Pet Food Market In Mexico

1 MEXICAN PET FOOD MARKET MARCH 2017 Prepared for: The Government of Canada Trade Commissioner Service 2 CONTENTS MEXICO’S PET FOODMARKET OVERVIEW 3 Product segmentation 3 Mexico’s pet food production 4 Market players 5 MEXICO’S PET FOOD INTERNATIONAL TRADE 7 Ingredients Imports 8 MEXICO’S PET FOOD DISTRIBUTION CHANNELS 10 Retailers 10 Veterinarians 10 Traditional markets 11 Specialized pet retailers 11 +Kota 11 Petco 12 Other stores 12 Online stores 13 Distributors and representatives 13 MEXICO’S PET FOOD TRENDS 14 Premium products 14 Humanization 14 Health 15 Branding 15 Fashion 15 Other pet products 15 MEXICO’S PET FOOD MARKET ENTRY 17 Regulations 17 Import process 18 Taxes and duties 18 CONCLUSIONS 20 ANNEX 21 Main shows and specialized forums 21 Associations 21 Distributors 21 Ingredients Importers 22 3 MEXICO’S PET FOODMARKET OVERWIEW The Mexican pet food market is on the rise, with double digit growth in 2015, rebounding from the effects of a value-added tax of 16%, enacted by the Mexican government in 2014. Mexico is now ranked amongst the top 10 pet care markets globally, and has one of the fastest rates of growth. Despite some variation in calculations, the majority of sources have determined that Mexico has a population of 20 million dogs and 5 million cats. However, only 46% of dogs and 12% of cats actually live in households; strays account for the remainder. The number of household pets has also shown an increase of 12.5%; it is estimated that approximately half of all Mexican households now have pets. In 2016, Mexico’s pet food market had an estimated value of $61.9 billion MXP (CND$4.27 billion), and equated to 1.15 million metric tons. This data represents a 6% - 8% growth in sales (due in part to inflation) and a 3.5% to 4.5% increase in volume. Despite this positive trend, industry sources concur that this market segment is unlikely to report double digit growth rates in the short term. Despite modest growth in the economy over the past five years and challenges to be faced in the ensuing years, due to domestic and international affairs, as well as a significant gap between Mexico’s rich and poor, the pet food market continues to grow; meeting the needs of diverse consumers, supplying everything from economy to premium products. - Product segmentation In Mexico, dry pet food dominates with an estimated 88% share, the majority being dog food, which accounts for over 70% of total market share (MXN $43.9 billion – CND$3.027 billion, equating to 873.3 thousand metric tons). Second is cat food, with a 28% market share and a market value of MXN$18 million in sales (CND$1.24 million) equating to 279 thousand metric tons. Food for other species has marginal participation with less than MXN$1 million (CND$69,000) in sales that equates to 5 thousand metric tons. 1 Source. Triplethree International, 2016. 1 Petfood Industry, December 2016. 22% 75% 3% 11% 88% 1% Dog food by type, Mexico 2016 Wet food Dry Food Snacks, cookies and rawhides 20% 80% 1% 16% 84% 1% Cat food by tipe, Mexico 2016 Wet food (cans and pouches) Dry Food Snacks, cookies and rawhides Volume Volume Value Value 4 In comparison to other markets worldwide, treats and snacks have not yet reached any real magnitude in the Mexican market, representing only 1% of total sales. Premium products are still a limited segment in the market; however, this is a growing market niche, and treats may also follow in due course. At present, it is estimated that only 40% of the nutritional requirements of pets is met by pet foods; as a consequence, there is plenty of room for additional sources in what is a fast-paced area of growth. According to a market survey from Consulta Mitofsky 2 , that referenced the type of food given to pets per location, it found that 56.8% of people living in urban areas bought special foods for their pets, compared to 23.8% that fed pets with homemade food and 14.4% that fed them from both sources. In contrast, in rural areas only 12.8% purchased food, against 72% who gave homemade food and 13.5% that fed pets using a combination of both sources. Today, 90% of Mexican households have at least one television and 29% at least one computer, facilitating in exposure to pet food advertising. As a result, lower-income pet owners are moving away from feeding their pets table scraps to prepared pet foods, and the emerging middle class looking more to mid-priced products. Therefore, mid-priced pet foods have enjoyed healthy growth and now account for 59% of total pet care sales. Source: AMEPA, 2015. Mexican pet owners are becoming more proactive, seeking the best possible pet food options with regard to health and nutrition, meaning more consideration is being given to the quality and ingredients of the products they buy. According to the industry, the average spending on pet food is at around MXP$275 (CND$18.96) per month. It is thought that only 8% of pet owners spend more than MXP$1,500 (CND$103.50) per month on food alone. If veterinary consultations and other expenditures are included, the average monthly cost rises to approximately MXP$1,000 (CND$68.96). - Mexico’s pet food production According to AMEPA (Mexican Association of Feed Manufacturers), national pet food production stood at 685,000 tons in 2012, and increased to 920,000 tons in 2015, and industry estimations calculated 1.12 million tons in 2016. 