Parthenon-EY Perspectives
Investing in the pet industry
Liz Lippert, Managing Director
Andres Saenz, Managing Director, Co-head of Private Equity
February 2017
Executive summary
Opportunities in the pet industry for PE investors
Large and growing market, supported by the humanization-of-pets trend,
driving increased consumer spend on both products and pet-related
services
$
Growth in the premium and natural segment, presenting opportunity for
new market entrants and brand building
High levels of M&A activity from strategic buyers looking to expand their
portfolio and creating attractive exit opportunities for investors
Significant growth in the retail channel, alongside a large potential
opportunity in the online space
Parthenon-EY | Page 2
Overview of opportunities in the pet industry
Positive dynamics
Growth in the market is being driven by a steady increase
in the number of pets in the US
Trend toward the humanization of pets drives consumers to
invest more in their pets
►
Despite this overarching trend, not all sub-sectors within
pet food and supplies are benefiting equally, and the trend
is beginning to mature
Pet food, including treats, has demonstrated strong growth
at the premium end of the market, and opportunity exists
for growth of mass-premium brands
Strategic buyers continue to look for ways to expand their
premium offerings in their portfolios, presenting exit
opportunities for investors
►
The demand for premium pet food products has driven a
proliferation of brands and has created a higher need for
brands to define a differentiated positioning
►
Distributors play a critical role for manufacturers by gaining
broader distribution for brands, especially smaller brands,
and managing relationships with thousands of retailers
►
Much of the consolidation of distributors has happened,
and a few key distributors have already emerged (e.g.,
Phillips, Central Garden & Pet)
►
Pet superstores and regional chains have experienced
significant growth, and regional chains are expected to
continue to grow
E-commerce is small but will be a source of growth going
forward
►
Independents have seen growth decline and have just
recently stabilized
While e-commerce has generated growth, pure-plays are
not yet profitable and the impact of Amazon is significant
New products and services are emerging such as better
tracking and monitoring of pets
Opportunity exists in the vet roll-up segment of the market
Changes in Rx regulation may create opportunities
►
►
1
Market
►
►
2
3
4
Manufacturers
►
Distributors
Retailers
►
►
5
Services
Watch-outs
►
►
►
►
Top-line growth in vet services has been relatively slow
While offerings such as pet insurance have limited
penetration, evidence has not surfaced to support longterm attractiveness
Parthenon-EY | Page 3
Market
The number of pets in the US has grown steadily
US total number of pets
(dogs and cats), 2000–14
1
Market
2
Manufacturers
3
Distributors
4
Retailers
5
Services
US pet
household penetration
200m
80%
179m
68%
165m
150 141m 143m
60
Total number of pets
164m 163m
171m
40
100
50
0
2000 2002 2004 2006
56%
Percentage
of households
with pets
20
2008 2012 2014
Source: IBISWorld; American Pet Products Association; Parthenon-EY Consumer Survey (n=1,410)
0
1988
2004
Parthenon-EY | Page 4
Market
The pet parent trend has driven spend, particularly in the
higher-revenue premium and natural product segment
US premium dog
food market, 2010–15
US premium cat
food market, 2010–15
CAGR
(2010–15)
5.8%
3
2010 2011 2012 2013 2014 2015
Premium
share of 49% 49% 50% 51% 52% 52%
market
$4b
$4b
$4b
7.9%
5.9%
0
Distributors
4
Retailers
5
Services
“There is a clear, long-term trend
towards pet anthropomorphism/
humanization in the US, driven by such
factors as urbanization, longer life
expectancy, shrinking household sizes
and greater social atomization ... ‘People
are treating their dog food like some
people are treating their baby food.’”
