nickelLast week, Blue Buffalo filed an amended S-1 providing an expected price range for its sale of 29.5 million shares of common equity, with an overallotment allocation of 4.4 million shares.  The company expects to raise in excess of $500 million in its IPO and will trade under the ticker symbol BUFF.

Based on an expected valuation range of between $16-$18 per share, at the mid-point ($17/share) Blue Buffalo would have an equity value of approximately $3.3 billion and total enterprise value of over $3.5 billion based on net debt of $241 million as of the March 31, 2015. This would imply a valuation of just over 18x trailing twelve months Adjusted EBITDA (as defined by the company) as of March 31, 2015.  The above stated range fell below my expectations in terms of anticipated value.  A few factors are likely to be weighing on institutional investors’ minds in light of a more complete analysis of the company’s S-1.

  • Too many eggs in one basket.  Companies that are subject to customer concentration issues generally receive discounts in the capital and M&A markets. In the case of pet food the customers are the retailers.  As disclosed in the  S-1, 73% of Blue Buffalo’s sales were to national pet superstores, PetSmart and Petco.  Based on my personal analysis and those of third parties I consulted, collectively we estimated that PetSmart likely accounts for between 66% – 75% of Blue Buffalo’s national pet specialty volume. This would imply that PetSmart is responsible for approximately 50% of the company’s total sales volume. This puts Blue Buffalo is in a more complex position vis-a-vis a move to mass.  While we think such a move for Blue Buffalo is inevitable, it may complicate the process or drive up the cost.  Clearly, PetSmart and Blue Buffalo need each other, for now. That said, last week PetSmart announced, what many had already known, that Natural Balance would now be available throughout their store network and online properties. I view Natural Balance as a perfect comp for Blue Buffalo from a product positioning standpoint. If PetSmart is able to obtain access to Merrick it would add a second leg to that protective stool.
  • Share and share alike, not really. According to Blue Buffalo’s own market segmentation analysis, in 2014 it owned a 34% share of what it terms the “Wholesome Natural” segment, which it defines as dry dog food using only natural ingredients (based on AAFCO), that have whole meat or meat meals, with the animal protein type clearly identified as their principal ingredient.  These traits are distinguished from the “Engineered” segment, which are characterized by the fact they typically do not contain whole meal or meat meal as their principal ingredient and/or they use lower cost proteins (by-product meal, corn/wheat gluten) and contain lower-cost starches (corn, wheat, fractionated grains). Setting aside the current supply chain issues as it relates to Blue Buffalo’s self classification, this nuance allows Blue Buffalo to inflate its market share. While we can appreciate the desire to isolate one’s difference in terms of ingredient panel and adherence to certain standards, this segmentation allows Blue Buffalo to exclude a meaningful set of Brands/SKUs from their market share calculation, thereby overstating the company’s position.  Talk to a seasoned pet food merchandiser and they will tell you this is not how they, or their end customers, think about the market.  I also note that several of the of brands in the Wholesome Natural segmentation analysis are either overstated or understated based on what I know to be their 2014 sales.  This simply speaks to the imprecise nature of the analysis.
  • About that lawsuit. Blue Buffalo’s S-1 makes it clear that they are responsible for directing their suppliers to purchase the ingredients they approve, from the people they approve, based on the terms they themselves negotiate.  Yet somehow Blue seems to be getting a free ride as it relates to their recent sourcing issues. However, several people I have spoken to recently expressed greater conviction about the probability of a countersuit from Wilber Ellis and/or a Purina victory.  If Purina does in fact play this out and wins an injunction against Blue Buffalo as it relates to its ingredient claims, it would undermine the Blue Buffalo story, in addition to having meaningful financial implications.  I note that the company has not set up a litigation reserve due to the fact that the lawsuit is in the early stages (as self defined), it is unclear the damages the plaintiffs are seeking, and the fact that Blue Buffalo maintains its counter claims.  It seems quite reasonable that institutional investors are factoring potential losses into their valuation models.

Notwithstanding the issues above, we expect Blue Buffalo to have a successful IPO later this month and for it soon to be trading at an enterprise value in excess of $4 billion.  Even a modest first day pop would get the company there. Get your popcorn, this should be fun to watch.

