Investment spike in the fresh dog food category

With a natural pet food segment worth approximately €5 billion ($5.33B), the opportunities around natural and minimally processed (that is, raw or gently cooked) foods are generating huge interest when it comes to capital injection. This is fueled by the fact that consumers are increasingly applying the same quality expectations to food for their pets as for themselves.

Outgrowing the broader market

The European pet edibles (both food and treats) market is now worth approximately €30 billion ($32B) and has been growing at a rate of 5% over the past 5 years. The natural segment is outgrowing the broader market with approximately 8% value compound annual growth rate (CAGR) over recent years. Whilst smaller in scale (approximately €1 billion/ $1.07B), the subcategory of raw and fresh pet food is experiencing the fastest growth with a yearly increase of around 10%.

Presently, around 90% of the minimally processed segment is focused on dog food. One of the reasons for this is that dogs are typically less fussy eaters than cats, so dog food has proven an easier market for challengers to disrupt.

Premium products

Pet owners still appear to be prioritizing premium products for their companion animals, even during times of economic downturn. However, it is believed that around 75% of consumers remain unaware of the current offering. Among those that do feed their pets minimally processed foods, in the majority of circumstances it accounts for less than 25% of their pet’s diet. This suggests opportunities for further growth as pet parents become more aware of and comfortable with the minimally processed proposition. Therefore, this segment is expected to continue to outperform the wider pet market in terms of growth.

Direct-to-consumer (DTC) sales channels enhance brand success

• Across Europe, online sales in the post-COVID-19 pet food market account for roughly 10% to 15% (depending on the country), which is approximately 3 to 5 points higher than pre-pandemic levels.

• In the minimally processed category, the online share of sales is typically much higher.

• As investors evaluate opportunities, a strong DTC pattern with a sticky customer base can materially enhance the success of a brand.

Co-manufacturing strategy is less relevant

• In recent years, many premium brands that are not involved in minimal processing have relied on co-manufacturers. Rather than owning their own factories, they outsource their manufacturing process to a partner. This approach allows brands to scale quickly, without needing to raise the additional capital associated with an own manufacturing operation.

• In contrast, minimally processed pet foods are more complex and require an extra level of care in the manufacturing process. This is because there is an element of risk involved from live bacteria when producing raw or gently cooked (and subsequently chilled) food.

• Therefore, minimally processed brands typically require more capital early on in their development phase in order to fund factory construction projects.

Local sourcing of minimally processed brands is an added advantage

• While mainstream pet food brands have fallen victim to shortages and delays in recent months, minimally processed brands are generally domestically focused and therefore less susceptible to supply chain disruptions.

• Major advantages of self-manufactured strategies include the ability to source ingredients locally and guarantee safe and clean processes as well as fast delivery to the customer.

Customer loyalty remains key

• Investors are tracking targets that deliver rapid growth, and this is often fueled by a sticky customer base.

• Many investors will look to conduct cohort analysis to measure the loyalty to a brand among consumers as well as the longevity of a cohort’s allegiance to a brand. Brands with proven long-standing customer relationships and sticky recurring revenue streams will attract investor capital.

• Minimally processed pet food brands typically employ a DTC subscription model, which helps drive customer retention and fosters a closer relationship between brands and their customers.

Where is the investment going?

In the European market, a lot of minimally processed brands are smaller venture capital-backed or privately owned companies. Many of these early-stage brands are balancing the rapidly changing, inflationary conditions defining today’s marketplace with the rate of consumer demand and their own growth ambitions.

Various transactions have materialized in Europe over the last 2 years. For example, in 2021, Butternut Box, a UK-based DTC freshly prepared foods business, raised €45 million ($48M) in a round led by L-Catterton to fund its continued growth. Supported by its new facility opened earlier that year, Butternut Box saw sales grow by 51% to €40 million ($42.66M) in the year to December 2021. In May 2021, Scottish raw pet food brand Bella & Duke raised €8 million ($8.53M) in a round led by BGF. The company has experienced rapid growth in recent years, as it targets more than €50 million ($53.33M) in revenue in the next few years.

Early last year, the fresh cat food subscription service KatKin secured €21.6 million ($23M) in a round led by Verlinvest and Perwyn. Not long after that, in July 2022, Axcel acquired premium pet food manufacturer Voff Premium Pet Food. We expect more brands to be added to this list, either due to capital raises or mergers and acquisitions (M&As), in the near future.