Pet Industry
Pet Industry Reports

Deal Hound (Pet) Report 2H 2020

2020, A YEAR WE WON’T FORGET: DIGITIZATION OF PETS

Amid a year that disrupted everything, pet owners and the pet industry appear to be shaking off the habits of “old dogs” and learning “new tricks.” The effects of the COVID-19 pandemic appear to be finally pouring gasoline on the smoldering spark of e-commerce in the pet services space, everywhere from delivery to marketing, challenging pet owners known to be brand- and store-loyal. Unexpected opportunities are emerging in an unfamiliar environment of lockdowns, working from home, automated subscription delivery programs, and what’s possible in same-day large-item delivery. If recent years have leaned into the trend of “humanization of pets” – consumer demands for human-like products for pets – then 2020 may just be the dawn of the “digitization of pets.” It was perhaps only a matter of time for e-commerce to catch up to pets, but COVID made that time now.

Coupled with a new reluctance to venture out to shop amid concerns of contagion comes new COVID-inspired demand for more products. At the start of 2020, the biggest drag on the pet services and supply sector was seen as a decline in pet ownership. Younger generations weren’t adopting pets at the rate of older generations, and the number of pets in the U.S. had been expected to decline for years. That changed with months of isolation, working from home, and reduced opportunities to socialize both at work and on the town. “Pandemic pets” became the next big thing. Shelter Animals Count, which manages a database of some 500 pet rescue shelters, reports adoptions jumped 15% in 2020. Shelters in the Washington, D.C., area have reported demand so high they began running out of available pets…

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PETS AND THE PANDEMIC: DEMAND MEETS DELIVERY

The unexpected arrival of COVID-19 in the first half of 2020 confirmed long-held beliefs that the Pet Industry is often among the most immune to turbulent economic conditions. Business Insider puts it bluntly, “Basic pet care is a consumer staple like food and electricity.”

People will always care for beloved pets. But the unusual start to 2020 has also shown that even the Pet Industry can’t avoid change this time.

While temporary retail store closings, distancing rules, and limited human interaction led to a spike in pet food sales during a period of stocking up (OK, hoarding) early on, the industry appears now to be heading down a potentially bumpy road toward e-commerce – internet sales – driving the sector into an electronic age it has struggled to adapt to. Difficulties migrating pet supply sales to e-commerce date back to the spectacular dot.com crash and burn of Pets.com, which in 2000 went from an $82 million IPO to bankruptcy in just nine months.

But pets are an important part of our lives. So successful suppliers will find ways to adapt. Even as the pandemic led to job losses and decreasing incomes, pets helped people cope. According to the American Pet Products Association’s (APPA) “COVID-19 Pulse Study,” 72% of owners said spending time with their pet helped reduce stress during the pandemic. For many, having a furry pal is more than a diversion, and pet owners recognize the benefits and are willing to spend to preserve their relationships…

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LONG FRAGMENTED, VETERINARY SERVICES EXPERIENCING CONSOLIDATION

In the pet product and services industry, an identifiable shift in how people see and treat their pets drove an emerging wave of veterinary hospital acquisitions and regional rollups in 2H 2019 as the industry consolidates. A wave of young adults in their 20s are having children later in life – if at all – opting instead for pets, which become true members of a family. This “humanization of pets” is fueling demand for veterinary hospitals that provide a holistic approach, offering everything from routine checkups to advice on, and access to, affiliated high-end products including organic or specialty pet foods, vitamins and wellness supplements, prescription medication, etc.

IN DOGGONE BOOMING: SHORE CAPITAL PARTNERS

Chicago-based Shore Capital Partners is a case in point: after working with two emerging veterinary hospital groups to establish Detroit-based Mission Veterinary Partners in 2017, Shore has been on a tear, building Mission from 22 hospitals to more than 50 in less than two years. In the second half of 2019 alone, Mission added five veterinary hospitals across the Midwest, a unit growth rate of more than 10 percent in less than six months.