– Euromonitor
... resulting in revenue growth
among players
1
0
Manufacturers
3
The humanization of pets has resulted
in pet parents who treat their animals as
one of the family …
►
2
Premium dry
5
Premium wet
$3b
3
Premium dry
8
$3b
4
8.4%
$3b
Premium
$10b
wet
$10b
$9b
$9b
$8b
$8b
10
Market
2
Commentary
CAGR
$5b
(2010–15)
6.3%
$13b
1
2010 2011 2012 2013 2014 2015
►
The natural pet product market reached
$4.1b in 2012, growing rapidly at a
CAGR of 17% since 2008. – Forrester
►
“Many natural and organic foods and
treats have gained popularity,
experiencing 20% growth rates in
previous years and providing lucrative
sources of revenue.” – IBISWorld
4.0%
Premium
share of 45% 46% 47% 47% 48% 49%
market
Dog food is growing at a 5% CAGR, with cat food at a 4% CAGR
Source: Parthenon-EY consumer survey (n=1,410)
Parthenon-EY | Page 5
Manufacturers
Small brands and high-growth specialty manufacturers
have experienced the greatest growth in recent years
CAGR
$29b (2007-14)
$27b
$25b
$23b
5%
$26b
20
►
12%
2%
28%
3%
$19b
Manufacturers
3
Distributors
4
Retailers
5
Services
Increased growth and competition has spurred M&A
activity in the pet food space, particularly in the
premium segment
$23b
$21b
Market
2
Commentary
US pet food market by company share, 2007–14
$30b
1
“In June 2015, Blue Buffalo also filed for an IPO, and
[was] expected to raise US$500 million with its first stock
offering. …The growing popularity of premium dog and
cat food, which is projected to grow significantly faster
than the broader categories, will likely create new merger
activity. Companies like Freshpet, Blue Buffalo, WellPet
and Diamond Pet Foods will remain attractive targets for
both investors (in the form of IPOs or private equity firms)
and other manufacturers.” – Euromonitor
8%
Other smaller niche players are gaining share, largely
as a result of the pet parent trend
10
►
6%
0
2007
2008
2009
2010
2011
Nestle
Colgate Palmolive
Mars
Blue Buffalo
Del Monte
Private label
P&G
Others
Source: Euromonitor; The New York Times, Reuters, FoodProcessing
2012
2013
2014
“This strong growth at the premium end of the market
is being driven in large part by a boom in sales of socalled “alternative” dog and cat food. These include
offerings that fall into such categories as organic, holistic
raw and human-grade. ... Many of these products are
manufactured by small enterprises. Among these small
companies are numerous start-ups and ‘mom-and-pop’
operations.” – Euromonitor
P&G sells Pet Care division to
Mars and Del Monte’s Big
Heart Pet Brands sold to JM
Smucker for ~$6b (2015)
Parthenon-EY | Page 6
Manufacturers
Natural/premium products are gaining shelf space in all
channels; regional chains carry a much more extensive line
1
Market
2
Manufacturers
3
Distributors
4
Retailers
5
Services
Percentage of pet food shelf space occupied by natural/premium brands
Regionals provide much
greater access to natural/
premium brands, even
with less shelf space
Source: Parthenon-EY store visits; Parthenon-EY independent and regional pet retailer survey (n=181); Retailer visits and calls; News articles; Capital IQ;
One Source; Hoovers; AC Nielsen; Parthenon-EY consumer survey; company websites; Mintel; Parthenon-EY analysis
Parthenon-EY | Page 7
Distributors
Distributors play a critical role in the value chain,
especially for independents
Q: Do you (manufacturers)
n=6
percentage of your
(independents) pet food
supplies is sourced through
a distributor?
100%
No
80
80
80% or more
60
40
60
Yes
40
60% to 79%
20
20
40% to 59%
20% to 39%
0
Importance of
independent channel
Market
2
Manufacturers
3
Distributors
4
Retailers
5
Services
Q: Approximately what
consider the small
independent pet retailers an
important channel for your
products?
100%
1
0
Less than 20%
Today
Source: Parthenon-EY independent and regional pet retailer survey (n=181); Parthenon-EY interviews
Commentary
Independents and regionals play an important role for
manufacturers; these channels tend to rely more heavily on
distributors as opposed to the pet superstores
► “You go to distributors because of slow-turning products, or
expertise in the channel. The regionals don’t leverage their
buying power right now. If it’s franchised, they will do it even
less.” – Former VP of Merchandising, regional pet chain
► “Companies continue using distributors even after reaching the
scale to go direct because it is much better utilization of their
assets. It allows them to focus on building their consumer
base.” – VP of Marketing, pet distributor association
► “85-90% of my products are through distribution. I prefer going
through distributors. Part of it is the relationship I have with them
and part of it is that I can buy 3-4 individual items instead of a
pack of 24 if I want to add it to my store. I don’t expect any
major changes to this going forward.”
– Owner, independent pet store
► “Most of my supplies come from a distributor. I like sourcing
through distributors because of being able to access more
products at the same time.” – Owner, independent pet store
► “What we sell through distributors are going to both regionals
and mom and pops. Regional chains and independents don’t
have the mass and volume to hit the minimum order point to
go direct.” – President, pet product manufacturer
Parthenon-EY | Page 8
Retailers
A variety of retail channels sell pet food and supplies
1
Market
2
Manufacturers
3
Distributors
4
Retailers
5
Services
Overview of pet food and supplies retail landscape
Brick-and-mortar-focused
Online-focused
Pet specialty
Pet superstores
Regional chain
pet retailers
Other
Independent pet
retailers
Hyper-markets/
mass merchants
Grocery stores
Pet-focused
online retailers
Club/other stores
General online
retailers
Description
Large national pet
specialty chains
► >300 total units
► Units typically
>15k sq. ft.
