Shifting pet marketplace leads to further consolidation

When first covering the pet industry, the number of businesses with the backbone of ‘I could not find it, so I made it’ was remarkable. Over time, we have witnessed the industry experience substantive change, evolving from a home-spun category, driven by an entrepreneurial spirit to a systemic global business. That is not to say the founders’ flame has been extinguished, but today the industry rises and falls based on the performance of a concentrated set of market participants.

Consolidation

Consolidation in the pet category has accelerated, as disparate point solutions evolved to become systemic businesses. S&P Capital IQ reports that global pet industry transaction volume has grown ten-fold in the past 20 years, with a record deal volume of 335 transactions in 2021, up from 265 transactions in 2020. While 2021 may stand as a record year, we do not believe the consolidation drumbeat will fade in light of several factors.

Most crucially, the pet industry remains an attractive growth category. While industry growth tapered in the largest pet markets leading up to the pandemic, COVID-19 accelerated pet population growth and category spending trends. This injection of demand created market opportunities for both existing and new entrants.

Coupling this with the continued manifestation of humanization and premiumization in emerging pet markets, few consumer categories can match the same durable growth potential of the pet industry. Profitable growth is one of the most valued attributes in today’s transaction markets, and the pet industry has profitability in spades. Capital will continue to flow to the pet category and industries where attractive returns can be realized.

Changing marketplace

A second factor is that the nature of competition has changed. In the US, we have shifted from an economy led by older generations that possess stored wealth, to one driven by younger generations with access to fewer resources. While older generations show a higher propensity to shop in physical retail stores, younger consumers prefer to shop online.

As a result, many incumbent franchises have been disconnected from the customer, both in terms of products or services and preferred sales channels. Acquisitions are often a ‘quick fix’ for businesses that need to reposition their proximity to the customer.

This theory is being proven by the many buyers seeking and paying a premium for pet businesses offering products in the right formats, or accessing customers in preferred channels.

Operating at scale

It has been demonstrated in consumer categories that the benefits of industry growth are primarily found in scaled franchises. As the pet industry has seen its products and services formats proliferate, and as those that control customer access seek to monetize their position, the cost of doing business has increased. As retailers seek continuity of products on their physical or virtual shelves, they are also favoring larger providers who have more supply chain control and access to substitutes when supply is constrained. Also, competing in the fastest-growing economies requires substantial resources. As a result, many innovative companies are realizing the benefits of being part of larger platforms and operating at scale.

Access to capital

Lastly, and not to be overlooked, money is currently cheap and plentiful. Cash on the balance sheets of large corporations and in the hands of institutional equity investors are at peak levels. S&P Global reported record cash and short-term assets on corporate balance sheets globally at a historical high of $6.8 trillion (€5.98T) as per August 2021.

According to Preqin, global private equity inflows were on pace to exceed $1.2 trillion (€1.06T) through the first 9 months of 2021: a new record. Debt also remains abundant and cheap, largely a hangover from easy money policies and stimulus in large industrialized markets. When these capital conditions are prevalent, the pace of M&A has historically been robust and valuations frothy, motivating sellers to transact.

While the Federal Reserve is expected to raise interest rates to fight inflation in the US, we anticipate the pace of consolidation to continue into the foreseeable future.