But that’s not all Shore has been up to in the space. Since it began working with another regional group, Southern Veterinary Partners, in 2014, Shore has continued to grow the Birmingham, Alabama based veterinary hospital chain, adding eight practices in the second half of 2019. Southern currently boasts 112 veterinary practices, serving more than 1 million pet patients a year. In 2019, Inc. magazine named Southern one of the country’s fastest growing privately held companies, earning the highest growth ranking of any veterinary company…

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The Deal Hound Pet Report - 1H 2019

E-COMMERCE CONTINUES TO REALIGN PET RETAIL

The U.S. Pet Industry continues to evolve and restructure at an accelerated pace through the first half of 2019, as the influence of e-commerce and IT pushes big-box retailers to fully embrace an “omnichannel” sales strategy in order to maintain their competitive edge. A recent report from Packaged Facts estimates that the online sales of pet-related products will surpass $11 billion in 2019, a significant leap from $3.2 billion in 2015, representing a 50%+ annual growth rate for online retail alone. As e-commerce continues to disrupt traditional retail in nearly every consumer product category, M&A participants in the Pet Industry increasingly view an online sales presence as a “must-have” offering.

Although the shift towards online retail has been rapidly growing for well over a decade, only recently have the largest industry participants, such as PetSmart, Petco and Walmart, began to diversify their channel mix to actively pursue customers both in physical stores as well as online. While traditional brick-and-mortar retailers are seeing major headwinds in terms of consumer spending, it is primarily the growth of pet e-commerce that has contributed to the growth of the industry over the past couple of years. “Online shopping has not just been cannibalizing existing business from brick-and-mortar channels. Instead, for the past few years, the Internet has been disproportionately responsible for helping to keep the U.S. pet industry on a healthy growth track,” says David Sprinkle, research director for Packaged Facts.

With e-commerce projected to account for nearly 20% of nationwide pet product sales this year, specialty and big-box chains have also been differentiating themselves from traditional online retailers by focusing on veterinary and pet care services. This is evidenced by Petco’s additions of Thrive and PetCoach, PetSmart’s partnership with Banfield Pet Hospitals and Walmart’s opening of PetIQ vet clinics in its store locations. The new PetCoach locations will offer grooming, training, dog walking and selected retail products, while Banfield and PetIQ locations provide veterinary services. These types of services inside pet superstores have been successful in attracting pet owners to physical store locations.

INCREASED DEMAND FOR HEMP-RELATED PET PRODUCTS

Demand among pet parents for CBD-infused and hemp-based products has increasingly driven M&A activity within the Pet Industry through the first half of 2019. This trend is evidenced by Elixinol Global’s acquisition of a 25% equity interest in Pet Releaf and Dixie Brands adding an additional 25% minority stake to its existing ownership stake in Therabis. Although in some cases, the regulatory environment surrounding these products still lacks legal clarity, this has not stopped manufacturers from producing them or retailers from promoting them to the market in order to satisfy…

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The Deal Hound Pet Report - Q4 2018

PET FOOD

In the latest pet food report published by Packaged Facts we continue to see sizable growth in the U.S. pet food market. This continued growth is evident with the sales of dog and cat food in the U.S. retail market rising 4% from 2017 to 2018 to reach $27 billion. With much of the growth stemming from online retailers, there has been a noticeable increase of the overall market.

Natural and Organic Foods – according to a survey by Michelson Founds Animals Foundation, a non-profit dedicated to keeping pets in their homes primarily through microchipping and adoptions:

  • Over half of pet owners believe that they feed their pets better than themselves!
  • Almost half of pet parents who eat organic feed their pets organic foods.
  • Almost half of pet parents who are on a protein-rich diet feed their pets the same way.

Rather than purely highlighting the ingredients inside, manufacturers are increasingly focusing on the overall nutritional benefits and transparency, such as sourcing and sustainability, at the behest of consumers.

Personalization and Customization – The simplicity of ordering online and accessibility of tailor-made products have made it easier for consumers to feed their pets what they believe are the best ingredients, without having to cook it all from scratch at home. This category ranges from scratch, home-delivered subscriptions to meal toppers and broths that can be added to traditional kibble.