2 Survey “Mexico: Las Mascotas en Nuestros Hogares”, (Consulta Mitofsky, April 2014). CDMX State of Mexico Jalisco Nuevo Leon Veracruz Puebla Guanajuato Chihuahua Baja California Tamaulipas 13.10% 9.10% 8.60% 6.40% 5.10% 4.90% 4.40% 3.90% 3.80% 3.10% Pet Food Consumption per State, 2015 62% only in 10 States 5 States that participate in pet food production are: Queretaro, the State of Mexico and Jalisco (which together represent 89.2% of total national food production), Guanajuato, Mexico City and Puebla. There are new investments in the sector, as installed capacity is almost fully utilized. For example:  Nestle Purina is investing CND$300 million dollars in its dog and cat food manufacturing site in Silao, Guanajuato. Sixty percent of production will be focused on the domestic market and the remainder is to be exported to Central and South America. With this plant, the company will expand its current production capacity to more 375,000 tons per year.  Malta Texo opened a new manufacturing site in the last quarter of 2016 with an investment of CND$20.70 million and has a monthly capacity of 17 thousand tons. Additionally, the company plans to build a new plant in Veracruz in the near future with a capacity of 10 thousand tons per month. - Market players According to AMEPA (Mexican Association of Feed Manufacturers), only 14 companies were attending to the demands of the pet food market in Mexico a decade ago. This was led by Mars Petcare, Nestle, Procter and Gamble, Colgate, Farmland, Diamond, Malta Texo and Nupec among others. These were focusing primarily on dry dog and cat food, with only limited participation in wet food and snacks. Since then, there has been a radical change and diverse industry sources have expressed that 100 pet food companies, equating to over 150 brands, now participate in the Mexican pet food market. Of these, 22 are producing their own brands, 19 manufacturing their own brands and importing others, 10 companies solely import, 12 are sub-contractors and 37 companies participate in third-party production. 3 Source. Triplethree International, 2016. From these 100 pet food companies, 89 are focused primarily on dog food; there are no companies focusing solely on the manufacturing of cat food. Approximately 50% of companies operating have only local coverage with the remaining 50% having regional coverage. This excludes international companies that are present in Mexico. Effem (Mars - including brands such as Pedigree, Whiskas, Royal Canin , Eukanuba) and Nestle Mexico (including brands such as Dog Chow, Pro Plan and Cat Chow) are the predominant players in the dog food sector, representing 38% and 34% of the total market share respectively, followed by Malta Cleyton and Nueva Tecnologia en Alimentación 3 Source: Triple Three International, Petfood Technology Workshop Mexico 2016. 22% 19% 10% 12% 37% Pet Food Industry in Mexico, 2016 Manufacturers Manufacturers + import Importers Subcontractors Maquila 6 (NTA). In 2015 Malta Cleyton accounted for a 7% share value of total dog food, with NTA climbing to a 4% share value. Mars Petcare has made significant investments in Mexico, as the company forecasts that in eight years the country will become its second most important market, following closely behind the U.S. Leading brands, volume (dog food) Economic Standard Premium Campeon Pedrigree Royal Canin The Top Choice Dog Chow Ganador Ganador Perron Beneful Ol'roy Pedrigree Nogacan Source. Triplethree International, 2016. Leading brands, volume (cat food) Standard Premium Whiskas Royal Canin Cat Chow Minino Catrina Sportman's Choice Luckycat Mr. Cat There are no specific market leaders in the snacks segment, other than the main pet food manufacturers already mentioned. There are various Mexican companies targeting both domestic and export markets, but most are small to medium sized companies such as the following:  Nivo Golden Rawhide, which produces 100% rawhides; 99% of production targets the US and Canadian market, with monthly sales of 10 tons. Their products are manufactured under various brand names, and are available on Amazon and eBay, as well as in pharmacies, retail stores and veterinary practices.  International Pet Accessories, is focused on the production of nutritional snacks that enhance skin, hair and bones. The company sells to retailers and specialized pet stores. New players in the market, as well as pre-existing small to medium sized companies, targeting vets and mom and pop shops, have found success by offering good quality products at more competitive prices along with innovative packaging and differentiating their product line from major competitors. These new players have strong sales forces, visiting traditional markets, vets and mom and pop shops directly, which in some cases avoids distributors, allowing them to offer more competitive prices. These companies strongly emphasize the quality of ingredients, and are well aware of their marketing and branding limitations when compared to key players in the market. Additionally, traditional animal feed manufacturers have identified this opportunity in the pet food market niche, and are also creating new product lines in this segment; pet food being a complement to their main business line, which remains animal feed. These companies are taking advantage of the economy of large scale supplies purchases and current installed capacity. 