Three Factors Shaping M&A Strategy in the Global Pet Products Industry

The global pet products industry is growing, changing, and attracting attention from major acquirers and investors. In this report we share the three key trends shaping M&A strategy in this dynamic sector.

Pet Food Becoming More Premium

Growth for the pet food sector is healthy, outpacing U.S. packaged food sales in 2017 by a factor of three.¹ The fastest-growing opportunity is at the premium end of the market: Premium pet food sales were greater than economy and mid-priced sales combined in 2017.²

Will Bain, a director in Harris Williams & Co.’s Consumer Group in London, observed this trend during his recent visit to the Interzoo conference in Nuremberg, Germany: “The array of innovation at the show was simply phenomenal, with no shortage of high-end product companies serving consumers who want only the best for their pets.”

The M&A plans of large corporations are further evidence of this shift. One example is General Mills’ acquisition of Blue Buffalo, a pioneer in the premium natural pet food category. Similarly, J.M. Smucker recently acquired Ainsworth Pet Nutrition, a leading producer, distributor, and marketer of premium pet food and snacks. The acquisition, J.M. Smucker says, “expands its presence in [the] fast-growing premium pet food category.” ³

Ryan Budlong, a managing director in Harris Williams & Co.'s Consumer Group, explains such acquisitions are part of the “mainstreaming” of premium and super-premium pet products: “These high-end products are now being bought by mass consumers through retailers like Target and Kroger. They used to be a segment of the market that was only available through specialty and independent retailers.”

Budlong sees that trend creating a new opportunity. “As brands like Blue Buffalo become more mainstream, it creates an opening for newer, more differentiated premium brands to take their spot at specialty and independent retailers.”

The growing demand for premium pet products also creates an opportunity for private-label and co-packing manufacturers. “Interzoo was attended by a large number of private-label businesses offering very sophisticated, innovative products,” says Bain. “They have moved away from only supplying mainstream items and toward helping leading retailers and brands play in the growing premium space.”

Online Growth Reshaping the Industry

As with many other consumer goods, disintermediation and “the Amazon effect” are transforming the pet industry. In 2017, U.S. e-commerce pet care sales grew by roughly $3.4 billion, compared to approximately $317 million for brick-and-mortar pet care sales.⁴ Amazon alone sold about $2 billion worth of pet products in 2016, and it reached a penetration rate of 32 percent among pet owners, the same rate held by PetSmart.⁵

As Budlong observes, the predictability of pet food consumption makes it an ideal candidate for subscription-based e-commerce: “Consumers give their pets the same amount and brand of food at the same rate for months at a time. Getting it online makes perfect sense and is a big convenience.”

As with premiumization, major players in the industry have focused their M&A strategies on taking advantage of this shift to e-commerce. PetSmart’s 2017 acquisition of chewy.com is perhaps the best-known example: The deal has been billed as the largest e-commerce acquisition in history, its value driven in part by chewy.com’s status as one of the internet’s fastest-growing sites.⁶

Likewise, in April of this year Nestlé Purina PetCare acquired a majority stake in Tails.com, a UK-based direct-to-consumer dog nutrition business offering customized, subscription-based food delivery and nutritional support. According to Bernard Meunier, CEO of Nestlé Purina PetCare EMENA, “This move underlines our focus on investing in high-growth categories and acting on consumer trends.”⁷

China-Based Buyers Increasingly Active

Interest and activity in the pet sector are rapidly becoming more global. For example, Chinese consumers are forecast to spend $7 billion on their pets by 2022, with annual market growth of approximately 20 percent.⁸ This steep trajectory is driving increasing activity in the space among Chinese buyers and investors.

In November 2017, for example, New Hope Group, a Chinese agribusiness company, teamed with other Asian investors to acquire Australia-based Real Pet Food Co. The merged company is well-positioned to take advantage of the trends outlined above, offering Chinese and global consumers grain-free and game meat pet foods and snacks, as well as private-label items.

“We have definitely seen an uptick in China-based buyers participating in our pet industry transactions,” notes Budlong. “It’s similar to the trend we have seen in other consumer segments. As the Chinese middle class becomes wealthier, those consumers are demanding more Western goods. That trend, paired with increasing pet ownership, creates a significant opportunity to sell pet products in China.”

Conclusion

M&A activity in the global pet industry is being shaped by the shift toward premium products, the rapid rise of e-commerce, and the growing interest in the space among Chinese buyers and investors. Those businesses that can take advantage of these trends are best positioned for future growth.

For more information, please contact our industry professionals, several of whom will be attending SuperZoo in Las Vegas from June 26^th through the 28^th.

Published May 2018