/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.

unicornOn Wednesday, as anticipated, Blue Buffalo, the pet industry’s most prominent unicorn, filed to raise up to $500 million in a public offering (see form S-1 here).  The company intends to trade on the NASDAQ under the “BUFF” ticker symbol.  J.P. Morgan and Citigroup are the lead underwriters. BUFF reports generating $918 million in revenue in 2014 ($940 million for the latest 12 months ended March 31, 2015). The company estimates it holds a 6% share of the total pet food market and 34% share within its competitive set, which it defines as the Wholesome Natural market segment.

A number of items that are notable from the S-1:

  • The company’s growth strategy lays out a thinly veiled plan for ubiquity in product access, noting that Blue Buffalo currently feeds only 4% of dogs and 2% of cats.  Growth will come from 1) building U.S. market share by expanding the availability of Blue Buffalo products, which we assume means a move into mass, 2) entering into therapeutic diets, and 3) select international opportunities (Canada, Mexico, Japan).
  • Blue Buffalo products tend to over index with younger households (Gen X and Gen Y) as well as younger pets (ages 0 – 1), providing some belief that it will increase market share as these owners age by capturing them early in the lifecycle.  Approximately 4% of Blue Buffalo sales occur online, versus 2% of the total market according to Blue Buffalo, which makes sense given the demographic where the brand is resonating strongly.
  • The business has delivered impressive growth over both the recent and longer term time horizon.  Revenues increased from $190 million in 2010 to $918 million in 2014, representing a compound annual growth rate (“CAGR”) of 48%.  During this same period Operating Income grew at an 86% CAGR from $15 million to $179 million.  Operating Income margins have increased from ~ 8% in 2010 to nearly 20% in 2014.  While future growth rates are projected to taper, it appears to be more associated to with the “law of large numbers” catching up with the business, as opposed to any change in fundamentals.
  • Management plans to continue its movement towards vertical integration as it relates to production. The company notes that in-sourcing a substantial portion of its product manufacturing, whether at the existing Heartland plant (which is expected to produce 50% – 60% of Blue Buffalo volume) or to future owned facilities, will yield significant cost savings. The Gross Margin profile of the business is healthy for this category, at around 40%, but has not shown much in terms of scale benefits. That said, that fact is not all that surprising given the level of production outsourcing and variable cost of protein inputs.
  • The company is building a dedicated sales force for the veterinary channel.  Blue Buffalo views veterinarians as key influencers and believes it can develop a set of differentiated products that will create disruptive results in this channel.
  • The company incurred $2.9 million of legal expenses in 2014, which are costs related primarily to the litigation with Nestle Purina.

The filing highlights the reason BUFF has not pursued an M&A exit.  Historically, the high water mark for pet food M&A has trended at 3.0x Revenue.  However, if Blue Buffalo were valued at $3 billion, that would imply the company was worth 15.5x Adjusted EBITDA of $193.2 million, which feels considerably light for the leading independent natural pet food brand. Consider Freshpet, which is smaller, unprofitable, and has not produced as impressive growth, trades at over 6.0x Revenue. While we don’t see Freshpet as the perfect comp those who are not close to the industry are naturally going to make that comparison. Our expectation is that a public Blue Buffalo will be valued closer to $5 billion, too big a piece of cheese for even the largest industry mouse to swallow. That valuation assumes that the company can detail a tangible plan to grow outside its core channels and in lower cost products, improve its gross margin profiles, and deliver higher level of surety around its product inputs.

/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.

outrageThe false advertising lawsuit between Nestle Purina and Blue Buffalo celebrated its one year anniversary last week.  The milestone date was met, shortly thereafter, with an admission that a “substantial” and “material” portion of Blue Buffalo pet food sold to consumers over the past few years contained poultry by-product meal, which runs directly counter to the claims Blue Buffalo has historically made in an effort to build its franchise.  The admission, according to a Purina press release (see link here), was necessary to enable Blue Buffalo to file an Amended Complaint in the litigation to include its suppliers as a Defendants.  Blue Buffalo’s own press release (see link here) stated that it “requested permission to bring a claim against this former supplier and others involved for intentionally mislabeling ingredients and unjustly enriching themselves.”

What I find most interesting about the latest turn of events in this saga is the clear lack of outrage from, frankly, anyone other than Purina and a handful of class action lawyers.  While Blue Buffalo appears to be acting within the legal guidelines as it relates to product recalls (since the mislabeling poses no health, safety or nutrition issue a recall is not mandated by the FDA) and customer notifications, it is hard to see how their handling of this situation is good business practice. That said, the pet industry seems to be taking this in stride, in direct contrast to past pet food ingredient disclosure scandals.