7 MEXICO’S PET FOOD INTERNATIONAL TRADE Derived from factors such as peso-dollar fluctuation and tariffs on foreign produce, the import of pet food has dropped significantly in the last decade and is not currently strong competition for local manufacturers. According to AMEPA, Mexico imported 200,000 tons of pet food in 2002; however, the figure fell to less than 40,000 tons in 2012, and has since remained steady at between 45 and 50 thousand tons annually. When compared with Mexican production, the import market is not representative, accounting for less than 5% of the total market demand. Source. Ministry of Economy (SE), 2016. Main players in the market such as Effem and Nestle Mexico import some of their product line from other manufacturing sites around the world, and so also participate actively in the import segment. The main countries of origin for pet food imports includes the U.S. with over 80% market share, followed by Canada with 14% market share. Companies currently importing products from Canada include Royal Canin, Mexican importers, among others. The largest market players are importing complimentary products, such as wet food products from the U.S. and other manufacturing sites; this is due to production in Mexico being predominantly focused on dry food. IMPORTS Value in USD Volume in KG Value in USD Volume in KG Value in USD Volume in KG Value in USD Volume in KG Value in USD Volume in KG 2016 2016 2015 2015 2014 2014 2013 2013 2012 2012 US 75,057,398 43,312,721 69,022,658 41,406,156 69,911,031 44,092,662 73,025,376 43,670,247 59,734,722 38,141,500 Canada 13,131,355 7,147,935 13,992,229 6,762,470 15,963,705 6,222,148 15,987,508 5,765,696 3,816,644 1,621,662 France 688,909 246,635 619,043 215,245 730,295 197,565 823,584 250,454 6,789,934 3,876,578 Poland 20,465 6,539 48,006 7,806 44,840 499 0 0 0 0 Brazil 0 0 0 0 38,638 9,228 55,502 12,816 91,989 33,153 Netherlands 574,531 41,360 510,341 33,789 16,845 918 0 0 0 0 Colombia 1,092 911 659 410 768 412 1,767 510 0 0 Switzerland 8,743 66 8,290 71 0 0 0 0 13,903 70 Ireland 41,198 9,140 119,967 24,834 0 0 0 0 0 0 TOTAL 90,023,821 50,934,599 84,321,193 48,450,784 86,740,586 50,532,355 89,893,737 49,699,724 70,453,789 43,673,492 Source. Ministry of Economy (SE), 2016. 0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 90,000,000 100,000,000 20122013201420152016 Mexico Pet Food International Trade Imports Volume in KG Exports Volume in KG Imports Value in USD Exports Value in USD 8 Some small to medium sized manufacturing companies prefer to produce in Mexico due to competitive prices and logistics. Some manufacturers state that it was more competitive to seek third party production within Mexico rather than abroad, due to the increasing cost in freight and the fluctuation of the peso against the dollar. With regard to exports, the presence of Mexican-made products around the world is still modest at around 27 thousand tons in 2016. The main limitation to increased exports is installed capacity, which at present only manages to meet domestic demand. The majority of exports are focused on the Central and South American markets where again, the largest players in the market control a significant share of Mexico’s exports. Exporting companies include the following: Agribrands Purina Mexico, Dibaqmex, Raigosa Distribuciones, Bayer de Mexico, Campi Alimentos, Corporación Santa Fe, Diafauret, Insumos Pecuarios del Sureste, International Pet Accesorios, Invetti, Malta Texo de Mexico, Nestle Mexico, Nueva Tecnologia en Alimentación, Organización Sahuayo, Productos de Consumo Z, and Suplementos para Mascotas Muños Magaña. EXPORTS Value in USD Volume in KG Value in USD Volume in KG Value in USD Volume in KG Value in USD Volume in KG Value in USD Volume in KG 2016 2016 2015 2015 2014 2014 2013 2013 2012 2012 Guatemala 6,352,948 7,697,718 6,303,278 6,854,172 5,335,680 5,633,452 5,492,333 5,607,611 4,479,565 5,003,081 Costa Rica 6,300,448 7,473,077 5,607,882 5,907,599 5,334,017 5,323,152 5,706,424 5,654,525 4,727,414 4,950,247 US 3,662,273 265,279 4,984,605 623,044 3,806,611 740,392 4,127,139 994,958 7,930,855 3,071,022 El Salvador 2,845,623 3,163,498 2,907,357 2,868,937 3,010,435 3,083,689 3,169,962 3,437,236 2,417,769 2,749,322 Panama 2,324,848 2,582,006 2,413,518 2,391,380 2,162,156 2,313,301 2,528,853 2,592,266 2,907,376 3,043,542 Honduras 1,886,555 2,259,643 1,791,950 1,893,658 2,022,777 2,079,196 2,254,430 2,283,962 1,716,066 1,859,705 Nicaragua 1,344,039 1,438,703 947,220 936,950 906,913 891,006 779,971 788,537 580,131 663,745 Canada 2,616,156 279,398 2,041,369 215,696 787,918 125,263 895,510 166,064 761,151 149,500 Dominican Republic 946,665 1,106,371 598,794 519,548 473,235 448,679 411,382 381,916 313,276 307,831 Jamaica 144,006 196,986 223,753 251,157 213,416 254,612 310,539 376,717 324,474 419,478 TOTAL 28,880,239 26,879,640 28,298,460 22,651,920 25,633,031 22,385,212 27,977,028 24,385,014 28,116,011 24,245,954 Source. Ministry of Economy (SE), 2016. - Ingredients imports Smaller sized companies with