Even though total pet industry sales dipped fractionally in 2006—their first decrease in 10 years—they bounced back last year to top $39 billion, thanks largely to double-digit growth in the pet-services segment, according to a new report by The Mercanti Group, an investment banking firm in Minneapolis.

In fact, pet services are expected to remain the fastest-growing segment in terms of percentile growth—even during less-than-stellar financial times, analysts said.

Wealthy families, which account for approximately one-third of all pet-related expenditures, spent $1.74 billion on grooming, boarding and other pet-related services in 2006 (43 percent of the category), versus $1.05 billion in 2005 (37 percent). Furthermore, because wealthier pet owners now consider grooming a necessity rather than an option, they may be more likely to cut spending on supplies such as pet toys during tough economic times than to skip grooming appointments, Mercanti said.

While PetSmart and Petco are the primary drivers of growth in the grooming segment, smaller specialty pet stores also are devoting square footage to grooming and pet salons are springing up around the country. In addition, mobile pet grooming has emerged as a very high-growth category, the report said.

Mercanti said growth in the boarding/day care segment makes sense, given that upper-income households are more likely to own a pet, spend a lot on it and travel more frequently for business and pleasure.

Spending on veterinary services increased more than 6 percent between 2005 and 2006—dramatic in light of the 0.7 percent decline in overall pet expenditures that same year.

The pet food segment, with an estimated $15.9 billion in sales, accounts for 40 percent of all pet industry sales. Dog food leads the segment (60 percent of all pet food sales), followed by cat food (33 percent), and food for fish, birds, reptiles, small animals and other animals (6 percent), the report said.

The 2007 pet food recall had little impact on the pet food market as a whole, the report said, but it probably reinforced the beliefs of people who already bought premium, niche pet foods. In addition, it probably caused some brand shifting as well as an exodus to small-batch producers.

Citing an online survey by Mintel International, the report suggested that many pet food buyers who switched to natural/organic products after the recall would not stay with those items in 2008. However, Mercanti believes there will come a tipping point—especially for high-income owners—in which a combination of increased competition and greater product selection will lead to greater adoption of natural/organic foods.

For now, the report said, only 25 percent of owners believe organic pet food is better than conventional pet food and worth the higher price. Nearly half (46 percent) believe organic pet food is better but not worth higher prices, and 28 percent believe organic pet food is better than conventional pet food. Interestingly, these results are pretty consistent across all demographic sectors, including households earning more than $75,000 per year. In fact, only 25 percent of households earning more than $100,000 believe organic pet food is worth the higher price.

The pet supplies segment was the only category to dip significantly in 2006—20 percent—and did so at all household income ranges. According to Mercanti, the category probably suffered at the hands of the truly essential—and growing—food and veterinary services categories. A decline in cat ownership also may have negatively impacted the category. [June 2008 PET AGE]