In 2007, when the pet food industry was rocked by recalls related to contaminated vegetable proteins, imported from China in 2006 and early 2007, used as pet food ingredients, the response from the industry was visceral.  Sadly, thousands of dogs were affected by the associated product contamination, and many died as a result, justifying such a strong reaction. These deaths led to increased governmental oversight of the pet food supply chain as well as widespread recalls from pet food brands of all sizes operating across both geographies and sales channels. Consumers made their voices heard online and in the stores, resulting in a myriad of brands experiencing a decline in shelf space and, in some cases, expulsion from pet retailers.

To be clear, the situation with Blue Buffalo is not 2007 revisited — the ingredient mislabeling has not been linked to the deaths of any companion animals. However, if you have followed the fine print of this situation two things are notable — a) that it appears unlikely that Wilbur Ellis was the only party providing Blue Buffalo by-product meal and b) Blue Buffalo was not the only manufacturer receiving these shipments. The later of these statements we know to be true based on disclosures by both Blue Buffalo (see link here) and the FDA (see link here). I believe the former to be true because Blue Buffalo now states that they intended to bring claims against “this supplier and others”, with the former being Wilbur Ellis. Further, Blue Buffalo previously stated it sourced chicken meal from multiple parties (see link here), so it does not seem logical that a “substantial” and “material” portion of their pet food could contain by-product if Wilbur Ellis was the only one mislabeling these shipments.  I don’t know this to be the case but I would have expected Blue Buffalo to be emphatic about that fact pattern if it was true.

Yet despite these observations and incongruities, we have not seen the level of discord in the market that one might have expected given historical precedent. In fact we have not witnessed any discord. Yes, there are blog posts here and there making hay of Blue Buffalo and their handling of the mislabeling situation, but the vocal minority exists everywhere online.  Notably, retailers we talk to are not intending to remove the product, nor are they seeing any decline in sales. Further, we are not hearing a groundswell of consumers demanding other brands that received the by-product meal disclose the fact they may have mislead their customers as well. I would like to think that consumer advocacy does not require pets to perish in order to gain momentum, especially at a time in society where moral outrage against opaque corporations and public institutions has never seemed more elevated.

What I am left to believe from the fact pattern above is that a broad set of consumers are either unaware or don’t care. Further, I am also of the mind that the benefit the industry’s retailers receive outweighs the cost of taking a stand. I can’t blame them either. Their job is to be responsive to customers, not to think for them. However, the industry has done so (think for them) in the past when the risks outweighed the rewards (China sourced chicken jerky as an example).

Surely this cannot be the last we have seen in this epic. Maybe a definitive judgement will result in more fervor, but I would not wait for outrage, because it is not coming.

/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.

piggyAs has often been discussed, the post recession rise of the pet industry is often linked to the ongoing upgrade cycle in pet food. Pet owners, fueled by a combination of love for their companion animals, human food trends, and supply chain concerns associated with foreign sourced product, began to spend more on what they were putting into their pets bowl on a daily basis, focusing on solutions with higher quality ingredients, known sourcing, and production integrity. The result was a proliferation of brands targeting consumers with premium and super premium offering that met these emerging needs. Premium solutions now make up 42% of total consumables sales according to Packaged Facts. The net result was that the pet food upgrade cycle fueled a disproportionate percentage of industry growth.

From 2008 to 2014 estimated year end, according to the American Pet Products Association, sales of pet food increased from $16.8 billion to $22.6 billion, over 35% or nearly 5.1% annually. What is less often discussed is that this period of time coincided with de minimus growth in the pet population, especially large dogs who are the primary driver of pet food volume. If consumers of pet food were not growing, and therefore volume was flat to down, the resulting rise in pet food sales had to be price driven. In fact, during this period annual pet food inflation averaged over 3.0% annually according to Federal Reserve Economic Data.

screen shot 2015-02-14 at 8.26.25 amWhile rising pet food prices have been a boon for the industry, a lack of real wage growth has meant that these premium solutions are increasingly cutting into the discretionary spend of pet owners. While on the surface this may not be a problem for the industry — sales afterall continue to be robust — over the long term it is and will be. Our belief is that cost inhibits ownership, and for the industry to continue to grow the population must expand. Further, the increasing presence of higher cost solutions can serve to undermine the trust relationship between the retailer and the pet owner given that most of the benefits of these premium solutions are not easily observable.