local coverage rely on domestic suppliers for ingredients and raw materials imports. Medium sized companies, or those which also manufacture animal feed, can occasionally import some grains and proteins based on price and demand. Their purchases are not exclusively for pet food, but for their whole operation. Pet food manufacturers interviewed for this study expressed interest in receiving information on Canadian ingredients; however, none identified a specific need or product of immediate interest. Some also stated that they are importing salmon protein, poultry meal, and special flavors on a regular basis. Unlike producers in other markets, such as the U.S., Mexico does still not enhance products with probiotics or other value-added ingredients, which results in simpler formulations. Large multinational companies have sourcing offices in Mexico and abroad, 9 and import products and ingredients from various locations. It is usually more productive to approach the international headquarters when offering new supplies. In 2015, Mexico imported an estimated volume of 100 thousand tons in meat and bone meal, with the majority coming from the U.S.; proportionally 85% is from pig, followed secondly by poultry. The main importers include Bachoco, Campi Alimentos, Compañia Scoular de Mexico, Effem Mexico, Nutrecom and Vimifos among others. In the case of animal feed fats, Mexico imported approximately 325 thousand tons in 2015, primarily from the U.S. Estimates show that around 73% was for human consumption and 27% for industrial use. Main importers include ACH Foods Mexico, Cargill de Mexico, Industrializadora Oleofinos, Procter & Gamble, Aceites and Grasas y Derivados among others. 4 Source. AMEPA, 2016. Mexican pet food manufacturers have not identified any specific need to manufacture products abroad as they can find suppliers in the Mexican market, thus, avoiding additional exposure to liabilities such as fluctuations in exchange rates, delays in deliveries and having to deal with large minimum orders that can be beyond their requirements, among others. 4 Source: AMEPA, 2016. 10 MEXICO’S PET FOOD DISTRIBUTION CHANNELS Mexico’s pet food distribution is dominated by the ‘modern’ sector, which includes retail stores and price clubs. These stores sell largely standard products; however, some are expanding their category lines in both economy and premium products. Unfortunately, there is no official information available concerning the market share of each distribution channel as categories are diverse and include retail stores, wholesalers, veterinarians, pet stores and mom-pop shops. According to industry consultants the predominance of private label pet food manufacturers could stem from the fact that the largest retail channels for pet food in Mexico are retailers and price clubs, culminating in a 60% share. The veterinary channel accounts for 14% of sales, followed by pet specialists at 13% and ‘traditional’ markets at 8.7%. 5 Pet care development in the country has also been boosted by the solid growth of superstores such as Petco, which entered the market in 2013. Internet retailing has also seen an increase, not only with Amazon, which made inroads in June 2015, but again by Petco, with its online shop. According to the Asociacion Mexicana de Internet (AMIPCI), there were 54 million internet users in Mexico by the end of 2014. As a result, there is a slow but steady increase in online retailing. - Retailers Market leaders, such as Mars Petcare, have distribution agreements and alliances with major retailers and convenience stores such as Walmart, Organizacion Soriana, Chedraui, Comercial Mexicana, HEB, Oxxo, 7-Eleven and pharmacies. Major retailers are now open to expanding their products range with domestic brands; this has allowed other companies in the market to increase sales. Retailers are also exploring the potential for marketing their own brands, and are hiring local manufacturers that work under private label contracts. Historically, these retailers carried only a limited assortment of pet food products. However, they are now devoting more shelf space to premium pet supplies in order to meet increased demand from the consumer. While not normally the first choice for pet supplies, drugstores and pharmacies are channels for pet food sales, but normally only offer economic, standard pedigree or similar products. - Veterinarians According to Mexico’s National Statistics Institute (INEGI), there were over 7,000 pet retail stores nationwide in 2014. There are no recent statistics, but considering the credible growth in this sector over the last few years, the number of retailers will have increased. 5 Source: Triple Three International, Petfood Technology Workshop Mexico 2016. 11 Veterinarians receive regular visits from representatives and distributors from various brands in order to continue supplying existing products and to inform of new products on the market; veterinarians appreciate this understandably timesaving practice. According to interviews with diversified veterinarians, the points they consider when choosing a specific brand includes the following:  Service: a long-term business relationship that also includes clear information on the product, product samples and product guarantees (research, brand, marketing materials), consistent supply and training. Most veterinarians will not market a specific brand if the supplier does not readily provide the material.  