Premiumization of Cat Food – With the prevalence of premiumization in dog food, companies are expected to become more focused on improving the health of cats through nutrition. Proper nutrition has the ability to improve digestive conditions, urinary tract issues, and obesity, which is at an all-time high in cats. Examples include Caru, whose stews for cats are intended to improve hydration or provide optimal nutrition for ailing or older cats, and Plato Pet Treats, which advertises its bone broth as a supplement for dogs but totes the safety and efficacy for cats too.

PRODUCTS

The Michelson Founds survey identified several non-food trends to watch for in 2019, including:

Tech Connectivity – Pet tech covers health and nutrition apps, pet servicing apps, smart toys, monitoring cameras and tracking devices. Over half of pet parents in the survey responded that they have special technology solely for their pets. In addition, more than half are interested in pet tracking devices and approximately 40% are looking…

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The Deal Hound Pet Report - Q3 2018

RISE OF PRIVATE AND EXCLUSIVE LABELS

In the past, we have mostly touched on consumer-facing products and services like the veterinary services market, but vet services are only a fraction of the overall animal health industry. Vetnosis predicts that the animal health market, which develops and manufactures drugs and vaccines for companion pets and livestock animals, will generate $33 billion in revenue by 2020. As companies continue to innovate and pet owners demand higher levels of care, the animal health industry will only continue to grow. This growth is already driving companies to quickly add to their capabilities through acquisition.

SERVICES AS A DIFFERENTIATOR FOR PET RETAILERS

We have spoken in great length about pet retailers’ need to give pet parents a reason to come into their stores instead of turning entirely toward less expensive and more convenient online competitors. The advent of Amazon Prime and Amazon’s distribution centers scattered around the country, as well as Chewy.com and its acquisition by PetSmart, have reduced the costs to consumers of shipping large, heavy bags of dry food. Also, premium food has become more available in grocery and mass, especially with the acquisitions earlier this year of Blue Buffalo and Ainsworth by two of the largest CPG companies, General Mills and Smucker’s, respectively. Of note, Ainsworth also has significant capacity for private label manufacturing. E-commerce is expected to grow from 14% of pet product sales in 2017 to 25% of sales in just four years, and in 2017 online purchases grew 92% for dog food and 63% for cat food…

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Deal Hound Pet Report - Q2 2018

INDUSTRY DEEP DIVE: ANIMAL HEALTH

In the past, we have mostly touched on consumer-facing products and services like the veterinary services market, but vet services are only a fraction of the overall animal health industry. Vetnosis predicts that the animal health market, which develops and manufactures drugs and vaccines for companion pets and livestock animals, will generate $33 billion in revenue by 2020. As companies continue to innovate and pet owners demand higher levels of care, the animal health industry will only continue to grow. This growth is already driving companies to quickly add to their capabilities through acquisition.

RECENT TRANSACTIONS

Henry Schein Animal Health/Vets First Choice

Henry Schein is spinning off its animal health business and merging it with Vets First Choice to form Vets First Corp. The new entity will combine Henry Schein’s veterinary supplies, practice software and distribution network with Vets First Choice’s prescription management platform.

Founded in 2010, Vets First Choice raised over $200 million in growth capital from investors including Clayton, Dubilier & Rice just last year. Henry Schein expects to receive $1-1.25 billion in the transaction; shareholders will own 63% of the new company. Henry Schein’s Animal Health Division reaches an astounding 75% of all U.S. veterinarians in some capacity, and half of U.S. vet practices use its practice management software platform. Vets First Choice manages prescriptions for 5,000 companion animal and equine practices. The merger creates a behemoth in the animal health space, which is especially impressive given the vast number of individual vet practices that remain.

The spinoff will enable Henry Schein to focus completely on doctors and dentists in the human market to stave off competitors such as the Amazon Business Division, which has been growing its sales with these medical practitioners.

Tropichem Research Labs/TetraGenx

Tropichem Research Labs, a portfolio company of Thompson Street Capital Partners (TSCP), announced the acquisition of TetraGenx, a leading independent animal health contract development and manufacturing organization (CDMO).

