During the second half of 2011, the pet industry endured a brief hiatus from its uninterrupted growth trajectory.  Against a backdrop of macroeconomic uncertainty, the pet industry suffered as consumer sentiment deteriorated.  Stagnant unemployment, coupled with a housing market laboring to recover, left the industry with a post-holiday hangover.   As a result, expectations for 2012 were modest given the industry was in transition as historical growth themes from the 2007 – 2010 period waned.  This commentary was front and center in our Spring 2012 report.  What we did not accurately predict was how quickly Humpty Dumpty would be put back together again.

As we approach the bell lap for 2013, the pet industry appears poised to beat expectations for the year.  Pet population growth has accelerated, the housing market has improved, and consumer sentiment is trending up and to the right again.  This has been good for the pet industry, which saw both revenue and earnings accelerate. Coupled with investments in innovation and further evidence of traction for the Total Pet Health trend, the near term outlook looks much brighter today. Below is a summary of the macro trends I see currently impacting the industry.

  • Industry in Major Innovation Push. In recent versions of my report, I expressed a belief that the pet industry was laboring through a period characterized by a lack of innovation.  Limited investment during the recession resulted in fewer new product introductions in 2010 and 2011.  While the 2012 tradeshow season did not produce evidence of breakthrough renewal, there are signs the industry is addressing the issue.  Product company CEOs tell me they are investing heavily in R&D, retailers are promoting innovation through launch support, and equity backers are funding unique start-ups.  Where there is innovation there will be further consolidation.  Expect more excitement at Global Pet Expo 2013.
  • Ecommerce Gaining Momentum. One of the most discussed topics at SuperZoo was direct-to-consumer for the pet industry.  There is evidence, based on web traffic patterns, and partner engagement, that the category is moving online and that ecommerce leaders are growing rapidly. As Amazon experiments with same day delivery and online retailers find partnerships that provide access to pet prescriptions, we expect this solution set to grow in acceptance, taking share of independent pet specialty stores. Notably, PetSmart, who has commented that they are not seeing any market share erosion from online competitors, recently changed their management bonus program to tie ecommerce sales to compensation; recognition by the industry’s top retailer that ecommerce is a real competitive threat in pets over the long term.
  • Public Pet Companies Breakout, Again.  During 2H2011, core publicly traded pet companies lost momentum. Lacking a cohesive growth driver, earnings contracted and pet equities traded on company fundamentals with mixed results.  The industry malaise did not last long, as our comp group collectively produced 12.1% revenue growth and 16.7% earning growth in 1H2012.  As a result, core pet equities, as a group, have outperformed the S&P500 by over 15% in 2012.   While the expected names (PetSmart and MWI Veterinary Supply) continue to perform, it’s notable that others, such as Neogen Corp (23.7% equity return), Central Garden & Pet (40.4%) and Oil Dri Corp (11.2%), which have lagged in prior periods, have all produce double digit returns.  The broad advance is, in my opinion, a very positive sign for the industry.
  • Big Deal Potential.  Headline deals are important influencers of transaction dynamics within an industry.  Deals beget deals, as buyers and investors look to take advantage of market shifts caused by consolidation. While the pet industry has enjoyed a number of high profile transactions over past 24 months, these deals have been spaced in such a manner so as to limit our ability to glean anything meaningful from the associated transaction multiples. A single data point is not indicative of a trend.  However, when multiple deals express the same characteristics, it has a powerful impact.  With the recent Sergeant’s  Pet Care Products transaction, the pending Zoetis (Pfizer Animal Health) IPO, and potential deals for Central Garden & Pet / Blue Buffalo / Natural Balance Pet Foods, the industry may have a run that re-frames market valuation dynamics, similar to 2006 when the revenue multiples for premium consumable companies were established through the Milk Bone and Meow Mix transactions.

While we have never soured on the long term potential for the pet industry, what we are seeing in terms of a recovery and re-acceleration is remarkable.  It is our expectation that 2012 will turn out to have been better than expected, providing the industry an opportunity to breach its prior apex within the coming years.

As always, a full copy of my report is available by email.

/bryan