Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Pet Food Industry
Transcript
- Lucas: Luna, I have been watching this one data point that feels completely out of step with everything else we talk about on this show. The New York Fed's latest survey on household financial worries — highest level since July 2022. People are clearly feeling squeezed. Luna: Right, that came out Monday. And yet pet ownership is still near record highs, and pet food spending keeps climbing. Lucas: Exactly. That is the contradiction I want to drill into today. The global pet food market is roughly $150 billion, and it's growing at around 4 to 5 percent annually even as real GDP growth here in the US is running at just 1.6 percent. How does that work? Luna: Well, the humanization trend is a huge part of it. People treat their pets like family, and that doesn't stop when inflation bites. Lucas: It's almost recession-proof in a weird way. During the 2008 downturn, pet food sales actually grew. But the mix shifted — people traded down from premium to mid-tier, or from wet to dry. Now we're seeing something slightly different. Luna: What's different this time? Lucas: Premium is holding up better than expected. Brands like Hill's Science Diet and Royal Canin — both owned by Mars, by the way — are reporting strong demand. Part of that is the aging pet population. Older dogs and cats need prescription diets, and people are reluctant to switch those. Luna: So the medicalization of pet food is a factor. But what about the budget side? With CPI still elevated — April's reading was 332.4, up from 330.3 — lower-income households must be feeling pressure. Lucas: They are. The average hourly earnings number just came in at $37.50, up maybe 2.5 percent year-over-year. That's not keeping pace with inflation. So you're seeing two things happen simultaneously. Luna: I'm guessing private label is one of them. Lucas: Bingo. Store brands from Walmart, Target, and Costco have gained share. PetSmart's own brand, Simply Nourish, is growing double digits. But here's the twist: even within private label, they're adding functional ingredients — probiotics, omega-3s, things you used to only see in premium. Luna: So the floor is rising. And the ceiling — what about the ultra-premium segment? Raw, freeze-dried, fresh-frozen brands like Freshpet or The Farmer's Dog? Lucas: That's the second trend. Freshpet's revenue grew about 30 percent last year. They're opening new production lines. The barrier is price — a 10-pound bag of Freshpet costs around $40, versus $15 for kibble. But for a certain demographic, that trade-off is acceptable. Luna: It's almost a V-shaped recovery within the category. The very rich keep upgrading, the middle gets squeezed, and the bottom switches to value. But the overall volume stays high. Lucas: Exactly. And that creates a strategic problem for the big players — Nestlé Purina, Mars, Colgate-Palmolive's Hill's. They have to manage multiple tiers at once. Purina, for example, has Pro Plan at the top, then Purina One in the middle, and Dog Chow at the value end. They need to keep each segment profitable. Luna: And with input costs rising — corn, soy, chicken, packaging — they're reformulating. I noticed that several brands have quietly switched from chicken meal to chicken by-product meal, which is cheaper. Lucas: That's the kind of detail listeners might not catch. The ingredient panel changes slightly, the price stays the same, and the protein content might drop a percentage point. It's a hidden form of shrinkflation. Luna: But pet owners are label readers. Do they notice? Lucas: Some do. Social media lights up when a beloved formula changes. But most people buy on habit and price. And here's where the data gets interesting — the JOLTS report last month showed job openings jumping to 7.6 million from 6.9 million. That suggests the labor market is still tight, which supports spending. But the unemployment rate is stuck at 4.3 percent, and long-term unemployment is surging. That's a two-tier economy. Luna: And the pet food industry mirrors that. The people with secure jobs keep buying premium. The ones who've been out of work for six months are cutting back. Lucas: Exactly. So the question for investors and executives is: how long can this bifurcation last? If stagflation deepens, the value tier will grow faster. We're already seeing that in the pet food aisle — the shelf space allocated to private label has increased maybe 15 percent in the last two years. Luna: And what about the supply chain? Pet food relies on agricultural commodities, and we've had drought in the Plains and avian flu affecting poultry prices. Lucas: That's pushed some manufacturers to explore alternative proteins — insect meal, lab-grown chicken, plant-based proteins. It's still tiny, maybe 1 percent of the market, but it's growing fast. The sustainability angle also appeals to younger pet owners. Luna: If today's episode gave you a useful lens on how stagflation is reshaping even the dog bowl, here's a thought — these conversations stay ad-free because of listener support. If you found value in it, buy me a coffee dot com slash fexingo helps keep the lights on. Now, back to the data. Lucas: Yeah, absolutely. So, one more thing I want to touch on — the international dimension. The US is the largest pet food market, but China and Brazil are growing faster. In China, pet ownership is booming among the urban middle class, and they're importing premium brands. Luna: But tariffs could complicate that. We saw the US propose new tariffs on 60 economies just last week. If retaliation happens, imported pet food could get more expensive. Lucas: Right, and that would accelerate the shift toward domestic production. Mars and Nestlé already have plants in China, but smaller exporters would get squeezed. It's another layer of complexity. Luna: So where does that leave the average pet owner in, say, Ohio or California? Are they going to pay more for the same bag of kibble next year? Lucas: Probably yes. But they'll have more options at different price points. The industry is innovating fast — subscription models, fresh-frozen delivery, even pet food vending machines in some cities. Stagflation is forcing everyone to be more creative. Luna: And that creativity might be the real story. Not just how much we spend on our pets, but how the entire ecosystem adapts when the economy stops cooperating. Lucas: Exactly. Next episode we'll look at another surprising sector. Thanks for sticking with us.