Own Organics CEO Peter Meehan explained that this is why his company began selling pet food 12 years ago, This whole industry has grown up around anthropomorphic behavior of humans we take trends and things that we re doing and we apply them to animals (Bloomberg Businessweek, April 2013). Globalization As U.S. pet companies continue to look abroad northward for growth, and other foreign companies increasingly make inroads into Canada, the Canadian pet market is becoming even more global. Pet companies established in Canada are avidly mining less developed parts of the world for growth, especially the BRIC nations (Brazil, Russia, India and China). And the U.S. pet insurance business now encompasses two major players crossing over from Canada Pethealth and Trupanion (formerly Vetinsurance in Canada). Canadian pet retailers have also been expanding into the U.S. market of late. Pet Valu, the third largest pet specialty store in North America, according to Pet Business, has made a major push into the U.S. market. The retailer, which operates close to 500 stores in the two countries, has grown its U.S. footprint to 94 stores as of February 2013, adding 35 stores since March 2012. The company, which focuses on smaller formats, has locations in Connecticut, Maryland, New Jersey, Pennsylvania and Virginia, and just signed leases on three locations in Long Island, New York (two in former Blockbuster stores, another in a former Sleepy s store). Another Canadian retailer, Global Pet Foods, entered the U.S. market with two stores in Connecticut in 2011, although U.S. expansion seems to have halted since then. 10 Packaged Facts January 2014

Canadian Pet Market Outlook, 2014 Chapter 1: Executive Summary Retail Trends Pet Shoppers Say Let s Make a Deal As in the U.S., retailing pet products in Canada has never been more competitive. Four trends have conspired to intensify the competitive landscape for pet product retailers: 1) expansion of pet superstores such as PetSmart and Pet Valu; 2) growth of mass merchandisers in pet retail, such as Walmart; 3) the Internet; 4) the sluggish economy. All of these factors have created shoppers who demand value in the products they buy, chart out shopping trips beforehand, and switch channels to make ends meet. Packaged Facts March 2013 survey shows that today s pet product shoppers are looking for deals. Among those who buy pet products, over two-thirds (68%) agree they look out for lower prices, special offers, and sales on pet products, while 22% have no opinion on the matter. One of the main ways in which pet owners are deal-seeking is by shopping around. Well over half (54%) of pet product buyers agree they shop for pet products at a variety of stores, with almost 20% indicating a strong level of agreement. What this means for retailers is that customer loyalty may very well be a thing of the past, and that to attract new consumers to the aisles, low prices are a must. [Figure 1-1] January 2014 Packaged Facts 11

Chapter 1: Executive Summary Canadian Pet Market Outlook, 2014 Figure 1-1 Level of Agreement with Statement: I look out for lower prices, special offers, and sales on pet products, 2013 (percent of Canadian pet product shoppers) 45% 40% 41% 35% 30% 27% 25% 22% 20% 15% 10% 5% 6% 5% 0% Strongly Agree Somewhat Agree No Opinion Somewhat Disagree Strongly Disagree Source: Packaged Facts survey, March 2013 Industry Mainstay: The Premium Shopper Premium products have become a fact of life in the pet market, and premium product shoppers are one of the main drivers of pet product sales. Pet owners dedication to their pets health contributes to this trend, as many pet owners are willing to do whatever it takes to keep their pets healthy. This phenomenon is a driving force behind the success of premium products. In the pet food market, a premium product is often equated with a healthier product, something hard to cut back on even in tough times. The March 2013 Packaged Facts survey found that a resounding 69% of pet owners would be willing to spend extra to ensure the wellness of their pet. As discussed in Chapter 2 of this report, one of the factors that may be influencing pet owners decision to purchase higher quality products even if it means higher prices is the growing tendency for pet owners to consider their pets part of the family, a belief held by 84% of the pet-owning population. Pet Owners Shop at Supermarkets, Supercenters for Pet Supplies According to Packaged Facts March 2013 survey, purchasing rates shift noticeably when considering channels through which pet product buyers made a purchase in the last three 12 Packaged Facts January 2014

