With the U.S. economy teetering on the brink of the COVID-19 cliff for the past half year, 2020 will probably be slower than usual for pet industry investment, an expectation also based on concerns surrounding the pandemic’s summer rampage, its unknown future trajectory and uncertainty over the presidential election. Looking a bit further ahead, however, a survey of private equity and/or animal care operators who had participated in a private equity/animal care transaction over the past two years or expected to do so soon suggests the U.S. pet industry may be riper than ever for investment.
Conducted in May by Katten Muchin Rosenman, a law firm with multiple offices in the U.S. and abroad, the 2020 Private Equity in Animal Care Survey found that, economic devastation notwithstanding, 68 percent of private equity respondents and 61 percent of animal care respondents were more receptive to private equity since March 2020, when the spread of COVID-19 spurred President Donald Trump to declare a national emergency. In addition, a large majority (90 percent) of private equity respondents considered animal care to be an attractive target, and 71 percent expected pet industry transactions to increase over the next 12 months, with more than one-quarter predicting a gain surpassing 10 percent.
Investors and animal care operators remain bullish on the U.S. pet industry for good reason. During the time of coronavirus, the market has been more than recession resistant, with food and non-food pet supplies doing better so far in 2020 than they likely would have otherwise. One explanation is the extreme adaptability of pet owners, marketers and retailers during the stay-at-home era, underscored dramatically by the rapid embrace of online ordering. At least equally counterbalancing has been the pandemic-driven pet population boom, which continues to make headlines.
As reported by The Washington Post on Aug. 12, “The Cabbage Patch Kids craze of 1985. The Tickle Me Elmo mania of 1996. To understand what has been happening with the sales and adoptions of real, live puppies and dogs during the novel coronavirus pandemic, you have to think back to buying frenzies that consumed the consciousness of the entire nation … What began in mid-March as a sudden surge in demand had, as of mid-July, become a bona fide sales boom. Shelters, nonprofit rescues, private breeders, pet stores—all reported more consumer demand than there were dogs and puppies to fill it … Americans kept trying to fill voids with canine companions, either because they were stuck working from home with children who needed something to do, or had no work and lots of free time, or felt lonely with no way to socialize.”
Canines are not the only beneficiaries of this trend. Cats and other pets, too, are seeing a spike in demand among cooped-up Americans, especially households with kids and/or those that already had one or more pets, per Packaged Facts’ March/April Survey of Pet Owners.
Looking ahead, much of the investment interest will naturally be centered around companies doing well during the new normal of social distancing and staying at home. Top of mind are veterinary providers with strong digital platforms including those fielding front-line or back-office telehealth applications. In what now looks like a remarkably prescient move, Petco acquired online teletriage service PetCoach in 2017, and in mid-2019 Banfield—majority owned by Mars—introduced its Banfield Vet Chat mobile app, which allows Banfield’s 2 million Optimum Wellness Plan clients to obtain veterinary advice remotely 24/7. In doing so, Banfield teamed up with app developer Vet24seven, which fields its own MyPetDoc (“powered by Ask.Vet”) service, and which is clearly attractive to Mars, which also owns the acquired VCA, BluePearl and Pet Partners veterinary chains.
Entrepreneurs, veterinary chains and e-tailers aren’t the only ones diving in to veterinary telemedicine. During 2018, Boehringer Ingelheim (BI) Animal Health (NexGard, Frontline, Heartgard, etc.) introduced PetPro Connect as part of its Collaborative Pet Care program, and in May 2020, responding to the need for social distancing, BI expanded the system with the PetPro Tele+ platform, an “all-in-one” telemedicine solution including mobile-to-mobile appointments that does not require integration with a practice management system and can therefore be put into use quickly. In June 2020, in an effort that dovetails with the e-tailer’s push into prescription pet medications, Chewy began beta testing Connect with a Vet, making it possible for Autoship customers to chat remotely with a vet for free.