Price/margin: competitive prices with attractive margins. Additionally, credit is an important differentiator.  Branding: veterinarians also prefer brands that are already known to the customer. In all, veterinarians appreciate regular visits from qualified representatives that can also answer questions and clarify doubts, as well as give information on promotions and discounts, speed of delivery and proffer samples of new products. Thus, in order to succeed in this market, it is vital to have a local distributor or representative. A local distributor or representative is the distribution channel that generates greater confidence to pet owners, due to proximity to the vet. It presupposes that those products would not be sold if not based on factual studies, and that such products have the credibility of the veterinarian and are accordingly more specialized than those acquired at a convenience store. - Traditional markets Wholesale grocery channels and traditional markets are an important market for bulk, medium-priced products. In 2016, this channel showed an increase of 18% in terms of sales and 13.5 in terms of volume, higher in comparison to other channels. Mom-pop shops are also important in the distribution of pet food. These retailers are focused on standard and economic products as well as bulk products that can be sold by weight, and according to the needs of the individual customer. This channel has been a particular preference of new local manufacturers. - Specialized pet retailers Specialized pet retail is considered a new segment in the market, with less than a decade of presence in Mexico. Presence is still limited in comparison to other such markets worldwide.  + Kota +Kota is the largest pet store in Mexico, with over 300 stores nationwide, and with presence in Aguascalientes, Baja California Sur, Campeche, Chiapas, Coahuila, Colima, Durango, Mexico City and metro area, Guanajuato, Guerrero, Hidalgo, Jalisco, Michoacán, Nuevo Leon, Morelos, Nayarit, Oaxaca, Puebla, Queretaro, Quintana Roo, San Luis Potosi, Sinaloa, Tabasco, Veracruz, Yucatan and Zacatecas. Of these, 63 stores opened 12 in 2016, in response to the recent increase in demand in the sector. The majority of +Kota stores in Mexico are owned outright by the company, with a minority operated under a franchise scheme. +Kota offers 371 SKUs for dog food and 103 SKUs for cat food, with almost 60% being dry food. Only 4% is natural, organic product. Some of its main brands include Pro Plan, Royal Canin, Eukanuba, Science Diet, Nupec, Fancy Feast, Blue Buffalo and Mira Bayer among others. +Kota offers phone sales, online sales, and immediate free delivery.  Petco Petco is a specialized pet store with 35 units in Mexico, and has coverage in nine states: Mexico City and metro area, Coahuila, Guanajuato, Hidalgo, Jalisco, Nuevo Leon, Puebla, Queretaro, and Yucatan. Petco distributes over 25 different brands of dog food (400 SKUs) and approximately 10 brands of cat food (77 SKUs). Main brands distributed by Petco Mexico include Pro Plan, Royal Canin, Science Diet, Fancy Feast, Instinct, Blue Buffalo, Natural Balance and Merrick among others. Almost 60% of SKUs are in dry pet food. Petco divides food into diverse categories: advanced food, basic food, advanced canned food, basic canned food, prescription canned food, natural food, prescription food, advanced dry food, natural dry food, prescription natural food, snacks and natural snacks. Also in Petco’s range are additives, dressings, rawhides, bones, chews, and fruit snacks. Petco has online sales, with free delivery on orders over MXP$500 pesos, with a delivery time of between 5 and 11 days.  Other stores Apart from only two major players, all others are independent franchises or stores with less than 10 units nationwide. For an example:  Petland, the US retailer has five locations in Mexico City, one in Morelos, one in Hidalgo and one that recently opened in Jalisco. The company has a similar format to +Kota. It is under a franchise scheme, and to date its expansion in Mexico has been limited.  Nuugi is a pioneer in Mexico, established as a franchise in 2008. It started as an online pet food store but now offers hotel, hospital, vet, beauty and day-care services. At present the company has seven franchises in Mexico City and Puebla; they also operate a mobile unit for canine services.  Supervet, is a retail store under a franchise scheme for the distribution of pet food and animal feed for sheep, cats, horses, birds, pigs, fish, rabbits, dogs, hens, chickens, roosters, cattle and turtles. The company has regional coverage in Jalisco.  Croquetilandia, is focused on the distribution of premium pet food, and at present has four stores in Mexico City. 13 - Online stores Some of the online sites that offer pet food for both wholesale and retail include the following:  Petsy - https://petsy.mx/ Founded in 2013, the company has an annual growth of 40% with a 66% repurchase. It offers over 7000 products online, of which 472 SKUs are in dog food and 175in cat food. Its main brands are Royal Canin, Pro Plan, Blue Buffalo, Pedigree, Natural Gourmet, Instinct, Hill’s Science Diet, Eukanuba and Diamond. Its main competitive advantage is that it has a web site and an app. It guarantees delivery in less than two hours within Mexico City and in less than 24 hours nationwide.  