“For the times they are a-changin'” – Bob Dylan
The pet industry produced another solid year of growth according to the American Pet Products Association. Total industry revenue increased 5.3%, to $51.0 billion in 2011 driven by growth in all major segments of the industry. Sales benefited from pet population growth, which returned after a two year absence, and price inflation in all categories. Discretionary services produced the strongest growth rate at 7.9%.
During the past five years the industry has grown 20%, a remarkable rate under any conditions, but especially in light of the economic contraction experienced in 2009 – 2010. Expansion was fueled by the “Humanization of Pets” movement. The trend toward treating pets as family members shifted spend into higher priced categories such as premium food, driving growth in the absence of population expansion. While this theme remains relevant, its influence has tapered as the product rotation it stimulated nears completion. As evidence, premium food market share is flat over the past two years. In contrast, private label pet food and supermarket channel share, both associated with value, have grown. While a value focus will continue due to the domestic economic climate, it will not drive industry volume but rather shift mix. Instead, I believe an accelerating focus on pet wellness and population growth will fuel the industry in 2012, albeit at lower growth rates than seen in the past few years.
While the concept of “wellness” and the pet population is not new per se, I see it coming together in a new and integrated way, which I call “Total Pet Health”. Previously wellness was about giving your pet “better” food, augmenting their nutrition with consumables that provided perceived benefits, and then taking your pet to the veterinarian and listening to their advice about dental health and weight management. Today the concept of wellness is about empowering yourself to make the most informed decisions about your pets long term well being using all available resources, rather than relying on pseudo experts. It is about making product decisions based on actual results, not marketing claims. It is about selecting the best product for the need at the time rather than blindly associating with a brand. Its about having a relationship with your veterinarian around preventative care and using insurance to control total cost of care.
To adapt to these changes in owner behavior, I expect to see pet brands morphing from product or service providers into wellness brands. As an example, in July 2011, VCA Antech, the nations leading owner and operator of animal hospitals, acquired Vetstreet (d/b/a Vetinsight.com) a provider of client communications, pet education, and home delivery of pet medications and supplies. Against a backdrop of strained relationships between pet owners and veterinarians driven by veterinary services price inflation, VCA took measurable steps to empower pet owners. Vetstreet’s information solutions enable pet owners to educate themselves about pet health conditions, learn what tangible steps they can take to remedy those conditions at home, and understand what to expect if they do take their companion to the clinic in order to avoid unnecessary service or charges. Through this transaction, VCA transitioned itself from being a perceived source of the problem to being a wellness solutions provider.
A summary of my Total Pet Health theme is below:
From a pet industry transaction standpoint, I expect slower growth will result in further consolidation. While the pet industry saw substantive consolidation in 2011, it also saw renewal as growth remained robust. Private placement volume within the industry accelerated in 2H2011. However, in a slower growth environment it will be harder for emerging companies to gain scale. Further, interest from institutional equity sources in highly competitive pet categories will logically recede absent lower valuations. If capital is lacking innovation will also be limited. To the positive, truly innovative companies should enjoy premium valuations – see United Pet Group’s acquisition of FURminator as a prime example of this reality. These conditions point to transaction volume being oriented around consolidating segments – distribution, hardgoods, retail, and veterinary services – in the near term.
Despite a fundamental bias towards consolidation, I expect pet industry transaction volume to be modest in 2012 absent a major transaction on the consumables side. When Procter & Gamble acquired Natura Pet Products in 2010 it sent shock waves through the industry, especially in light of the fact that P&G was rumored to be exiting of the pet sector. While the industry has seen active M&A and capital markets since that time, it appears wanton for another marquee transaction to provide it stimulus and buzz. The recent United Pet Group/FURminator transaction caught the attention of the product side of the industry, but consumables have been lacking a bellwether since Nestle Purina acquired Waggin’ Train in 2010. Given the prospects for an industry growth taper, as well as downstream tax motivations, it seems plausible Blue Buffalo Company or Natural Balance Pet Foods, the two largest independent pet food companies, could trade in 2012. If they do, expect a flurry of activity in their wake.
As always, my full report is available by request.
/bryan
March 20, 2012 at 3:47 pm
I would very much appreciate a copy of the full report.
I also have a question. I read somewhere just today that the refrigerated, frozen & dehydrated raw segment of the pet food industry in the U.S. now accounts for about 1% of the total, and is projected to grow at a 20-25% rate through 2015. I guess this would be called an “emerging niche” market. But is the growth in this segment coming from the battle for market share in the premium end of the pet food industry (perhaps consumers realizing that “grain free” doesn’t necessarily mean “starch free?”), or is the growth in frozen raw a part something that should be seens as part of the “wellness” movement? Thanks!
