Pet Industry’s Transaction Environment Reacts to COVID’s Effects on Growth Drivers
The pet industry has enjoyed consistent and dynamic growth relative to both GDP and other consumer categories since the Great Recession. While its recession-resistant nature has again been evidenced by the industry’s performance during COVID-19, the drivers of growth continue to evolve in meaningful ways, and in some cases, the pandemic has only catalyzed change within the category.
Millennials, Gen Y, and their younger counterparts now make up the largest component of pet ownership in the country. Younger pet owners are building upon trends set in motion by Baby Boomers, such as the premiumization of pet diets and the shift to treating pets like family members, but they bring their own unique preferences for interacting with brands and differentiated buying practices—all accompanied by a reduced spending capacity. While younger generations may command a smaller individual resource base to support pet ownership, their willingness to pay does not appear to be affected as evidenced by growth in premium product penetration across categories which has reached peak levels.
While the media reports accelerating pet ownership for all generations of pet owners due to COVID-19, that narrative is not well supported by actual intake outcome adoption data. However, the pandemic has truly created a heightened awareness of the role pets play in our mental health and wellbeing, driving up fosters and likely pet ownership over time.
At the onset of COVID, we saw increased pet product purchases due to pantry stocking and the effort to make pets comfortable in the work from home environment. During this period, product access trumped brand loyalty—“Good enough available” was favored over the prospect of running out. And now that owners are home with their pets all day, they also need to keep their companions occupied in order to focus on work or support remote learning—picking up an extra pet bed for the home office, more toys, and more treats to keep them busy while the Zoom calls carry on.
Pre-pandemic, pet purchases were migrating online due to widespread product availability and an increased focus by pet owners on convenience. COVID-19 served as an accelerant to the online purchasing trend—all food and beverage products, as well as pet purchases—drove 10 years’ worth of e-commerce penetration over a 90-day period. Even so, pet channel retail visits since mid-May are on largely on par with prior-year levels, indicating the durability of physical retail in the pet category. Physical retailers remain the largest sales channel at 85% of sales, and growth exists in click-and-collect (36% of online sales) , localized home delivery, and a proliferation of service strategies—providing evidence of a defensive moat for pet retail that is bigger than people perceive.
With the pet industry’s growth drivers reshuffled, industry competitors are scrambling to better align themselves with strategies that will enable them to survive an elongated pandemic period and position themselves for success on the other side, where behavioral realities are unlikely to fully normalize. In turn, we are seeing a meaningful change in the transaction environment.
COVID was a huge shock to the system. Pandemic realities have made business owners more aware of the risk they shoulder daily, much of which is outside their control. For company owners whose wealth is tied up primarily in their businesses, we are seeing a strong desire to assess options for risk-diversification. While they’re perhaps in better shape than before the pandemic, they are also not sure they want all of their eggs in one basket. As a result, we expect many businesses that had no near-term plans to sell or seek partial liquidity to begin exploring their options.
Additionally, owners hoping to sell to a strategic bidder are facing an extended timeline to transact while the large pet companies focus their attention on their own operations. Many strategics in the pet industry are tied to large food franchises—think Nestle, Mars, or Smuckers—or home goods product businesses like Clorox or Spectrum Brands. As the boards and management teams of those companies deal with supply chain challenges, shifting sales channel dynamics, and accelerated product demand, their ability to focus on strategic M&A is exceedingly diminished. The likelihood that they will acquire companies in this environment comes down to pre-existing knowledge of the target company, the level of need for the target’s product category within their broader product mix, and whether the target has enough scale to move the needle. This narrows the field down to a relatively small number of target companies.
Private equity firms’ purchasing power is also somewhat constrained due to the decreased availability of leverage to support buyout transactions, especially if the target has or is experiencing volatility in their business. For assets of moderate quality, leverage is less available, and therefore the ability of debt to support purchase price is diminished. As a result, that segment of the market is faced either with rationalizing valuation expectations or waiting to transact until the environment normalizes.
These dynamics will drive an increase in minority growth equity and minority recapitalizations for attractive companies that are not targets for strategic exits or not quite right for leveraged buyouts. This allows owners to diversify risk, gain capital to accelerate product and channel growth, and support the longer timeline to an eventual strategic acquisition.
What’s Your Why?
The pet industry, as well-defined and attractive as it is, suffers from information asymmetry because there are few industry bankers with both deep knowledge and a willingness to share that knowledge. My pets Ruger and Tyr, and Greta before them, have played a meaningful role in my personal wellbeing and my success as an investment banker, and I am rewarded when my industry experience helps an owner achieve a financial objective they could not have otherwise realized on their own.
About Bryan Jaffe, Managing Director, Food, Beverage & Agribusiness
As a Managing Director at Cascadia Capital, Bryan Jaffe helps build client relationships by focusing on M&A mandates, recapitalizations, restructuring, and equity private placements for consumer-facing companies. Bryan has deep domain expertise in the food and beverage and companion animal industries, having co-founded Cascadia’s Consumer & Retail practice, and subsequently the Food, Beverage & Agribusiness practice. He joined Cascadia from Gordian Group, where he managed and executed complex and special situation financial advisory assignments, including restructurings and reorganizations, buy-side and sell-side M&A transactions, financings, and matters requiring opinions and expert testimony.
(1) Packaged Facts, Pet Food in the US, 15th Edition