Tropichem, which was acquired by TSCP in 2015, is a contract manufacturer registered with the FDA that develops, manufactures and packages products for the companion pet, personal care and household and industrial industries. TetraGenx specializes in complex drug product formulation development to create innovative pharmaceutical, over-the-counter and nutraceutical veterinary pharma products. Tropichem is doubling down on the animal sector by providing customers a “one-stop-shop” for product development and manufacturing…

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The Deal Hound Pet Report - Q1 2018

INDUSTRY DEEP DIVE: PET FOOD RECALLS

BACKGROUND

Conversations at Global Pet Expo in March this year centered on the rash of pet food and treat recalls this quarter. The FDA lists 17 recalls in the first quarter of 2018, which excludes the products recalled in early April from J.M. Smucker and Evanger’s containing pentobarbital.

Pet food comprises the largest portion of spending for pet parents and the quality and safety of the food has a significant impact on pets’ health. According to the American Pet Products Association (APPA), overall spending on pets reached $69.5B in 2017, which represents the highest level ever and an increase of 4% over 2016. Pet food and treats make up the largest portion of that figure. In 2017, $29.1B in spending was related to food and treats. That figure is  expected to grow an additional 3% in 2018.

Most food recalls were related to Listeria and/or Salmonella in raw foods – whether fresh, frozen or freeze-dried. Many pet parents may not realize that most bacteria can survive the freezing or freeze-drying processes. Risks from these bacteria not only affect the dogs and cats eating the products, but they may also affect the humans who are feeding them, playing with them and caring for them. Raw and freeze-dried food and treats have increasingly been on the radar screens of pet parents recently, and they make up a fast-growing segment of the food and treat market, which is likely contributing to the increased recalls.

EFFECTS

It remains to be seen what the effect will be on the pet industry. With the speed and breadth of the dissemination of information today, many consumers may shun these companies or shy away from raw pet food all together. However, Blue Buffalo, for one, did not seem to take a major hit, despite a number of recalls over the past 10 years. The company still reached $1.3B in sales in 2017 and garnered a revenue multiple over 6x in its acquisition by General Mills, announced in February. We also will be keeping an eye on openings for brands not subject to the recalls, the potential for more outside regulation and changes to customer shopping habits (i.e., purchasing refrigerated or frozen food from trusted local retailers)…

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Q4 2017 Deal Hound Pet Report

Q4 INDUSTRY UPDATE

SEGMENT SPOTLIGHT: VETERINARY SERVICES

2017 was bookended by two significant veterinary services transactions. In early January 2017, Mars announced its $8.8 billion acquisition of VCA, and at the end of December 2017, KKR announced its acquisition of PetVet Care from Ontario Teachers’ Pension Plan (OTPP) and L Catterton.

To continue focusing on its more profitable pet care division, Mars acquired VCA’s 800 veterinary clinics, along with veterinary labs and doggie day care facilities. Mars now owns and operates almost 2,000 clinics. The combination of two of the largest providers in the industry may lead to concern about concentration; however, the veterinary sector remains highly fragmented with over 25,000 clinics and hospitals in the U.S., and the FTC only required divestment of 12 locations. PetVet was one of the beneficiaries of the divestiture, acquiring four of the clinics.

PetVet Care was founded by Gino Volpacchio and L Catterton in 2012. Within two years, the company expanded to 30 hospitals and received an investment from OTPP. Today, the company operates 125 general, specialty and emergency hospitals in 22 states with over 600 veterinarians on staff. The transaction follows a few months after KKR announced its acquisition of Covenant Surgical Partners, an owner and operator of human ambulatory and physician practices, from an investor group led by DFW Capital Partners, Iroquois Capital Group and PineBridge Investments. Not surprisingly, similar benefits are gained by both medical and veterinary roll-up strategies, as platforms grow through acquisition and provide all aspects of financial, operational and ancillary services to improve operations.

Some upstarts are trying to shake up the industry by making vet care easier and more accessible for pet parents. These companies are creating teams of mobile vets that make house calls for checkups, vaccinations and treatments and provide online and video consultations. In addition to the general convenience factor, mobile vet services are especially attractive for pets who become anxious or scared at vet clinics, households with numerous pets and seniors who may have difficulty traveling. Often, these mobile vet companies feature apps that enable online booking and access to patient information via smartphones. These companies are enabling vets to work on part-time or full-time flexible schedules or as side gigs.