When I walked the aisles of my local pet store, I noted that approximately 15% – 20% of the dog food SKUs would result in an after tax price of over $100.  A few other stores I sampled had SKU counts that comprised between 10% – 30% of their dog food merchandising mix at, or above, this price point.  This highlights a further concern of the pet food upgrade cycle for independent pet specialty stores. As conventional and natural grocery introduce more emotive brands with similar product characteristics, in an effort to capture their share of the pet food pie, the risk of consumers defecting the channel increases. Why would one pay $100 for a 40 lb bag of dog food when they could get a solution with a high percentage of the same attributes for 60% – 75% of the cost? According to Packaged Facts, 69% of pet product shoppers look for lower prices when they shop for pet products; further, 74% of pet owners believe that many pet products are becoming too expensive; finally, 52% of dog and cat owners are actively channel shopping. Given that premium and super premium solutions command a higher profit margin profile for both the pet specialty retailers who carry the products and the manufacturers/marketers who supply the channel, a pet food “downgrade cycle” could be devastating.  Absent a change in the personal economic fortunes of pet owners, we see the potential in this thesis.

The net of this is that the pet industry needs to become more acutely focused on product transparency and value. Manufactures/marketers of pet food and the retailers who sell their products need to be doing more to help consumers understand what they are getting for their premium price and why it is justified or they risk losing customers to lower priced solutions would in turn slow industry growth. Companies that cater to the value oriented wellness segment of the market stand to benefit from these changes in pet consumer behavior.

/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.

fly in soupOn its way to a date with a public security listing, Blue Buffalo ran into a small problem.  It seems there was a fly in their soup; one which they claim to have been blissfully unaware.  Equally embarrassing was the fact their fiercest rival, Nestle Purina, had been the source of the discovery.  What followed the initial accusation is either evidence of the power the independent premium pet food company wields or the first act in a Greek tragedy. The outcome is likely to have an impact on the pet food industry investment and the pet food M&A landscape.

In March 2014, it was leaked that Blue Buffalo, the $600+ million revenue independent premium pet food marketer, had selected a trio of lead arrangers for its public offering. The company had, for years, been rumored to be on and off the market seeking a buyer at prices between $2 – $3 billion depending on the timing of the speculation. It appeared that the company was now ready to tap the public markets for liquidity, an event that filled the industry with equal parts fear and excitement.

Two months after the leak, Nestle Purina filed a lawsuit in federal court alleging its competitor was lying about the contents of its products. Nestle claimed that independent tests show that Blue Buffalo uses chicken byproducts and corn in some of its food formulations — despite making marketing claims to the contrary.  Nestle would later amend its case to dispute other product claims on kibble, treats, and even cat litter. The fact that the industries top dog would undertake efforts to undermine Blue Buffalo came as a surprise to many.  Many speculated it was a tactic to lower the potential acquisition price for the brand.  Blue Buffalo returned the volley several days later counter-suing Purina for defamation, a summary of which can be seen here.

In a letter to customers, Blue Buffalo Founder and Chairman, Bill Bishop wrote:

“It is an easy thing to make unsubstantiated claims, put them in a lawsuit and then publish them all over the Web to disparage and defame a company. It is quite another thing to prove those allegations… We will prove these and other matters in court with good reliable evidence, and we look forward to disproving the voodoo science that Nestlé Purina relied on to support their outrageous allegations.”

The complete responses from Bishop can be seen here and here. Later, Bishop would go all in on a letter to the editor of Businessweek that can be seen here.  During the process, the National Advertisers Review Board (NARB) recommended that Blue Buffalo modify marketing claims it was making about competing products.  While Blue Buffalo disagreed with the the conclusions of the NARB, they agreed to take into account their recommendations in the future.  Details of the review hearing, recommendation, and associated reaction can be seen here.

Upon reading the first letter of response, I knew Nestle had something.  History has shown that the de facto strategy for the guilty is to attack not the claim but the science of the test and the party administering it. If professional sports is a relevant proxy, sometimes that plan works.  So Blue Buffalo then set out to undermine the validity of the Purina’s independent test going so far as to claim the laboratory involved had “dubious scientific credentials.”  The company’s critique of Windsor Labs and its scientific findings can be seen here.