►
Regional pet
specialty chains
► 10-300 total units
► Units typically 8K15k sq. ft.
►
2% for all pet
stores exclusive
of superstores
►
Pet Supplies
“Plus”
► Pet Supermarket
► Petsense
► Petland
► Pet Food Express
►
►
►
►
►
►
►
►
►
Local pet
specialty chains/
single stores
► <10 total units
► Units typically
<8k sq. ft.
►
Large-format
stores carrying a
variety of
products, typically
at discount prices
►
Markets focusing
on grocery/food
products,
including national
chains and
independents
►
Retailers usually
selling a variety
of products which
customers are
required to buy in
wholesale
quantities
►
Online-only pet
specialty retailers
selling a wide
range of pet food
and supply
products
►
Online-only
general retailers
selling a wide
range of product
categories
►
5% for
hypermarkets;
<1% for mass
merchants
►
<1%
►
5%
►
18% for all of
online
►
18% for all of
online
►
►
►
►
Amazon
ebay
2010–15 CAGR
►
5%
►
2% for all pet
stores exclusive
of superstores
Examples
►
►
PetSmart
PetCo
►
Catnip-Bones
Paws & Claws
► Cause to Paws
Walmart
Kmart
► Target
Safeway
Shaws
► Kroger
Source Parthenon-EY independent and regional pet retailer survey (n=181); Company websites; Parthenon-EY analysis
Costco
Sam’s Club
► BJ’s
Wag
PetFlow
► Pet360
► PetCareRX
Parthenon-EY | Page 9
Retailers
Within the pet specialty channel, pet superstores are
growing faster than regional and independent pet shops
1
Market
2
Manufacturers
3
Distributors
4
Retailers
5
Services
US pet specialty store revenues by channel, 2010–15
Source: NAICS, SEC filings; Euromonitor; company websites
Note: “Regional chain” is defined as an enterprise with more than 10 retail locations nationally as of 2012
Parthenon-EY | Page 10
Services
Spend on veterinary services has grown at a CAGR of 3%
historically and is expected to grow at 5% through 2022
Expected veterinary services revenue
and revenue per clinic, 2007–15
1
Market
2
Manufacturers
3
Distributors
4
Retailers
5
Services
Projected growth in veterinary
services revenue (2015–22 CAGR)
per IBISWorld
40
1.3
CAGR
(2010–15)
6.0%
Revenue per clinic
32
30
27
28
28
29
28
33
34
5.1%
1.0
30
4.0
0.8
20
0.5
2%
2.0
10
0.3
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
Year-over2.2%
year change
1.6%
1.1%
1.2%
1.3%
1.5%
1.3%
1.1%
1.3%
28k
28k
28k
29k
29k
29k
30k
30k
Number
of clinics
27k
Source: IBISWorld; BLS; BEA; U.S. Census; Parthenon-EY analysis
0.0
0.0
Parthenon-EY | Page 11
Services
Increasing pet expenditures and trends toward pet
humanization have supported this steady growth
US pet industry total expenditures, 2010–15E
1
Market
2
Manufacturers
3
Distributors
4
Retailers
5
Services
US annual visits per pet and spend, 2007–12
CAGR
CAGR
('10-'15)
(2010–15) (2013–15)
80
5%
4%
Live animal
purchases
60
Live animal
purchases
Other services
Other services
-1%
9%
Supplies/
OTC med
5%
Veternary
care
5%
Food
3%
Supplies/
OTC med
40
Veternary
care
20
Total
spend
Food
0
2010
2013
2015
Total pet expenditure has grown steadily over the
past 5 years, with large increases in veterinary
care and other services
Source: American Pet Products Association; American Veterinary Medical Association
Pet owners are spending more at the vet or on
OTC medications, a trend that offsets flat vet visits
Parthenon-EY | Page 12
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Liz Lippert
Managing Director
Parthenon-EY, Ernst & Young LLP
[email protected]
+1 415 486 3617
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Sonny Ebarle
[email protected]
+1 415 894 4947
Andres Saenz
Managing Director,
Co-head of Private Equity
Parthenon-EY, Ernst & Young LLP
[email protected]
+1 213 977 8799
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