Some examples include:

  • Vetted, an on-demand veterinary startup that raised $3.3 million in August 2017 from investors including Foundation Capital, acquired VetPronto in November 2017. The merger doubles the size of Vetted. Vetted operates solely in the Los Angeles area, while VetPronto, which started in Seattle in 2014, has over 50 veterinarians in 15 cities.
  • Treat provides in-home vet care, grooming and training in the Bay Area.
  • Based in the UK, PawSquad launched with video and online consultations and transitioned to on-demand mobile vets. In June 2017, the company received an investment from Direct Line Group, one of the largest providers of pet insurance in the UK.
  • Fuzzy Pet Health provides in-home preventive veterinary care through annual memberships. Fuzzy Pet Health currently operates in the Bay Area, with plans to expand to other cities in 2018. The Company raised a seed round of $4.5 million in December 2017, co-led by Eniac Ventures and Crosscut Ventures…

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The Deal Hound Pet Report - Q3 2017

Q3 INDUSTRY UPDATE

GROWTH OF PRIVATE LABEL

As has been well-established, pet industry trends have increasingly followed closely behind trends in human products. Recently, we are seeing this play out in the growth of private label pet products, especially food. In general, consumers no longer view private label products as “cheap,” lower-quality substitutes. Although they are still lower priced than the national brands, they often maintain the quality, credibility and key characteristics (such as organic, gluten free or non-GMO) that consumers are looking for.

According to the Private Label Manufacturers Association, in 2016 private label dollar volume and units sold in the mass channel increased more than national brands, resulting in increased market share. While private label human food, such as Kroger’s Simple Truth brand, has become not only accepted, but sought out by U.S. consumers, U.S. pet owners haven’t caught on to purchasing these types of brands. However, more retailers are focusing on marketing private label premium pet foods.

Why Private Label?

  • Provides cost savings to customers for high-quality products
  • Encourages customer loyalty with a unique product line (i.e., to big box retailers)
  • With the increasing number of brands and product types on the shelves, private label can help remove the decision-making process for the consumer

Consumers want premium products but are looking for a trusted way to find them at lower cost, leading to an increase in “mass premium” products. Historically, premium products could only be found in pet specialty retailers. Blue Buffalo acted on this trend by channel jumping into grocery and mass retail in August 2017. Blue Buffalo announced that it would beginning selling its Blue Life products in these channels, adding to the competition experienced by independent pet retailers. Despite attempts to differentiate products sold in the various channels, the question remains: how will customers view these products? Independent retailers may decrease their focus on the brand, possibly opening up opportunities for other products…

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Q2 2017 The Deal Hound Pet Report

Q2 INDUSTRY UPDATE

The overriding transaction on everyone’s mind this quarter had to be PetSmart’s purchase of Chewy.com for $3.35 billion. How remarkable that the largest e-commerce acquisition ever occurred in the pet industry when only a couple of years ago PetSmart and Petco contemplated a merger of the two largest brick and mortar pet store chains. In 2016, PetSmart accounted for 37% of pet retail store revenue, according to IBISWorld, but now, the company clearly sees its future incorporating a corresponding measure of e-commerce. The buying power, pricing flexibility and convenience of Amazon and PetSmart/Chewy.com are affecting players throughout the supply chain, encouraging them to rethink their strengths and to adapt their models to a changing market.

Food & Treat Manufacturers

Higher end, branded manufacturers primarily have made names for themselves by selling through independent retailers. Independents can differentiate themselves by carrying unique and high-quality products and by having staff with the knowledge and expertise to educate buyers on specialized diets and formulations. Therefore, manufacturers realize it’s in their (and the market’s) best interests to aid the independent channel. They are adapting by:

  • Instituting Minimum Advertised Pricing (MAP) so that online retailers cannot undercut their independent competitors.
  • Pulling their products from Chewy.com. Within days of the acquisition announcement, Tuffy’s pulled its brands from the e-commerce site. Recently, Champion (Orijen and Acana brands) and Fromm’s followed suit, although Fromm’s has announced that it will now sell direct from its own website, which has some retailers concerned.