As it appeared the two sides were heading to court, Blue Buffalo issued a statement that one of its suppliers had mislabeled ingredients sent to their customers, which could (that choice of words is important) have resulted in Blue Buffalo product being made with poultry by-product meal.  That statement can be seen here.  While it is notable that Blue Buffalo is acknowledging some of Nestle’s claims, it is passing the buck to its supplier.  While Wilber-Ellis has a history of recall related issues, the names of other pet food companies who may have received mislabeled ingredients, as Blue Buffalo claims, have not surfaced.  Since the FDA and Wilber are choosing to remain silent on this issue (the FDA views those names, if any, to be confidential information), it would be natural to speculate that there are no other names and in fact, this circumstance was known to Blue Buffalo.  However, that is merely speculative. What is also interesting is that Blue Buffalo has not issued a voluntary recall (the FDA does not mandate a recall in cases where the ingredients involved do not have a reasonable probability of causing serious adverse health consequences), has not disclosed probable lot numbers, or offered to refund customers their money.  So far the strategy seems to be working as they have not wavered from their approach.

What happens next is likely to impact pet food investing and M&A.  If the circumstance above results in Blue Buffalo modifying or pulling its IPO plans, or going public and experiencing diminished value, or selling at a diminished value, it will be yet another cautionary tale of how supply chain issues can quickly erase equity returns hard earned over time in the pet space.  This may lead to investors pursuing pet consumables investments with greater caution and scrutiny.  Further, pet consumables M&A may come with more strings attached — broader seller representations and warranties, higher indemnification caps, etc. — or at lower valuations to account for this risk.  Companies that can demonstrate control over the product they put in the bag should also be ascribed a premium.  Owning your production assets becomes, in fact, more valuable. That written, if Blue Buffalo is able to hold shelf space, avoid a recall, and move forward with its liquidity plans, it will, in fact, validate how powerful the leading independent brand really is.

My view is the marketer is ultimately responsible for ensuring that the product in the bag matches the associated claims.  However, absent consumer lash-back, Blue Buffalo is unlikely to suffer much.  Further, given how much traffic their products drive at retail, pet specialty chains are more likely to accept the “it’s not our fault” explanation.  In the meantime, Blue Buffalo may get to see the results of the Freshpet IPO before confirming its path.  Freshpet is expected to price on November 6th.  At the mid-point of the range, Freshpet would command a fully diluted value of $414 million.  Based on estimated 2014 revenue, that would value the company at 3.5x – 4.0x revenue.  Those multiples would only serve to validate Blue Buffalo purported $3 billion price tag.

/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.

iamsA theme we have been emphasizing in our missives about the pet industry has been the concept of change. Industries evolve for a variety of reasons — innovation, regulation, exogenic shock, mergers/acquisitions, among others. Our view is that the pet industry is changing for another reason — slower growth. The key drivers of pet industry performance over the past five years — the humanization of pets and the pet food upgrade cycle — appear to have peaked and, as a result, we are seeing divergent performance among industry participants as new core themes take hold; innovators continue to take share from incumbents. A logical reaction to this state of play is an increase in deal velocity — incumbents buy innovators, investors fund innovators to accelerate their existing or potential advantage, and large companies consolidate to drive economies of scale. Notably that is exactly what we are seeing and some of those deals could have far reaching implications. The case of Mars, Inc. buying the Proctor & Gamble pet portfolio is an example of this reality in practice.

When Mars acquired 80% of P&G’s pet food portfolio for $2.9 billion, it should have come as no surprise P&G was largely exiting the pet space. P&G management had been actively seeking to pair its exposure to non-core lines of business and a buyer for their pet brands has been sought for several years. That Mars was on the other side of the transaction, was not a real surprise. After all, only a small handful of companies in the space could have taken a deal of this size down, Mars being one of them. However, Mars has been increasingly active in its food business overseas at the expense of its pet portfolio so many discounted the possibility. On its face, the deal appears to be attractive for Mars. Among the acquired brands, Iams fits nicely into their merchandise matrix, and mitigates the risk they would fall to the number three player in the most important pet market should Big Heart Brands have scooped up the assets. Eukanuba is largely redundant and Natura is a wild card given its recent recalls. What we suspect happened was Mars had sought to buy Iams for some time, and eventually the sides agreed to a deal where P&G threw in more assets (Eukanuba and Natura) and Mars, in turn, agreed to throw in more money. The $1.6 billion portfolio sold for 2.25x revenue after considering the retention of ownership.

