beakersHistorically, the discourse around pet food delivered in alternative form factors (fresh/frozen, freeze-dried, dehydrated) has focused on the merits, or lack thereof, associated with feeding your pet raw protein. Lost behind the countless articles delving into the pros and cons of raw, has been the growth in both size and importance of this sub-category, and the value it has created for those who invested early in this category.

According to GfK point-of-sale data from the pet specialty channel for the 12 months ended August 2015, alternative form factor pet food was, in approximate terms, a $175 million market.  Based on these same figures for the prior year period, this represents 50%+ growth for the category.  When you add to this annualized IRI MULO data for fresh/frozen pet food sold in the mass market and apply an adjustment to GfK’s estimate of dehydrated pet food, which we know to be low, and the total market is approaching $750 million, growing at 30% – 35%.  While relative to dry kibble, this market is in fact small, it is meaningful, and in combination with its growth rate, cannot be ignored by the large strategic buyers in the space.

Validation of this notion began to accelerate in 2H2014 when Agrolimen SA, a Spanish privately-held producer of food and other consumer goods, quietly acquired a controlling stake in Nature’s Variety, the market leader in freeze-dried raw pet food, from Catterton Partners.  This was followed closely by the successful initial public offering by Freshpet, Inc. (NASDAQ: FPRT), which currently trades at 2.3x Revenue despite some challenges in the roll-out of their refrigerator program among several large retail accounts.

After a brief fallow period, further validation arrived in the form of Nestle SA’s acquisition of Merrick Pet Care. While Merrick’s market entry into the freeze dried raw space (Backcountry), was nascent, the fact that they had an in-market offering was clearly a benefit to the deal.  Around this same period, Stella & Chewy’s, LLC, a portfolio company of Stripes Group,  and the market leader in freeze-dried raw sold in the independent pet store channel, transitioned into a new 164,000 square-foot facility in Oak Creek, Wisconsin, funded by a debt package sourced by the company in early 2015.  On January 7, 2016, the company announced it had hired a highly seasoned consumer industry executive to run the company and recruited pet industry executive Mark Sapir as Chief Marketing Officer.  Sapir most recently served as VP of Marketing & Innovation at Merrick.  Finally, on January 8, 2016, it was disclosed that WellPet, LLC, a portfolio company of Berwind Corporation, and the owners of the Old Mother Hubbard (which had been previously owned by Catterton) and Eagle Pack Brands, had acquires Sojourner Farms, LLC, doing business as Sojos. Sojos is number two or three player in the dehydrated pet food space.  In addition to providing validation of both the freeze-dried raw and dehydrated solution set, it also provides further evidence that larger players in the consumables space will buy smaller brands, especially if those brands resonate with premium customers who shop independent pet specialty.

So what does this all mean? I believe there are two conclusions that can be drawn. First, that the alternative form factor pet food market is a real sub-category and mid-sized to large players need to pay attention to it, because consumers are buying into the category, and have a response for how to compete within it or counter its proliferation going forward. The category is no longer a novelty, something that market leaders can simply write off or ignore.  Second, it’s going to result in more transactions as strategics buy into the space in an effort to deliver a competitive response. The winners of this coming-of-age will be the entrepreneurs who pioneered the category and the private/growth equity firms that supported them.  With a limited set of properties available, it could send valuations, which have been trending down, back towards the upper end of the historical multiple range.

/bryan

Note: This blog is for informational purposes only. The opinions expressed reflect my view as of the publishing date, which are subject to change.  While this post utilizes data sources I consider reliable, I cannot guarantee the accuracy of any third party cited herein.