Distributors

The large online players and big box retailers typically purchase directly from manufacturers, bypassing the pet product distributors. Distributors are exploring new avenues to support their primary customers.

  • For example, in March 2017, Phillips Pet, one of the largest U.S. pet products distributors to independent retailers, acquired PetFlow, an online pet retailer. Phillips is transforming PetFlow to create local “stores” for its individual retailer customers that provide online ordering and home delivery and maintain distinct customer data for the retailers.

Retailers

  • Retailers are consolidating to benefit from cost synergies, while maintaining a local feel, or they’re developing or acquiring their own local home delivery platforms. Bentley’s Pet Stuff has pursued both strategies, actively using acquisitions to enter new geographies to create a platform for organic growth. In addition, in Q3 2016, the company acquired Pet Food Zoom (now Pet Stuff Zoom) to offer local home delivery in the Chicago area, as well as nationwide shipping.
  • Companies are developing completely individualized products. For example, JustFoodForDogs creates handmade and custom diets for dogs, which can be picked up at their eponymous storefronts or shipped direct to pet parents. JustFoodForDogs received a growth equity investment from L Catterton in April…

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Q1 2017 Deal Hound Pet Report

Q1 INDUSTRY UPDATE

KEY TRENDS FROM GLOBAL PET EXPO 2017

With a record number of exhibitors and attendees again this year, the Thirteenth Annual Global Pet Expo in Orlando was another prime example of the continued growth within the pet industry. We were able to identify several deepening trends, as well as numerous innovative, new products.

Notable trends and observations from Global Pet were:

  • Less-processed food: Air-dried (dehydrated) and freeze dried foods are booming as companies try to introduce the idea of uncooked or raw products to pet parents that have been hesitant to experiment with it in the past. In addition to stand alone freeze dried products, pet food manufacturers are introducing more kibble plus products, which come in the form of dry food combined with freeze-dried meat or kibble that is coated in raw meat. These products can encourage pet parents to “try out” the trend at a lower price point than a full raw diet.
  • Coconut oil: Coconut-based products have become remarkably popular in human diets and personal care products. While some pet food manufacturers have been using them for many years, now they are highlighting them in packaging. Other manufacturers are using coconut oil as a key ingredient in new products and lines.
  • Focus on cats: Perhaps some believe that the market is overrun with dog products, or maybe it’s the growth of cat owners in the millennial population, but either way, we noticed original, ingenious and frankly, more attractive products for the cat owner/parent.
  • New products: Here’s a snapshot of some of the more original and cutting edge product introductions we viewed:
    • High tech pet feeders that measure how much food a pet eats or that make food available to the pet at a pre-set time
    • Calming, anxiety relieving collars and vests that utilize technology and techniques such as acupressure
    • Cooling vests and blankets to ensure that pets don’t overheat

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Q4 INDUSTRY UPDATE

Q4 2016 Deal Hound Pet Report

KEY TRANSACTIONS

The first several months of 2016 included many large pet transactions, like the acquisition of the Sojos brand by WellPet, the purchase of Whistle by Mars Petcare and the PetValu/Pet Supermarket deal. However, as we forecasted in Q3, the last few months of 2016 saw more transactions involving smaller-format pet specialty retailers looking to grow their geographic footprint and announcements by other companies that they intend to pursue this strategy.

In October, Kriser’s announced the first transaction in its history, the acquisition of Wylie Wagg, which enabled the company to expand into Washington, D.C. and Virginia. Since opening ten years ago, Kriser’s has organically developed its stores in Colorado, Texas, Southern California and Chicago and now operates over 40 locations, including the Wylie Wagg stores.

Bentley’s Pet Stuff has a history of making acquisitions in order to enter new geographic areas and using them as a basis to launch organic growth. This quarter, the company acquired Pet Food Zoom, for pet food delivery, and Moochies, adding 11 mall-based stores in Ohio, Kentucky and Indiana. In February, Bentley’s acquired the Shorewood, WI pet store Pet Outpost and said it planned to open up to 10 stores in the Milwaukee area over the course of 12 months. Over the first weekend of December, the company opened six new stores in the region. Also at around 40 stores, the company has plans to grow to 100 stores by Spring 2017.

