Despite a challenging economic backdrop, the pet industry was a star performer in the consumer economy in 2010.  With growth easily outpacing the broader economy, pet related companies were again the source of significant capital markets activity (both mergers and acquisitions and equity financings).

While the year will likely be best remembered for Procter & Gamble Co.’s acquisition of Natura Pet Products, it was only one of a significant handful of transactions that made headlines this year.   As I look forward to 2011, I expect to see a significant follow-on effect stemming from announced or closed transactions in the second half of 2010.  Further, as the broader economy continues toward recovery, deal velocity is expected to increase, especially in the pet space.  Notably, a number of meaningful pet transactions are known to be in process.

With the arrival of the new year, it is a natural time for us to take out our crystal ball and ruminate on what we see for the coming year.  As a long time follower of the pet industry, below are my predictions for the broader pet market in 2011.

  • Population Growth Returns.  After two years of stagnation, the pet population will return to growth in 2011.  During the recession, the pet industry grew as a result of food price inflation and the industry’s exposure to the premium consumer demographic.  With commodity prices in decline, forward growth will depend on population expansion.  While high levels of unemployment and low home ownership remain significant barriers, consumers will begin to add companion animals to their families as low cost food and health options become more widely available.
  • Premium Food Shake-Up Continues.   The impact of the Procter & Gamble / Natura deal will be felt in 2011.  I expect other major industry players to expand their portfolio to include ultra-premium and natural pet food properties in order to compete with a Natura portfolio that will likely move into the mass channel in 2011.  The most likely acquisition candidates include Blue Buffalo Company, Ltd., Merrick Pet Care, Inc., and Pet Guard, Inc., who have all been the source of sale speculation in the second half of 2010.  However, of concern are valuation expectations, which may dampen buyer interest.
  • Merchandising Changes at Mass.  PetSmart kicked off a new merchandising strategy in the second half of 2010.  The major pet retailer announced partnerships with Martha Stewart, GNC Corporation, and Fisher-Price, Inc., in an effort to attract store traffic and garner higher margin.  This strategy marks the return of centralized control over store direction that was widely dispersed prior to the recession.  I expect this strategy to be successful, and other mass channel pet retailers to seek their own partnerships in 2011 in an effort to compete with PetSmart’s first mover advantage.
  • Regulatory Pressures Increase.  The pet industry has enjoyed a long and relatively unimpeded run with respect to regulation.   While natural pet foods and supplements are regulated by the Food and Drug Administration (FDA)’s Center for Veterinary Medicine, consumers are not finding this sufficient to meet their needs.  As legislators move from focusing on the domestic economy to the tactical needs of their constituencies in 2011, I anticipate the pet industry will see increasing regulatory scrutiny with respect to product claims and supply chain management.
  • A Public Pet Platform.  The pet industry is undergoing a wave of consolidation across core market segments.   However, the industry lacks pure play public buyers given the size of the industry domestically.   The majority of public pet companies tapped the market in the mid-1990s, with PetMed Express, Inc. (d/b/a 1-800 PetMeds) the last in March 2000.  I expect this drought will end in 2011, with at least one major private pet company to enter the public markets.  My prediction is to see one of the major hardgoods companies to be the first to go.
  • Increasing Deal Velocity.  With over $400 billion in un-invested capital in the hands of institutional investors, I expect that transaction velocity will pick up across industries.  However, I expect the pet industry to garner more than its fair share.  During 2010, I witnessed an increased focus by consumer oriented growth equity and buyout funds in the pet industry.  I also saw major pet industry buyers become increasingly active. As valuations improve over the course of 2011, correlated with debt becoming more widely available, I expect to see capital markets and M&A transactions in the pet industry increase, potentially significantly, as owners seek liquidity and brands seek to capitalize on available market opportunity.