Petshop Mexico - http://petshopmexico.com  Petn’go - https://www.petngo.com.mx/  Alimento Premium – www.classypets.com In recent years, it has become increasingly popular to offer mobile beauty and vet services direct to the client’s home. However, most of these owner-managed companies do not sell pet food or accessories. - Distributors and representatives As previously stated, the importance of distributors and representatives is crucial in the pet food market in Mexico. Most distributors have a combination of products in their portfolios to include pet food and accessories or pet food and medicines. In the majority of cases, distributors will have an anchor brand from one of the key players in the market and will complement their line with other less known brands available. Distributors consider it very difficult to compete with the multinationals when dealing with new products, as large multinational companies are able to invest significant resources in marketing and promotion. Distributors have sales agents that cover various channels, visiting pet stores and veterinaries. These sales forces compete directly with Mexican small and medium sized manufacturers targeting the same distribution channels. Distributors have expressed a desire to know more about Canadian products, such as pet food and accessories, as they do require more product in order to be more competitive with + Kota and other specialized stores. Canadian companies wanting to enter the Mexican market need to find the correct distributor or representative, most of which have regional coverage, as this is the key for promotion and sales in the pet food market in Mexico. 14 MEXICO’S PET FOOD TRENDS - Premium products Premium products can be defined as those ranging in price from MXN$80 to MXN$90 per kilo (CND$5.50 to $6.20); sales accounted for approximately 2.8% of the market during 2015. Some industry sources have expressed that in 2017, the premium segment could reach 6% to 8%. Almost 90 thousand tons in premium dog food products were sold in 2016 and 6.5 thousand metric tons in premium cat food. Also during 2016, the industry reported that 220 new premium pet food products were launched in Mexico. Products labeled as holistic and natural are producing prices that range from MXN$110 to $115 per kilo (CND$7.59 to $7.93), approaching the standard of super-premium. 6 Considering that only a fraction of dogs and cats are in receipt of these luxury products, there is still a great deal of scope for growth in this market niche. At present, only 10% to 20% of the wealthiest pet owners purchase premium products. Product Price Dog Food Cat Food Value Volume Value Volume Economic 14% 29% Standard 61% 61% 94% 98% Premium 25% 10% 6% 2% Source. Triplethree International, 2016. Buyers of premium foods seek a variety of characteristics, among which, formulation and therapeutic attributes stand out. In this final category, products focus on treating skin problems, weight control and digestive issues. These include grain free products and natural products such as chicken, lamb, duck and salmon. Royal Canin and Hill’s Pet Food Nutrition are the market leaders in innovative new therapeutic products. The evolution of pet food is, now more than ever, mirroring the same concerns as those of food produced for human consumption, with a trend towards more natural and organic products. In the United States for example, there are producers who adhere to keeping their products in refrigerators for no more than two weeks, in order to guarantee the freshest possible produce. It may be that some of these trends take hold in Mexico, at least in some small segment, as these products are usually considerably more expensive. - Humanization In Mexico, until recently, most dogs and cats were considered objects, used simply to guard the house and hunt mice etc. However, over the past decade this view has changed and dogs and cats have increasingly become part of the family, especially in middle class homes. The population has become aware of the importance of animal welfare through the efforts of animal protection agencies, laws enforced to protect animals and the promotion of pet adoption, which has all encouraged a better understanding of the companionship that a pet can offer. 6 Petfood Industry, December 2016. 