M&A: Changing focus

Attractive, growing industry

Mergers & Acquisitions (M&A) are a global phenomenon, driven by the North American market. But M&A have become more significant in Europe too, and currently activities in Asia and among Asian investors are increasing.

The pet industry remains very attractive. It is an industry worth in excess of $100 billion (€91.5 billion), growing consistently and faster than many other grocery categories. Its growth is based on very strong fundamentals, including increasing levels of pet ownership, humanization and premiumization.

In developed, primarily Western markets, pet ownership is generally constant, with some growth. There are exceptions, such as the U.S., where pet ownership continues to grow. 

In developing markets, pet ownership is growing in line with economic development. Countries such as China have experienced tremendous economic growth and pet population and ownership rates have exploded likewise. As these economies continue to grow, so too will pet ownership. 

Increasing pet ownership allied with a global humanization and premiumization trend is also driving growth. Pet ‘parents’ switch to better, more expensive pet foods and products, which drives a constant growth in market values. 

These trends will continue to make the pet industry attractive to investors, both to industry insiders and outsiders, and we foresee some notable types of investment.

Consolidators

Buying a series of brands/companies and bringing them together to gain synergies remains an important area. This can be challenging, as Perusa would confirm with the Karlie/Paulchen/Flamingo acquisitions.

Incremental acquisitions

Strategic bolt-on acquisitions have become more common: smaller acquisitions get companies into niches or fast growing segments where bigger brands would not have the traction, or in which the scale is too small. Acquisitions enable companies to acquire product skills or intellectual property (IP) that is likely to be important in future. Examples are WellPet (U.S.) which has acquired SOJOS, a freeze dried and raw food specialist, to complement their natural brands portfolio, and recently Whimzees (Paragon in the Netherlands) whose dental snacks range adds to their treats and snacks portfolio.

Nestlé Purina also bought up some smaller brands. In 2015, it acquired Merrick in the U.S., one of the fastest growing natural brands in pet specialty foods. This March, it announced a majority share in Terra Canis of Germany, a small high-quality (primarily) wet dog and cat food brand, using human grade ingredients. Both acquisitions give Nestlé Purina an entry to categories that are too small for their brands to enter or where their existing brands lack the image or consumer trust to be successful.

PetsMart, the U.S. specialist retailer, has announced the purchase of Chewy.com, a leading online only retailer. In recent years Chewy rapidly built a leading position online. Chewy’s and other online retailers’ success has had a serious impact on big box retailers (Petco, PetsMart), where sales have been flat or declining in an otherwise growing market. The acquisition gives PetsMart a strong position, in both online and bricks and mortar outlets. 

Active Chinese companies

A recent trend is Chinese firms investing in the West, often with the goal to grow and expand their business and geographic coverage. They may have established brands and market presence at home, but may not be easily accepted in new markets. An acquisition can ease acceptance and enable them to gain knowledge of markets and consumers at a much lower risk and much faster than building brands from scratch.

Hillhouse Capital from China recently completed purchasing Gimborn, a long established German manufacturer and brand owner of cat and dog snacks (Gimpet, Gimcat, Gimdog brands) and clumping clay cat litters (Biokat). Hillhouse sees major business growth opportunities by bringing respected Western brands to Chinese and Asian markets and expanding their European business.

Future of M&A

The intrinsic attractiveness of the pet industry to investors is undisputed. We will surely see an increase in smaller investments, as larger companies acquire niche brands. Like Catterton, which invested in companies such as Wagg Pet Foods in the U.K. and Lily’s Kitchen, a natural brands innovator.

Undoubtedly, investments from and into China will increase, as that market develops and local companies seek to expand and gain marketing and brand skills, enabling them to become global players.