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May 20, 2020

Pet Space Update During COVID-19

MHT Partners  | Consumer Investment Bank

The pet space continues to be an attractive investment arena in the midst of the pandemic. As a leading consumer investment bank very active in the space, we field a steady drum beat of inbound interest from sophisticated investors. Notably, CD&R’s recently announced pending acquisition of Radio Systems, Corp. serves as an apt example of recent M&A activity, growth and liquidity. The rumored sale price of $1.3B represents 12.75x pro forma adjusted LTM EBITDA as of June 30 – all the more noteworthy in the billion dollar plus range.

More broadly speaking, while unlike past downturns, overall industry growth rates will decline this year. Packaged Facts estimates U.S. pet industry retail sales will decline 17% in 2020 (to $78.5B in 2020E) — the “devil is in the sub-sector details” and in the supply/demand equilibrium equation. To bookend the spectrum of pet-related products and services, pet services, which by and large have been deemed “non-essential,” have and will continue to suffer the most given shelter in place restrictions and a massive decrease in travel (as relates to pet hotels and boarding). On the other hand, pet food, befitting its staple designation, is churning along fine notwithstanding “noise” from pantry stuffing in March that has reversed itself the last few weeks. Other sub-sectors (e.g., treats, durables) fall in between.

Non-consumable pet expenditures are projected to decline in 2020, though that decline appears to be largely a supply-side function due to a subset of brick-and-mortar retailers being deemed non-essential and temporarily shuttered (though a significant percentage of smaller independents, lacking eCommerce capabilities and capital, will undoubtedly permanently disappear). Chinese tariffs have taken their toll and COVID-19 related blowback may as well. Demand, on the other hand, has held strong. As an example, dog food (an essential staple) is projected to grow 4-5% in 2020E. Distribution channels play a large role in success, and anecdotal company checks with scores of vendors with eCommerce/DTC capabilities, or wholesale customers with eCommerce capabilities, highlights strong channel outperformance in these times. Nielsen reports that online sales of pet food in the U.S. increased $281 million (51%+ growth) from February to March 2020 and year over year (“YOY”) increased 77%, compared to March 2019.

While still relatively early, premium brands have held in well, but we may see a shift to lower-priced products as consumer budgets shrink, and/or consumers, absent a truly experiential and/or unique product assortment at their favorite pet store, limit their brick and mortar visits to the “one-stop-shop” FDM venues that offer lower price point products. The pandemic has brought about a period of product and brand discovery whereby the “value proposition” (and all the elements – price, content, transparency, convenience and availability that define it) will find itself under increasing scrutiny from consumers – and vendors need to take heed.

Helping soften the blow of COVID-19 is increased pet ownership as people look to pet companionship to fill the void of social distancing. Shelters nationwide report significantly elevated levels of adoption and fostering (the ASPCA reported a 70% increase in fosters in Los Angeles and New York in March) and if the Great Recession serves as apt precedent, dog ownership rates in the U.S. (presently at ~50%) should tick up a couple percentage points incrementally and pay dividends in the future. A recent LEK Consulting consumer survey indicates that U.S. dog and cat ownership has increased approximately 4%, or approximately 7 to 8 million animals, during the pandemic.

As an investment bank deeply involved in the pet space, we remain highly enthusiastic and optimistic for the pet industry and the growth PAWSibilities in the future – we welcome a discussion with you!

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