Special Report: Humanization of Cats and Dogs Powers Pet Industry

06 Feb 2017 --- Vox pop a random group of people and ask what they most associate with the corporate giant Mars? Most would probably say the eponymously named Mars bar. Some business savvy respondents might add Snickers, Galaxy or even Uncle Ben’s rice. But very few are likely to mention the corporate giant’s Whiskas or Pedigree pet food brands or its pet healthcare business.

But animal-related revenues at Mars now exceed sales of all its other divisions, following its recent $7.7bn purchase of the animal-hospital chain VCA, cementing its dominance in the fast-growing corporate-owned pet hospital industry.

The Mars “love story” with pets dates back to 1935, said Poul Weihrauch, the president of Mars Petcare, the year that Forrest Mars Sr acquired Chappell Brothers, bringing the Chappie brand canned dog food into the candy company’s portfolio.

Mars is not alone: there has been a string of recent acquisitions in the pet healthcare and pet food sectors, as corporate entities look to tap into the growing humanization of animals, which is driving up sales.

The global pet food market alone is worth $74.8bn, compared to $58.6m in 2011, according to industry figures, while Americans alone spent $35bn on veterinary care in 2015.

It is little wonder that traditional food for human companies such as Mars, Nestlé and J.M. Smucker are yanking their portfolios toward pet products.

Speaking to FoodIngredientsFirst, Bryan Jaffe, managing director at Cascadia Capital, said: “We believe the pet market will continue to consolidate as this business cycle wanes.”

“While large players will continue to utilize M&A to fill in portfolio gaps, the buyers of assets will be middle market consolidators and private equity.”

The purchase of VCA (whose business spans veterinary services, laboratory diagnostics, imaging equipment and medical technology) adds to an already multifaceted pet business at Mars, spanning pet food brands and pet healthcare. 

It includes the pet food brands Pedigree, Whiskas, the pet food brands previously owned by Procter and Gamble, as well as Banfield Pet Hospital and BluePearl Veterinary Partners.

Mars boasted annual pet food sales of $17.80 billion in 2015 - at a time when sales from the snacks part of its business are struggling.

However, Weihrauch denied that Mars is shifting into the pet business to counter shortfalls in the rest of the business.

Weihrauch explained: “The purpose of Mars Petcare is a better world for pets. We don’t make decisions in pet care because of what is happening elsewhere.”

“We have a fundamental belief that the two most important ingredients in a healthy life for a cat or a dog is nutrition and providing the best quality veterinary care to as many pets as possible.”

“That’s a philosophy that is independent of whatever growth rate you might in pet food or in chocolate or in chewing gum.”

In effect, Mars is using its twin interests in the pet industry - healthcare and food - to feed off each other.

Jaffe explained: “Mars is a unique asset in the pet industry, in that it has operating businesses that link both ends of the ecosystem - health care and consumables.”

“We believe their operational strategy involves liking the two poles, wherein information about a companion animal’s health and wellness can drive formulations and produce recommendations.”

Other recent deals in the sector include private equity companies CVC Capital Partners and the Canadian Pension Plan Investment Board buying San-Diego-based pet retailer Petco for $1.8bn; private equity company BC Patners snapping up pet retailer PetSmart in a $8.7bn deal; and J.M Smucker adding Milk-Bone dog treats and Meow Mix cat food to its stable of human-food brands, with its $3.2bn purchase of Big Heart Pet Brands.

Richard Smucker, executive chairman of J.M. Smucker, said pet food was a key avenue of growth for the company. 

He said the deal enabled the company “to now serve the mealtime and snacking needs of the whole family”.

Meanwhile, Nestlé this week opened a $86m pet-food plant in Brazil, which will make Purina wet food for cats and dogs.

Globally, pet care has been one of Nestlé’s biggest growth areas and now makes up around 13 percent of its overall sales.

Food processing giant ADM is also planning to expand further into the pet food business: last month it signed a deal to buy Crosswind Industries, the Kansas-based maker of treat products for pets. 

ADM sells more than 50 ingredients and commodities used by more than 70 percent of all pet food companies in North America.

Brent Fenton, ADM’s animal nutrition business president said: “The global pet food industry represents a strong opportunity for strategic growth.”

The flurry of M&A activity has been powered by a number of factors: fundamentally the growing humanization of pets has led to pet food manufactures making more nutritious, healthier food and pet owners increasing use of pet hospitals.

This has meant that pet companies have been growing faster than the economy have thus become seductive acquisition targets.

Not only that, big corporations have been struggling to develop successful pet assets so have been buying smaller companies with successful assets.

Jaffe thinks there may be also another reason for the growth in the pet food market.

He said: “It is our view that the real theme that has been driving growth in the pet market over the past few years is health and wellness, which is distinct from humanization.”

“Millennials and subsequent generations in the US appear much more motivated, in terms of purchase intent, by healthy living thematics as opposed to indulgence and pampering.”

While much of the activity has been pet-food related, the pet healthcare business has been booming in recent years, although this boom has been tapering off in more recent times.

“Considering that growth in pet healthcare has average seven to eight percent over the long term, the addition of VCA would help Mars tap into the appealing market,” Morningstar analyst Debbie Wang told FoodIngredientsFirst.

But the corporate pet healthcare is not without its critics.

Spearheaded by VCA, corporations now own up to 20 percent of America’s pet hospitals and critics argue that commercial interest might skew animal doctor’s opinions.

But Weihrauch argues that more animals than ever are entering its hospitals.

He said: “We have enjoyed better growth rates than the average. We don’t see a declining trend; we see more animals in our hospitals. We make good efforts to try to make it attractive to visit our hospitals and get the right care.”

It seems likely that there could be more corporate activity in the veterinary market ahead, as the majority of practices are still independent which could be targets for Mars and other big corporations.

For Mars, it seems that, once the VCA purchase is bedded in, it will be on the hunt for more pet-related acquisitions as it looks to cement its position.

Jaffe said: “In the interim, we expect Mars' focus will be around creating assets that deliver data that can help them achieve their strategic objectives.”

“Its acquisitions of Whistle (a startup that makes smart dog collars to track a pet’s location and fitness), which pre-dates the VCA transaction, is an example of this in practice.”

by John Reynolds