The evolutionary cycle that is currently gripping the pet industry is now on full display, impacting all segments and all market participant. The market is no longer benefiting from historical growth drivers as new influences overrun incumbent paradigm. Notably, pet food prices have experienced deflation throughout 2017, and this pattern is projected to continue.

The differentiation and uniqueness in the pet industry’s operational model is rapidly eroding.  The industry is beginning to parallel its human corollary, changing the nature of competition and anointing new winners.  Barriers to product availability have eroded and the consumer behavior patterns resident in the human food and healthcare markets are increasingly exhibiting themselves within the pet industry

The challenge for market participants is that the current phase of competition is not programmatic in nature. The strategies that parties have historically relied upon to compete are unlikely to serve as effective guideposts for future strategic decision-making.  Market participants should brace for higher levels of volatility

This fact pattern will present the best-positioned companies with an opportunity to create outsized value. Capital will flow into companies best-positioned to take advantage of new ownership paradigm and evolving channel preferences of pet owners at pre-money valuations that better resemble technology multiples. Acquisition multiples for market leaders will expand as companies will be “bought” more often than sold. Buyers are more likely to view assets differently, due to the tendency for strategies to diverge in periods of uncertainty, reducing potential competition for deals

However, increased risk associated with the current operational paradigm will also drive a flight to quality and elongate deal cycles due to increased scrutiny. When multiples are elevated, marginals deals are more likely to fail due to associated risk discounts.  We expect buyers to search for companies with meaningful barriers to replication – brand, intellectual property, access to alternative sales channels, or proprietary products.

Against this backdrop there were four theme that caught our attention in 2017 (click through to view content):

  1. Services are increasingly driving the growth of the pet industry.

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2. As anticipated, Blue Buffalo launched into FDM.

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3. Digital distribution is accelerating and changing the competitive landscape.

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4. Supply chain integrity/sourcing are becoming a meaningful form of differentiation.

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In short, we are living in interesting time.

For a full copy of the report contact me directly.

/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.

 

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