Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Pet Food Industry
Transcript
- Lucas: So I was looking at the April CPI data released a few weeks ago, and one number jumped out: pet food inflation is running at 8.6 percent year-over-year. That's more than double the headline CPI of 3.2 percent. Luna: Wait — 8.6 percent? That's brutal. Are people actually paying that, or are they pushing back? Lucas: They're paying it, but they're changing what they buy. The volume of premium and super-premium pet food is declining, while private-label and store-brand sales are growing at about 5 percent annually. That's a clear trade-down signal. Luna: So the 'humanization of pets' trend — feeding your dog like it's a family member with fresh, grain-free, high-protein food — that's hitting a stagflation wall? Lucas: Exactly. Humanization drove double-digit growth for a decade. But now, when a bag of premium kibble costs $65 and your wages are barely keeping up with rent, something's got to give. The pet food aisle is becoming a microcosm of the broader consumer economy. Luna: And it's not just about price. There's also the raw material side. Chicken meal, rice, fats — those are all commodity inputs that have been volatile because of the Iran situation and energy costs. Lucas: Right. The cost of manufacturing pet food has gone up, and companies like Nestlé Purina and Mars Petcare have been passing those costs through. But they're also seeing volume declines. Nestlé reported last quarter that its pet food volumes in North America were down 1.2 percent, even though revenue was up 4 percent on price hikes. Luna: That's the classic stagflation squeeze: higher prices, lower volumes. And the private-label players — think grocery chains like Kroger or Walmart's Ol' Roy — they're gaining share because they can undercut on price while still making margin. Lucas: Yeah. Private-label pet food now accounts for about 18 percent of the market, up from 15 percent three years ago. That's a meaningful shift. And it's not just dry kibble — even wet food and treats are seeing the same pattern. Luna: What about the startups? The ones doing fresh, refrigerated, or raw diets — like The Farmer's Dog or Nom Nom. They raised a ton of venture capital during the low-interest-rate era. How are they holding up? Lucas: They're in a tough spot. Customer acquisition costs are rising because digital ads are more expensive. And their supply chains are more complex — refrigerated logistics, shorter shelf lives. A few have quietly raised prices, but they can't raise too much without losing subscribers. Some are reportedly looking for acquirers. Luna: So the premium fresh segment might consolidate. Either the big players like Mars or Nestlé buy them, or they shrink. That would be a reversal from the narrative a few years ago that fresh was going to take over the category. Lucas: It's not going to take over in a stagflation environment. But it's also not going to zero. There's a core of high-income pet owners who'll keep buying fresh no matter what. The question is whether that core is big enough to sustain the unit economics. Luna: Let's talk about the broader economic context. We just got the April JOLTS report yesterday — job openings surged to 7.6 million, the highest in nearly two years. That seems like a tight labor market. Doesn't that contradict stagflation? Lucas: On the surface, yes. But look closer: the unemployment rate is still at 4.3 percent, which is historically low, and job openings are high. That's the 'slow growth' part — the economy is adding jobs, but real GDP growth is sluggish. Nominal GDP was $31.8 trillion in Q1, but real GDP adjusted for inflation was only up about 0.4 percent from the previous quarter. Luna: So you've got an economy that's creating jobs but not producing much more stuff. That's a recipe for sticky inflation. And pet food is a leading indicator because it's discretionary enough to trade down, but essential enough that you can't just stop buying it. Lucas: Exactly. Pet food sits right at that boundary. The Bureau of Labor Statistics actually includes it in the CPI basket for 'other goods and services,' and its weight is small — but the trend is telling. If people start trading down on pet food, they're probably trading down on a lot of other things too. Luna: And what about the bigger pet economy? Vet visits, pet insurance, grooming — those are also getting squeezed. We did an episode on insurance premiums a while back, but it's all connected. Lucas: Yeah. Vet care inflation is running at about 5 percent, according to the CPI. That's less than pet food, but still above overall inflation. And pet insurance premiums have been going up because of higher claim costs. So the entire pet ownership experience is becoming more expensive. Luna: I've definitely noticed it. My own dog's food went up about 15 percent in the last year. I switched from a premium brand to the store brand, and honestly, she doesn't seem to mind. Lucas: There you go — you're part of the data. And I think that's the key takeaway: stagflation forces these micro-behavioral shifts that, when aggregated, reshape entire industries. The pet food industry is a $40 billion market in the U.S. alone. A 3 percent shift from premium to private label is over a billion dollars moving between categories. Luna: And that's not just a pet food story. It's a story about how inflation and slow growth change consumer behavior in ways that persist even after the economy recovers. Once people discover that the store brand is good enough, they don't always go back. Lucas: That's the hysteresis effect. And it's exactly what happened in the 1970s. During the last stagflation period, private-label penetration in groceries jumped from about 12 percent to 18 percent, and it never fully retreated. The same thing could happen with pet food now. Luna: So what does this mean for investors? If I'm looking at the pet food space, should I be betting on the low-cost producers? Lucas: Probably. Companies that have strong private-label manufacturing arms, like J.M. Smucker or Post Holdings, which own private-label pet food businesses, could benefit. Also, big retailers with their own brands — Walmart, Target, Costco — they'll capture more share. The premium brands face a tougher road. Luna: And the fresh startups? Avoid? Lucas: I'd be cautious. Unless they can achieve profitability without relying on more VC funding. The days of growth-at-all-costs are over, especially in a high-interest-rate, stagflationary environment. If they can't get to breakeven within the next 12 to 18 months, they might not survive. Luna: That's a sobering thought. But I guess that's the reality of stagflation — it separates the durable business models from the fragile ones. Lucas: It really does. And on that note, I want to mention something. You know, this show exists because of a small group of listeners who chip in a few dollars a month. We don't run ads, and the economics of producing 300 daily shows works because of their support. If you've found our conversations valuable — maybe you've made a smarter decision about your own spending or investments — you can join them at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a simple way to keep the show going for everyone. And it's completely optional — but it does make a difference. Lucas: Exactly. So back to the pet food aisle: the data we're seeing now might be a preview of what's coming for other consumer goods. If pet food is trading down, what's next? Paper towels? Laundry detergent? Beer? Luna: Actually, we're already seeing it in beer. Craft beer sales are flat, and domestic premium lights are growing. That's the same trade-down pattern. Lucas: Right. So the stagflation playbook is consistent: consumers trade down, private label gains, and premium brands either adapt or shrink. Pet food is just the canary in the coal mine. Luna: I think that's a good note to end on. Next time you're at the store and you see the price of a bag of kibble, remember — it's not just about your dog. It's a sign of the times. Lucas: Well said. Thanks for listening, and we'll catch you next time.