As noted in the previous installment of this column, the pandemic-driven e-commerce boom has also given a boost to direct-to-consumer (DTC) pet product marketers, including new-generation fresh pet food startups such as The Farmer’s Dog, NomNomNow, JustFoodForDogs, Ollie and PetPlate. Demonstrating the ongoing promise of the DTC fresh pet food segment—and possibly as much due to, as in spite of, the pandemic—Smalls, a New York-based newbie focusing on high-quality fresh food for cats, saw its online cat food delivery sales surge 162 percent year-over-year from March 2019 to March 2020. In early August 2020, Smalls closed a $9 million financing round led by Left Lane Capital, which will allow the company to widen its pet food line with formulas for particular feline palates and expand to offer pet supplements, furniture and accessories.
“Since COVID-19 changed our lives and economy, there continue to be many unknowns,” said co-founder Matt Michaelson in a company press release in August. “But, if anything is certain, cats need to eat. Our DTC model allows us to safely deliver exactly what customers need, directly to their doorstep, and our business is seeing tremendous growth as a result.”
As companies face off against hard times, there could be some opportunistic buys as well, as with Mars’ 2007 acquisition of Nutro in the midst of the melamine-related pet food recalls. On the non-medical pet care services side, one company that might be receptive to a buyout is app-based pet sitting service Wag!. Due to the pandemic-related travel bust and work and learn from home trends, the company is facing a decline in demand for pet sitting services that seems likely to persist for the foreseeable future—on top of a string of difficulties throughout 2019 culminating with the withdrawal of the bulk of a $300 million capital infusion from Japan’s SoftBank Vision Fund. Prior to SoftBank’s retreat, Wag! approached arch competitor Rover as well as Petco about a possible sale, and Wag! is now being promoted on Petco.com, having replaced Rover.
As Vox observed in October 2019, when Wag! and Petco were in talks: “If it is Petco that buys Wag, it would give the brick-and-mortar retailer a stronger digital footprint and would build relationships with a younger generation of dog owners … A Petco purchase would also give Wag, a start-up that has struggled to gain market share and has come under heavy criticism for everything from runaway dogs to poor financial performance, a landing pad after taking $300 million from the SoftBank Vision Fund last year.”
Other companies ripe for investment or acquisition will include innovators facilitating DTC selling, online storefronts for independent pet shops, digital pharmacy platforms for veterinarians, and contactless and one-stop shopping efficiencies. As Bryan Jaffe, managing director of Cascadia Capital, told Petfood Industry in May 2020, “The pandemic has changed our traffic patterns and as a result changed our purchasing patterns. Lacking access to physical retail, we order online. Wanting to avoid an incremental trip, we pursue one-stop shopping solutions. Near-term consolidation will be driven by these realities. Buyers will look to acquire solutions who have access to the categories and channels where growth is evident.”
At the same time, as Entrepreneur noted in a June article headlined “4 Reasons the Pandemic Is a Boon for the Pet Industry,” during the past 10 years, food and non-food pet supplies have advanced “to meet consumer demand for products that not only offer added health or psychological benefits to pets but also come with an aspirational lens fit for Instagram,” citing “disruptive pet care brands” including recently launched DTC fresh pet food startups Maev and Sundays for Dogs and e-tail boutiques Wild One and West + Willow.
Across the board, pet industry watchers seem to be coming to the same conclusion. The coronavirus pandemic of 2020 has put a damper on many things, but most likely not among them are the prospects for ongoing robust investment in the U.S. pet industry.
David Lummis is the lead pet market analyst for Packaged Facts, a division of MarketResearch.com, and author of Packaged Facts’ U.S. Pet Market Outlook, 2020-2021: Responding to the COVID-19 Impact. Data cited are from this report and Packaged Facts’ March/April 2020 Survey of Pet Owners and August 2020 report, Digital Pet Care Products and Services: E-commerce and E-connectivity.