Growth of the pet sector has spurred increased acquisitions by equity holding firms

When Bill Sherk and his partners founded MiracleCorp in 1988, they did so knowing they wanted to one day sell the company. Miracle Corp’s first line of products – premium dog shampoos with tea tree oil – may have had the quality to shine, but dog shampoos weren’t a particularly large product category at the time, Sherk recalls. Ten years on, it still claimed less than a million in revenue per year.

The pathway to success and selling

MiracleCorp had to expand. So they went on a buying spree of their own, ultimately acquiring 7 other brands to expand into adjacent markets such as collars and tack, and eventually freeze-dried pet foods.

Finally, in the mid-2010s, MiracleCorp’s slow and steady growth picked up pace. They sold the majority of their product lines to BrightPet. And they weren’t the only pet business to sell.

“Every year for the last 3-4 years, there have been many acquisitions,” Sherk says. A growing number of companies – even those outside the pet sector – want a piece of what has become one of the world’s fastest-growing industries. And that growth is likely to continue: “People value pets more than I’d ever imagined. Sometimes it’s mind-boggling what people will do for their dogs.”

But for the start-ups just breaking into the business, the decades to come will likely look quite different thanks to industry consolidation and the role of online retail.

Pet sector – booming business

“The pet sector has long been attractive to investors, but interest has been especially high the last 2 years,” according to Lauren DeVestern, a managing director and partner at L.E.K. Consulting.

Pet care had already demonstrated remarkable resistance to recessions. With more than 90% of people now saying they consider pets to be part of the family, they aren’t any less likely to stop feeding the family dog than they are themselves. This makes petrelated companies attractive to investors looking for stable earnings.

Then the pandemic hit, and instead of taking a dive, like so many other sectors, pet ownership and spending on pet care surged. DeVestern: “People who have never invested in pet now want a piece of it. It’s always been an attractive area: recession resilient, and pandemic proof.”

New investors

The stunning performance of the pet industry during COVID-19 not only made pet care companies more attractive. It also changed the type of buyer interested in such acquisitions. Prior to the pandemic, the majority of pet sector acquisitions were strategic purchases of established pet brands by larger pet-focused companies. Since 2020, private equity and other fund managers are responsible for about half of the acquisitions in the industry.

The type of company acquired has also shifted. While pet food brands claimed most deals in the past, recently, other segments have seen an increase in activity. Veterinary services are increasingly popular, as are supplements and pet tech.

Shifting market dynamics

DeVestern remarks that despite the excitement of investors, not every business in the industry is enjoying the same level of success. “The mom-and-pop pet shops are struggling, facing competition from online, as well as other retailers. Everybody is selling pet products.”

Sherk believes that with similar dynamics now sweeping major online retailers, the start-ups of the future won’t be able to follow directly in the footsteps of even the most recent generation of acquisitions. “The distributors have changed over time. They are less interested in building brands. They want to harvest their return quicker.”

New offerings

According to Sherk, MiracleCorp benefited greatly from working with Amazon while the company was still relatively small. However, major names like Amazon or Chewy are now saturated with competing products. A new offering must be truly unique to break out on these platforms. “A direct-to-consumer strategy, or even a platform that allows products to be tailored to individual customers, is likely the winning strategy of the future.”

Nevertheless, DeVestern believes there is still ample room in the market for new offerings. The several million pets adopted over the past 2 years are expected to live an average of 12-13 years. Importantly, pet parents indicate they will be acquiring a second pet over the next few years. “Growth,” Sherk concludes, “will slow down as the pandemic wanes, but we’re not going into low growth territory by any means.”