The private equity industry is profiting from the pet humanisation trend, which is proving to be a strong catalyst for growth in the pet care industry, Robert Ober, a senior VP in Houlihan Lokey’s consumer group, told PE Hub Europe.
This shift in perspective is “transforming how pet owners view and treat their pets, aligning their needs closely with those of humans”, Ober said.
Aspects of human healthcare are increasingly being mirrored in the pet sector, boosting spending on premium pet foods and other health and wellness-related products that support preventive care of animals. “Also, advanced medical care gains traction, as pet owners are willing to pay a premium for products that offer health benefits and improve their pets’ quality of life.”
The focus on less-processed, nutrient-rich foods and tech-enabled health solutions, including pet wearables and smart products, reflects human health trends and fuels the growing demand for “high-quality, innovative pet care solutions”. Semi-moist cat food is a notable category, according to Ober, which is experiencing double-digit volume growth led by increasing consumer demand for premium and “real-looking” pet foods.
A recent deal that reflects this trend is Cinven agreeing to sell a majority stake in Partner in Pet Food, a pan-European pet food manufacturer, to CVC.
Houlihan Lokey expects that next-generation animal health – such as advanced diagnostics, testing, imaging, treatments – pet pharmaceuticals and supplements will be major beneficiaries of this trend. This will provide “acquirers access to higher price points and more pockets of the consumer wallet to capture, driving growth beyond pet ownership figures”, said Ober.
This continuous shift in consumer behaviour is driving changes in product innovation and market demand, presenting private equity with “robust” opportunities for investment and growth in the pet care sector, Ober said.
Pet parent preferences
Dealmaking in the pet health industry is largely shaped by changes in the pet owner landscape, particularly with millennials now comprising around 33 percent of pet owners, Ober said.
Additionally, PE firms find it appealing to invest in brands in “fast-growing segments” of the pet sector. High-growth categories such as health and wellness products, tech-enabled and convenience-driven solutions are attractive, as they offer “access to higher price points and sustainable growth opportunities”, he said.
Consumers are seeking value for money, not necessarily the lowest cost, he added. “Companies which deliver on this proposition are experiencing strong volume growth and make for highly attractive acquisition targets.”
Ecommerce is also seeing increased growth due to channel shifts brought about by the shifting “pet parent preferences” on the product side. “Direct-to-consumer (DTC) provides a particularly powerful entry point and tie-in to loyal pet parent followings that allow for the cross-sell of acquirers’ broader product portfolios.
“While DTC is an area of focus in its own right, we see DTC companies with a loyal following, strong online engagement, and technology links to the consumer being highly sought-after assets in this regard, as they provide a strong link to the consumer and allow strategic acquirers to push other products through that touchpoint.”
This is in line with Emeram’s investment in Provital, a German DTC dog and cat food provider, in early June. Other deals include TDR Capital’s acquisition of a majority stake in Jollyes, a pet retail chain in the UK, from Kester Capital.
Traditional trading down
Although there are several exciting growth segments, the industry faces broader macroeconomic challenges, including supply chain issues and rising raw materials costs, which are squeezing profit margins, said Ober. “The inflationary environment we have experienced in recent years, pushing consumer prices for pet food up by around 40-50 percent, has shocked many consumers out of their traditional brand-loyal shopping habits.”
Part of this has been the “traditional trading down” to private label products, which are often of comparable quality to the large traditional brands but are less expensive. “Companies are finding it tougher to pass on higher costs to consumers, leading to slower volume growth in some areas.”
Traditional kibble, one of the long-standing product categories that had shown years of consecutive growth, had its volumes stagnate in recent months, he added. “Therefore, private equity firms operating in this space should seek out specialised, on-trend sub verticals to achieve growth.”
Credt: Source link