15 It is paradoxical that a country with such wide gaps in income should have a pet food market that is among the 10 largest in the world. But perhaps this makes sense, when, according to data from Mexico’s National Statistics Institute (INEGI), the rate of population growth in Mexico stands at below 1.5% per year; this suggests that Mexican families are having fewer children. This downturn correlates with the upturn in buying or adopting a pet and could perhaps be seen as more affordable in light of lower household expenses due to shrinking family sizes - Health Mexican pet owners are becoming ever more conscious with regard to the healthcare of their pets. When pets become ill, many owners are prepared to invest in treatments, surgeries and event transplants. For this reason, consumers are also focusing a great deal more on beneficial pet nutrition as a preventive measure for the healthier and longer life of their pet. - Branding Pet owners tend to be more loyal to particular brands in the pet food industry, more so than in any other food industry, therefore, branding has a particularly significant importance in this market. Pet owners prefer to buy branded products, as they trust the formula and quality of such products. - Fashion Pets have become fashionable in today’s society, reflecting what is seen to be one of the aspirational characteristics of North America and Europe, where the humanization of pets emerged much earlier. This has also encouraged changes in consumption, such as the following:  Aesthetics –grooming has become an important consideration for pet owners, it can also be seen as something that reinforces a sense of status.  Accessories – Clothing, necklaces, costumes and various other adornments are readily available and help to reinforce the humanizing bond between pet and owner. - Other pet products Pet products is still a very fragmented category. Pet products encompass a wide range of products and accessories, obtained through both imports and domestic channels, usually being produced by small companies; as a result, it is difficult to define any one leading player. The high fragmentation of products on offer does not encourage brand loyalty, but rather, encourages channel loyalty to pet specialist retailers, which is identified as the main distribution channel. 16 Accessories and fashion items have been the preferred market niche of small sized companies that focus on design, and who offer their products to veterinarian practices as well as handcrafts markets and fashion shows, such as the following:  Urban Dog - http://www.urbandogwear.com/  Can Canes - http://www.cancanes.com.mx/  Bo Collares - https://bocollares.mx/ In the toys segment, the majority of products are imported directly by retailers, specialized pet stores and distributors from the U.S. and China. 17 MEXICO’S PET FOOD MARKET ENTRY The market is fairly open, with almost no barrier to entry. Nevertheless, Mexican regulations for the import of ingredients and formulation for pet food products, are strict and variable; therefore is valuable to find an importer acquainted with Mexican laws. - Regulations The regulatory framework for pet food in Mexico includes the following 7 : LAWS: Federal Law for Animal Health (Ley Federal de Sanidad Animal – LFSA) General Law of Fishing and Aquaculture (Ley General de Pesca y Acuacultura – LGPA) Federal Law of Administrative Procedure (Ley Federal de Procedimiento Administrativo – LFPA) and its Regulation Federal Law for Consumer Protection (Ley Federal de Proteccion al Consumidor – LFPC) and its Regulation Additionally, there are Mexican Norms that should be abided by:  Labeling: NOM-012-ZOO-1993  Commercialization: NOM-022-ZOO-1995  Zoosanitary specifications: NOM-061-ZOO-1999  Advertising: NOM-059-ZOO-1997 Some general requirements are as follows:  Labeling - The following commercial information should be in Spanish and included on the outer, front surface: o net content, o commercial name, o logo, o product registration number at SAGARPA (Ministry of Agriculture) - if required, o manufactured by, o imported and distributed by (name and address of both). o It must also state ‘vet use’ or ‘food for...’ (To include the species that the product is produced for). Laterally the packaging must contain the following information: o formulation, o lot number, o expiration date, o use indications, o dosage, 7 All regulations can be consulted at http://198.61.233.93:8080/web/a_paginas/marco.faces (only available in Spanish). 18 o usage instructions and warnings. The importer can label products before or after customs clearance, according to Mexican legislation.  Imported pet food products must come from a manufacturing company that is federally or nationally registered with the country of origin. Only products that are freely marketed in the country of origin can be imported; therefore, a certificate of free sale or its equivalent is required.  Companies must guarantee the quality of each imported batch of raw material or finished product by presenting the certificate of quality control from the manufacturing company, obtained under internationally recognized analytical techniques or those authorized by the Secretariat; the Certificate of origin must also be presented.  