To: Mr. Martin Coleman
Subject: Response to the Inquiry into the UK Pet-Care Industry
Dear Mr. Coleman,
I fear the inquiry into the functioning of the pet-care industry in the United Kingdom, while obviously noble in its main objective of consumer protection, is based on a fragile premise whose logical implications not only impede individual enterprise, but also undermine this Government’s ambition to foster an environment which attracts business investment and global capital. Some of the CMA’s mooted interventions are likely to dis-improve some consumer outcomes and sufficient weight should be applied to these potential negative consequences in the final analysis.
One can only conclude, upon reading the May 1st 2025 working paper, the CMA is conducting its investigation based largely on its original premise [1] that businesses (across an industry) earning returns above the cost of capital is indicative of competitive dysfunction which is unfair to consumers. There is a major problem with intervening in markets according to that philosophy: the law of economic gravity—that fair competition will inevitably lead to returns on invested capital declining to levels which just, and no more, satisfy its cost—is absolutely not universal. This is amply demonstrated by empirical evidence over reasonable time-frames [2].
The Nature of “Economic Gravity”
I believe there is ‘something’ associated with pet-care that manifests in industry profitability persistently above the cost of its required real capital. The ‘law’ of economic gravity is a law in the sense of Newton, rather than Einstein. It applies less well the further the economic output provided is from a commodity good or service.
Consider, as contrasting examples, the property & casualty insurance industry and the skincare product industry. Profitability for the insurance industry just about satisfies the costs of its necessary capital over-time, whereas the skin-care industry earns profits far above those commensurate with the capital investment required to generate them. One could not, and should not, conclude from this that the insurance industry is fairer on consumers than the skin-care industry. Each industry simply has different intrinsic characteristics.
Intangible Capital and Entrepreneurship
Returning the argument to the world of pets in the UK: ask the vets who have started their own practice what exactly was required to build up a customer list of pet-owners who trust the health of the non-human members of their family. I daresay the requirement was a sustained period of ingenuity, business acumen, long hours, and sweat. This build-up of intangible capital has been quantified by the prices buyers have been willing to pay these entrepreneurs. It shouldn’t be so blithely dismissed in the return-on-capital analysis.
Potential Downsides of Intervention
Assuming the UK vet-care industry generates revenues of approximately £6bn per annum, acting to reduce medicine prices to “attain capital costs” might provide a rough bonus of £38 per household. However, consider the risks:
Standards of Care: Reducing practice income will inevitably squeeze the spend responsible for delivering ever-increasing standards of care.
Reduced Investment: It would be rational for owners to reduce or defer investment in equipment or leasehold improvements, harming the interest of the consumer.
Entrepreneurial Incentive: Such measures would dramatically reduce the capital value of individual practices, damaging the incentive for future veterinary startups.
Global Capital Precedent: Significantly reducing industry profitability would discourage future in-bound investment, portraying the UK as an unstable environment for long-term capital.
On Medicine Pricing and Transparency
In a recent speech, you pointed out the significant mark-up on medicines. I believe medicine prices cannot be viewed in isolation from other services. There are no potential offsets in the vet-care cost structure to a reduction in medicine profits. If the industry raises the price of “vet-time” to recover the shortfall, the intervention on medicine pricing yields no net benefit.
Price dispersion is a feature of our economic system, not a bug. While it can be frustrating to pay higher prices in moments of need, it is not inherently indicative of unfair competition.
Conclusion
I applaud the CMA’s focus on transparency as a “win, win, win”—it is in the interest of pets, owners, and the long-term health of the industry. However, I appeal to the authority to put sufficient weight on the negative consequences of an outcome particularly unfriendly to business.
I am not an objective observer; I manage a US investment partnership which owns shares of CVS Group Plc. My partners and I are aligned to an investigation outcome which would not impede future capital formation or a healthy jobs market in the UK.
Yours sincerely,
Patrick McNulty
Footnotes and References
[1] As expounded in Section 4 of the November 2024 Working Paper: Approach to profitability and financial analysis.
[2] Empirical evidence for its failure has been aggregated in the following paper: Analysis Group: Challenges of Using Return on Capital
[3] Industries exhibiting returns far above the cost of capital include freight forwarding, branded consumer goods, academic journal publishing, and vertical software.
[4] I note the consideration by the CMA of unintended and derivative consequences of potential interventions in the working paper and applaud it.