2017 OUTLOOK

Entering 2017, we see no stopping the trend of humanizing pets that has dominated the sector in recent years.

Pet Food

According to Petfoodindustry.com, several human food and beverage trends for 2017 identified by Innova Market Insights for humans easily could apply to pets too.

  • Total transparency throughout the entire supply chain. “Natural” alone no longer has the cache that it once did. Pet parents are looking for clean labels with more narrowly focused definitions and the ability to track the origin and processing of pet food ingredients.
  • Benefits of plants. While raw meat has become mainstream, consumers still want to garner the benefits of plants for their pets. Plant-based ingredients could become more significant going forward, even in meat-based products.
  • Use of seeds and ancient grains. Following human food trends, pet food manufacturers are differentiating their grain-free products by introducing seeds, such as chia. Meanwhile, some are shifting away from the grain-free trend, while not reverting to old recipes, with the addition of ancient grains such as amaranth and quinoa. Many ancient grains are gluten free and high in protein, calcium, omega-3s and an array of vitamins and minerals…

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Q3 INDUSTRY UPDATE

The Deal Hound Pet M&A Report - Q3 2016

Key M&A Transaction

Q3 saw Roark Capital effect the merger of Pet Valu, North America’s third-largest pet specialty retailer, and Pet Supermarket, the largest community-based pet specialty retailer, creating the largest small-format, neighborhood, pet-specialty retailer in North America. Roark Capital initially took Pet Valu private in 2009. In early 2015, Pet Valu acquired the Jack’s Pets chain of 32 stores and later that year Roark acquired Pet Supermarket. The newly combined entity is known as Pet Retail Brands, and has over 900 stores in the U.S. and Canada and approximately $1 billion in sales. Both retailers have been growing fast and expect synergies from shared infrastructure, merchandising services and other resources.

We expect to continue to see the consolidation of smaller pet-specialty retailers. Recently, Chuck and Don’s, a top-25 retailer of high-end pet food and supplies with over 30 stores, announced that it is considering acquisitions for the first time in its history.

Key Trends

According to the American Pet Products Association (APPA), consumers will spend $62.7 billion on pets in 2016. With continued pet market expansion, more and more companies are investing in technology and software for both pet parents and pet industry players.

Pet care businesses, such as groomers and boarding facilities, are using online technology to schedule appointments, send appointment reminders via text or email (which can reduce no–shows by over 50%) and send automated reminders for follow up bookings and to re-engage customers. Consumers also are using search engines and review sites outside of normal business hours to schedule over 40% of appointments. We are seeing interest continue to rise in this segment. For example, Rover, which connects and books dog sitters and walkers with pet parents, recently raised an additional $30 million from existing investors Menlo Ventures, Madrona Venture Group and Foundry Group.

On the hardware side, the wearables market for pets is expected to reach  nearly $1 billion by 2022, according to Grand View Research. This is coming from startups looking to gain traction in the emerging pet tech category, including GPS monitors by Nuzzle, Gibi, Pod and Wuf and health/fitness trackers by PetPace and Voyce. In addition, traditional pet companies are getting in on the action, such as Mars via its acquisition of Whistle. The most surprising acquirers are the old-line electronic manufacturers. Acer, the global hardware and electronics company, announced that it is entering the pet accessories market with its recent acquisition of Pawbo, a Taiwanese maker of dog and cat products. Pawbo’s first product is an interactive pet camera, microphone and speaker that enables the user to “converse” with his or her pet, control accessories and even capture photos for social media. Targeted at millennials, a key demographic in the market, Pawbo will soon add activities and treat dispensers.

From a consolidation perspective, pet tech dominated pet M&A activity in Q3 with 12 transactions, nearly as many as all other segments combined.