Pet food products based on extraction oils, fishmeal or exclusively formulated with ingredients of vegetable origin and with added vitamins, minerals and premixes do not require a product registration number from SAGARPA. Only established Mexican companies can register products with SAGARPA, this makes it necessary to have a Mexican partner or distributor that can deal with this procedure. - Import process Before sending product to Mexico it is vitally important to verify the specific requirements of each product with SAGARPA. Only registered Mexican importers have the license and right to import products into Mexico (official importers’ registry – padron de importadores). Importers need to work with registered Mexican customs brokers, as they are responsible for customs clearance at the point of entry. Mexican authorities are extremely strict when it comes to import documentation, and amendments are not usually accepted. For this reason, it is strongly recommended that an advance electronic copy of all documentation is sent for review beforehand. Customs brokers can pre-validate all documents with the Mexican authorities, minimizing the chance of delays at the border. SAGARPA, along with its branch, SENASICA (sanitary inspection authority), will inspect all animal pet products at the point of entry and if required, issue a zoosanitary import certificate. After the product is authorized by SENASICA, the Mexican customs broker will pay the Mexican import declaration (Pedimento aduanal) and establish taxes, duties and tariffs to be paid. Customs authorities may also carry out random inspections at the point of entry. - Taxes and duties On the 1 st of January 2014, Mexico instituted a 16% value added tax (VAT) on retail sales of processed pet food, resulting in the market experiencing an immediate contraction. However, food for horses, a favorite pet among wealthy Mexicans, is still tax free. Horses are considered livestock, and livestock feed is tax exempt. 19 General duties for importing pet food to Mexico are at 10% ad valorem. There is a duty exemption for product originating from the NAFTA region. 20 CONCLUSIONS Mexico will continue to be a burgeoning market; growth for the foreseeable future is expected to reach between 5% and 10% annually. Prices will not see fluctuations higher than inflation rates in the market, and consumers will continue with their present spending tendencies for pet food and accessories. As the market is growing, it is expected that new companies will participate in both production and international trade. Due to disparities in the Mexican economy, segments forecast to show the greatest growth are the economic and premium sectors. However, there will be an interesting market niche of educated consumers seeking the best comparable quality and price, with brand recognition continuing to be a key factor in the purchase decision. Additionally, distribution channels will be further strengthened with new market alliances and marketing campaigns. There is still the need to improve communication and information channels to better inform the consumer on price and nutrition, which means that new market strategies will be needed in order to place new products and brands as the shopper becomes more discerning. Another key point to note is that of encouraging consumer perceptions of a legitimate balance between quality and price. The introduction of gourmet style products, supplements, snacks and accessories will be a limited market niche, aimed at the wealthiest sections of the population. Companies looking to enter this market need alliances with strategic distributors or representatives, who have sales teams capable of reaching fragmented points of sale in Mexico that includes vets, pet stores and traditional markets. And, who are also capable of standing up to the fierce competition of big multinational companies that dominate these retail segments. As e-commerce is still limited, Canadian companies cannot rely on this market strategy to succeed. 21 ANNEX - Main shows and specialized forums PetFood Technology Workshop Mexico http://www.petfoodforumevents.com/mexico-workshop/es/pagina-de-contacto/ 7° Foro México Sobre Alimento Para Mascotas-Internacional http://198.61.233.93:8080/Mascotas2016/pages/informacion.jsf Expo FIGAP http://www.figap.com/ Expo Can http://www.expocan.mx/ Congreso Veterinario de Leon http://www.cvdl.com.mx/ Foro Mexico sobre alimento para mascotas www.foromexico.net Expo ANTAD http://expoantad.net/expo2017/ - Associations AMEPA (Mexican Association of Food Manufacturers – Asociacion Mexicana de Productores de Alimento). http://www.amepa.org/ ANFACA (National Association of Animal Feed Manufacturers - Asociacion Nacional de Fabricantes de Alimentos Para Consumo Animal). CONAFAB (National Council of Animal Feed Manufacturers and Animal Nutrition - Consejo Nacional de Fabricantes de Alimentos Balanceados y de la Nutricion Animal). Federación Canofila Mexicana (Mexico’s Canine Federation) http://www.fcm.mx/ - Distributors Alimento Premium www.classypets.com.mx Comercializadora Hobby Pet www.hobbypet.com.mx 22 Comercializadora SAHB www.a4patas.mx Grupo Acuario Lomas www.acuariolomas.com.mx Grupo Conocido www.petmarkt.mx Interzoo Distribuciones www.interzoodistribuciones.com.mx Importadora FR https://www.importadorafr.com/ Inveett www.invett.com Mayoreo Total www.mayoreototal.mx Pet Foods www.petfoods.com.mx San Jose Mascotas www.san-marcos.com.mx Sanocan www.sanocan.com.mx Sanura www.sanura.net - Ingredients Importers Agrosesamo www.agrosesamo.com Australian Moss www.australianmoss.com Campi Alimentos www.campialimentos.com Canpro www.can-pro.com.mx Corporación Santa Fe (DM Mexicana) http://d-mmexicana.com.mx/ 23 Grupo Vali www.vali.com.mx Harinas www.grupoharinas.mx Norjal www.norjal.com Nueva Tecnbologia en Alimentos (NUTEC) www.gponutec.com Proan www.croquetaschop.com Productores Agropecuarios Tepexpan www.tepexpan.com.mx Suplementos para Mascotas Muñoz Magaña www.summma.com.mx