While the deal backdrop consists of some mildly compelling drama, more interesting is what it all could mean in terms of change. Of significance, Mars is largely focused on the mass channel, and logic would dictate that they would seek to move Natura into mass at a lower price point. Given the recalls that is where Natura might have some residual value. That scenario could have significant implications for pet specialty assuming a Natura launch is a prelude to other natural brands entering the FDM channel under their flagship brand. The would be a big win for consumers — premium natural pet food at a mass price. This would add additional fuel to the notion that Blue Buffalo, if public, would pursue this very strategy. Further, Big Heart Brands, through its Natural Balance transaction, would be well situated to join this movement despite the promise to keep the brand in channel. The net result is the potential for both share and channel shift but also pet food deflation. Falling food prices would have significant implications for major pet specialty and independents. On a price per pound basis, premium food trades at 2x-3x price premium and a 2x-2.5x profit premium. Price compression would therefore have a significant impact on margin for pet specialty players.

We concede that the scenario above is speculative, but one that increasingly has the potential to be realized in whole or in part. Further, it is one that we would not have given much consideration 12 months ago that everyone should now take seriously.

/bryan

willieWillie Nelson once said, the early bird may get the worm, but the second mouse gets the cheese.  In this case, I’m not sure which mouse I was.  Just days after I published my fall pet report a number of news worthy items came into focus that would have merited a mention in my industry report.  However, several of the items provide direct validation of the trends I have been discussing here over the past year.

Of greatest significance was the headlines coming out of PetSmart’s Analyst Day presentation.  Just prior to their Analyst Day presentation on October 17th, management announced that they expected third quarter same-store-sales (“SSS”) comps to come in below the anticipated range. Management believes 3Q13 SSS will come in at 2.0% – 2.5% versus prior guidance of 3.0% – 4.0%. PetSmart has not seen comps this slow since 2009. Notwithstanding the company’s issues with driving traffic, management is sticking by its full year EPS guidance.

Notably, as part of their presentation, PetSmart finally addressed its web strategy in some detail.  CEO David Lenhardt noted that how to remain relevant to consumers across channels was one of his biggest concerns and that the company would be investing more of its marketing budget and CRM resources online. He went on to detail several new ecommerce initiatives include in-store inventory look-up online, improved mobile experience online, in-store pick-up, and opening of a new West Coast distribution center which will reduce shipping times. Lenhardt continues to believe that PetSmart’s position as a destination retailer and its services platform will continue to enable it to compete effectively against other online players.

Over the past year, I have been highlighting the risk of the internet to PetSmart.  I’ve not been alone in ringing this bell.  While I believe PetSmart is uniquely situated to perform well online long term, my concern has been that they have not had a coherent strategy. In light of recent financial performance, including 3Q13 guidance, I have to believe that other online players are succeeding at eroding some of the premium customer base of PetSmart’s and Petco, especially among a younger demographic.  The company’s willingness to detail their plan, after years of side stepping the question, tells me there is some truth to this theorem. While online will result in erosion of hardgoods share, because of the wide availability of these products online, the concern will not reach its apex unless and until pet specialty sees consumables share erosion to online.

Second, the long running narrative linking imported pet jerky story product to numerous pet deaths finally hit the headlines. News about pet death related to foreign jerky products have appeared in nearly every major online publication during the past week. My historical conversations with domestic manufacturers has been that regulatory bodies are not doing enough to protect consumers from imported product and instead have been myopically focused at cracking down on domestic producers.  While it is terrible that so many pets had to fall ill before we got to this point, it now seems we have arrive at the moment where the paradigm shifts. When the dust settles the winners will be consumers and branded treat companies with domestic sourcing and production pedigrees.

Third, Whole Foods announced that they are launching a house brand of premium value oriented pet products. Whole Paws will consist of 24 SKUs addressing both dogs and cats cutting across multiple categories ranging from grain-free food and treats to cat litter.  The attempts of traditional grocery to cut into pet specialty sales are, like the jerky story, old hat for those that follow the industry closely, but the within the natural segment pet remains an under monetized opportunity. Grocery continues to leak share to both mass and pet specialty, due to price and assortment respectively.  However, natural has a real market opportunity in my opinion because it can provide grocery consumers more of a one-stop-shop.  While space limitations will ultimately cap the potential of the natural channel within pet, this product line launch is a clear demonstration that store managers are starting to understand the potential of pets within their channel.  Natural could become a nice bed for incubation of emerging brands with a wellness oriented theme much the way it was in natural beverage, healthy snacks, and gluten free foods.

Finally, the relative pull of the pet industry on owners was again affirmed to me when I became aware that pet owners will purchase nearly $330 million of costumes for their pet this year. This amounts to approximate 22 million consumers spending, on average $15 annually.  What consumer pressures on pet?

/bryan