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Q2 INDUSTRY UPDATE

Q2 2016 The Deal Hound Pet M&A ReportActivity within the Pet industry continues to be driven by the humanization of pets, especially as millennials reach adulthood. The ongoing drive toward more natural products translates into a market with high growth potential that is now gaining momentum even outside of traditional pet food categories. According to Packaged Facts’ “U.S. Pet Market Outlook 2016-2017,” the humanization trend is spreading beyond dogs and cats to birds and small mammals. The trend can be noticed mostly in pet food and treats (natural, functional, gourmet, convenient, green, lifestyle/species specific and human-grade ingredients).

At the same time, consumers around the globe are jumping on the natural bandwagon. Interzoo 2016 saw a new spotlight on meat and protein-based pet food, with a focus on grain free, fresh meat, and BARF (biologically appropriate raw food). The European market also has seen an increasing desire for alternative protein, whether for perceived health reasons, such as pet allergies, or concerns over supply and sustainability. One example is insect protein, which is showing up in pet treats in North America and even in complete diets in Europe.

Key Trends

As the Pet industry continues to grow on a global scale and new options develop, consumers can be even more selective. From ingredients to packaging, today’s conscious consumers are continually pressuring companies to operate responsibly and sustainably. One increasingly apparent trend is consumers’ desire for brand transparency, and now pet owners have the ability to trace the origin of a product’s ingredients. This “conscious-consumer movement” also is driving M&A growth globally in the alternative/specialty pet food categories, as limited-ingredient diets and other specialty products continue to gain traction…

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Industry Overview

Pet Industry vs. S&P 500 - Q1 2016Our observations from the 2016 Global Pet Expo in Orlando and newly released data confirm to us that the ongoing humanization of pets is growing beyond the $30-billion U.S. pet food market and into the more broad health and wellness industry. In a March 2016 Nielsen Survey of American and French pet owners, 85% stated that they believe food choices can extend the lives of their pets. In addition, a 2015 Packaged Facts Report stated that 74% of owners strongly agree or somewhat agree that high-quality dog foods are effective for preventive health care, up from 51% in 2014. New product offerings, M&A transactions and overarching trends seen in the Pet Industry continue to be decidedly similar to human consumer trends in food, healthcare and wearable technology.

Within the Food and Treats segments, not only have ingredients and sources in pet food become more scrutinized, but also large players are now competing for market share from pet owners who are treating their dogs and cats to non-GMO, grain-free, raw, supplemental or other fundamental food products. WellPet added more natural and raw food options to its product offering through M&A. By acquiring Sojourner Farms LLC, the company added the Sojos line of homemade, all natural, freeze dried, raw pet food to its healthy and natural brand portfolio. Zuke’s also announced that it will be expanding its treat-based business to include natural dog food. Available in summer 2016, Zuke’s Ascent Natural Dog Food will be free of grains, wheat, corn, soy, artificial preservatives, colors and flavors. The U.S. grain-free pet food market currently is worth $2 billion. Supplemental bars, similar to granola or protein bars for humans, also have taken off in the pet space via R&D by traditional pet food manufactures and start-ups. Purina retails pre-exercise (PRiME Bar) and post-exercise (ReFUEL Bar) nutrition bars under its Pro Plan brand. Smaller players like PowerBark and TurboPUP have gone one step further and have created nutritional bars to replace entire meals for when owners and pets are not home in time for dinner.

Beyond just caring for pets through their diets, attention to pet activity and fitness is becoming a major focus. In 2015, 58% of dogs and 54% of cats were considered overweight or obese. As consumers become more interested in tracking their pets’ exercise in addition to their own, fitness trackers like Fitbark and Whistle are making an impact. In March, Mars Petcare reportedly acquired Whistle for over $100 million. Whistle stated, “We look forward to connecting nutrition, healthcare and technology to improve the lives of pets and their families”. Whistle acquired pet wearable competitor and maker of Tagg, Snaptracs Inc., in 2015. Previously, Whistle raised over $20 million in venture funding from Carmelo Anthony’s Melo7 Technologies, Nokia Growth Partners, Nas’ Queensbridge, Slow Ventures, DCM Ventures and Qualcomm. Concern for pets’ health and wellness will continue driving growth, M&A and innovation in the industry.

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