Canadian Pet Market Outlook, 2014 Chapter 1: Executive Summary months across three categories: pet food, pet medications, and other pet supplies. By this measure, supermarkets come out on top in pet food, attracting 42% of pet product buyers, followed by Walmart at 37% and PetSmart at 25%. In addition, five other channels attract at least 10% of pet product buyers as pet food shoppers: pet chains other than PetSmart, supercenters other than Walmart, independent pet stores, veterinary offices and wholesale clubs. Walmart leads in other pet supplies, at 35%, followed by PetSmart at 29% and supermarkets at 23%. In pet medications, not surprisingly, veterinarians are No. 1, at 60%, followed by Walmart at 10% and PetSmart at 9%. January 2014 Packaged Facts 13

Chapter 1: Executive Summary Canadian Pet Market Outlook, 2014 Pet Ownership Trends 57% of Canadian Households Own Pets F or marketers across the entire pet industry spectrum, pet ownership is of utmost importance. A strong base of pet owners is essential to driving sales of both products and services. In 2013, the percentage of Canadian households that own pets (including dogs, cats and other household pets) was at 57%, according to Packaged Facts consumer survey data, a percentage equating to over 7.5 million households. The survey revealed that cats are more popular pets than dogs, and both were more popular than the other pet classification: in 2013, 37% of Canadian households owned one or more cats, 32% owned dogs, and 9% owned other types of pets, including fish, birds, small mammals, and herptiles. In addition, 16% of survey respondents indicated that they lived in a household with both dogs and cats (either single or multiples of each type), 4% owned at least one cat and one other pet, and 3% owned at least one dog and one other pet. [Figure 1-2] Figure 1-2 Canadian Ownership Levels for Selected Dog- or Cat-Owning Classifications, 2013 (percent) Any 57% Cat 37% Dog 32% Dog and Cat 16% Other 9% Cat and Other Dog and Other 4% 3% 0% 10% 20% 30% 40% 50% 60% Note: Percentages reflect ownership of one or more pet. Source: Packaged Facts Consumer Survey, March 2013 Likely hindering ownership of companion animals other than dogs and cats is the lower-level marketing focus, a function of smaller animals relatively low return on shelf space compared with the higher-priced and faster-moving canine and feline products. Additionally, animals other than dogs and cats may be less resistant to economic cutbacks since the human/animal 14 Packaged Facts January 2014

Canadian Pet Market Outlook, 2014 Chapter 1: Executive Summary bond is arguably less of a factor, especially with regards to the adults who ultimately make the product purchasing decisions. That said, smaller animals of all types birds, small mammals, herptiles, fish are frequently the pet market entry point for kids, something the pet industry has begun to encourage more heavily in recent years. Single Pet Ownership Higher Than Multiple A greater percentage of Canadian households own just one dog or cat than own multiples. Over three-quarters (77%) of survey respondents live in households with one dog and 61% with one cat, compared with 14% who own two dogs and 26% who own two cats. The percentages drop even further as the number of pets increases. More $100K+ Pet Households Higher-income households are a crucial component of the pet market, with households earning $100K or more annually accounting for a greater percentage of pet owners than their numbers would suggest. According to Packaged Facts consumer survey data, the percentage of households earning over $100K annually accounted for only 21% of the population, but accounted for 25% of pet owners in general, 29% of dog owners, 22% of cat owners and 26% of other pet owners. Dog and Cat Ownership Rates by Age According to the Packaged Facts survey, approximately 57% of Canadian households owned pets as of 2013. By age, however, the 45-54 age group was well ahead of the average, with a pet ownership level of 75%. This group also ranked highest in ownership levels in both the dog and cat classification, and came in second (along with those age 25-34) in the other classification. The 18-24 age group is at the top for other pet ownership, at 15%, although this group ranked third in overall pet ownership and fifth in cat ownership. At 39%, the age 65+ group had the lowest percentage of pet ownership, and was also in last place across all classifications. Nearly half of the age group represented primarily by Boomers, the 55-64 age group, owned pets in 2013, at 48% for overall ownership levels, and had a higher level of cat ownership than those age 18-24. January 2014 Packaged Facts 15