March 20, 2012 at 7:19 pm
I view fresh, raw/frozen, freeze-dried and dehydrated (what I often refer to as “alternative form factors”) as a health issue. There is evidence that these processes preserve more the nutrients in the fundamental ingredients that food was meant to deliver. In terms of competition, alternative form factors compete for share among super premium customers. However, there are also is a class of consumers who prepares their own meals for their pets, and these solutions also pull people out of this camp and into the branded food camp. Ultimately if super premium is going to again grow share, it will come from these types of solutions, either becoming part of the food basket or all of it, as those who were going to trade up in kibble appear to have based on the most recent data. If the economy improves, and real incomes expand, there will be more trading up in straight kibble but also it will attract customers into this niche market.
March 20, 2012 at 6:57 pm
Hi Bryan,
I always enjoy reading your posts and reports. I would appreciate a full copy of this report when you have a minute. (Total Pet Health Industry)
Many thanks,
Kate McGrath
March 20, 2012 at 7:23 pm
As always I appreciate you following my blog. I should have copies of the report out to my regular mailing list early next week. Thanks for your patience.
/bryan
March 22, 2012 at 2:22 am
Very interesting analysis, Bryan! As someone who has recently entered this market (as a writer and feline nutrition & behavior consultant), I am watching these trends very closely.
When you are ready to send the report, I, too would appreciate a full copy.
Thank you!
Tracy Dion
CatCentric.org
March 23, 2012 at 2:11 am
This is very interesting….would love to see the full report. -Thanks!
FA, PetSmart
March 23, 2012 at 1:23 pm
Bryan,
Always enjoy reading your thoughts and analyses. Please add me to the mailing list.
Pat Hillegass
April 17, 2012 at 12:07 pm
Hi Bryan,
I stumbled upon your blog while researching the pet industry for a project I’m working on. I’d Very much love to see your full report on 2012 Pet Industry Trends. Thanks so much.
Wade
May 14, 2012 at 7:59 am
Your thoughts and analysis are very interesting. Many of the companies that you mention were my clients before my “retirement”. I would really like a copy of your full report.
Carl
June 28, 2012 at 10:16 am
Your analysis is always fascinating and fantastic (qualitatively and qualitatively) can I please have a copy of this report
June 30, 2012 at 7:48 pm
Andrew, what’s your email address?
July 1, 2012 at 8:41 am
sophrinix@gmail.com
June 28, 2012 at 2:40 pm
stupid spell check. quant and qual not qual and qual.
July 2, 2012 at 11:13 am
Hi Bryan,
Your analysis is very interesting. Please add me to the requests for your full report. Thanks very much.
July 5, 2012 at 7:24 am
I would very much appreciate a copy of the full report and any other pet segment/category/shopper insights.
Thanks
July 8, 2012 at 1:13 pm
Very interesting. I would love to see a copy of your full report.
Thank you.
July 10, 2012 at 4:24 pm
Bryan,
Interesting analysis. I work in PE and am doing some initial research on the space. Would love to get the full report and be put on your regular mailing list. Thanks.
July 17, 2012 at 4:08 pm
Hi Bryan,
I really enjoyed the article and would be extremely interested in the full report.
Many thanks in advance.
July 21, 2012 at 12:48 pm
I would like to have a full copy of your report
Benny Zeevi
DFJ Tel Aviv Venture Partners
bennyz@dfjtelaviv.com
Thanks and kind regards
benny
September 14, 2012 at 5:22 am
late stumbler on this blog. Can I join your mail list and request a copy of this report? Many thanks.
ghardy@irishdogfoods.ie
September 14, 2012 at 6:15 am
The new report will be available by mid-October. I will include you on that distribution list.
October 31, 2012 at 12:15 pm
please send me a copy ! yours faithfully, Smalltalk Magazine Pet directory
September 14, 2012 at 9:51 pm
I would also like to be added to the October distribution list for the full report. sapphirepetcare@yahoo.com. Thanks so much!
September 23, 2012 at 9:47 pm
Bryan, very well written and insightful. You seem to have your thumb on the pulse. I am very interested in reading the complete report. May I have a copy?
Best Regards,
Dennis Gordon
September 24, 2012 at 7:24 am
A new report will be available in October and I will forward it along.
Bryan
October 8, 2012 at 10:53 pm
Your analysis is very interesting. Please add me to the requests for your full report. Thanks very much.
October 20, 2012 at 6:56 pm
Bryan
Thanks for your posts. How do I get onto your regular mailing list. I would love to read as many of your reports as possible. I am doing research for a series of ideas my team and I are working on. Finding industry specific trends research has been a challenge. Primarily because we are learning what resources we should be using.
Thanks
Michael