Pet Market Clearview
The UK pet market has shown resilience and premium growth in recent years, with the market now valued at £5.9bn (€6.6bn)1.
Twelve million UK households have pets (44% of households). The UK pet population stands at around 54 million of which 33 million are fish and 21 million are non-aquatic pets2. Pet numbers are driven by social comfort, companionship and security as well as the growth of one-person households. Pet owners tend to humanise pets taking extra care of their diet and wellness, providing a major boost for the market.
It is suggested that many pet owners now view their pets as members of the family. Kelton Research notes that 81% of cat or dog owners consider their pets to be true family members, whilst Mintel reported that one in five of UK cat or dog owners would cut back on spending on their own food before reducing spend on food for their pets.
Humanisation has led to increased spending on pets’ welfare and increasing the need for a wider range of products and services, including the development of pet food and veterinary services.
Food goes posh
As consumers become more health conscious and nutritionally aware, they are applying the same thinking to the food they feed their pets; so called positive nutrition. This trend is forecast to continue with clear signs that consumers are trading upwards in premium food. Just as a mother or father wouldn’t feed their baby an unhealthy meal, pet parents are not willing to compromise on the quality of the food they feed their pets. Innovations in pet food are yet to reach all consumers, so we expect this to support growth over the next five years.
As pet parents seek to ensure their pets are kept healthy and happy, companies that provide wellness services are becoming increasingly more attractive. In early 2017 we saw Mars, one of the world leaders in the pet food market, move into the veterinary hospital space, purchasing VCA Inc. for €8.6bn. Since then Mars has also acquired UK-based Linnaeus Group and Sweden-based AniCura, as it seeks to build its presence in Europe.
Humanisation is undoubtedly driving acquisitions. M&A in the space has been strong, driven by a need to not only gain expertise and a differentiated product portfolio, but also geographical expansion and access to new customer and distributor bases.
A number of players in the food sector are betting on the growth of the pet market in a moment when packaged food for human consumption is experiencing a slowdown. These include General Mills, owner of Betty Crocker and Old El Paso amongst other brands, which completed the €6.4bn acquisition of US pet food brand, Blue Buffalo, in February 2018. General Mills wasn’t the first. In 2015, we saw the €4.3bn acquisition of Big Heart Pet Brands by spreads corporation, The JM Smucker Company. JM Smucker has subsequently spent €1.5bn on the purchase of Ainsworth Pet Nutrition, proving its dedication to the sector.
A power shift
Whilst traditional multinational pet players, such as Nestle and Mars, have long been the market leaders, they are increasingly facing threats from smaller, more premium brands, keen to take a piece of the action. Market leaders are not adapting fast enough to consumers changing needs – for example price is now only the third most important factor for consumers when buying pet food – and so significant market share is potentially up for grabs.
Consumers’ are becoming increasingly aware of what goes into their food, and it’s no different with the food they feed their pets. Whilst historically a pet owner would have chosen a well-established brand as a ‘safe bet’, these days they are choosing based on health benefits and product quality.
With market share under threat it’s not really a surprise that we are now seeing the leading players make acquisitions in adjacent markets. We’ve seen Mars move into the veterinary space and in April this year we saw Nestle make a play for UK-based business Tails.com, a direct-to-consumer, tailor-made dog nutrition subscription business. Tails.com is the coming together of two rapidly expanding segments of the consumer world; personalised pet nutrition and online subscription services.
Of course, Mars and Nestle won’t be losing their market leading position anytime soon, however they will need to watch their tails.
There is an increasing proportion spent on pet health to increase lifespans and treat diseases such as obesity which has become more prevalent in animals just as it has amongst humans. This has paved the way for the pets’ supplements market. The UK market is now worth approximately £100m (€112m) and is growing at 7% per annum3 as pet owners become more aware of the existence and effectiveness of such products. The market is immature and fragmented so there is significant scope for businesses to scale up, and so are becoming interesting targets.
In January 2018, Inflexion invested in UK-based leader Lintbells, which includes two key brands YuMOVE, the number one joint mobility supplement for dogs and cats, and YuMEGA, the UK’s number one supplement for skin and coat.
More than ever, pet owners are seeking products geared towards overall pet health and specific health concerns. We expect a much larger M&A focus on this market going forward with potential entrants from the human supplements sector.
While the US and the UK have traditionally been the market leaders in the global pet market, a number of emerging economies, in particular China, are seeing double digit growth rates. The Chinese pet food market is thought to be growing at a rate of 20% per annum with Chinese shoppers set to spend £5.3bn (€5.9bn) on their pets by 20224.
With the US market growing at 2% per annum, and China’s growth trajectory expected to continue, it’s only a matter of time before the country takes the number one spot in the rankings.
Chinese firms are actively pursuing opportunities in the pet food space in a hope of taking the brands back to China. In December 2017, in a bid to move further into the fast-growing sector, agriculture company, New Hope Group joined a consortium including Singapore’s state-owned fund Temasek and private equity firm Hosen Capital to acquire Australian firm, Real Pet Food Company, in a €664m transaction. The deal marked an exit for PE firm Quadrant which spent €354m on acquiring the business in 2015, and during the short ownership supported the bolt-on of Nature’s Gift, Dr Billinghurst and Tucker Time.
So what next?
The increasing humanisation of pets across the world is continuing to drive significant M&A activity across all segments of the pet market. It’s likely that we will see regional pet food brands (not owned by large corporates) step up their M&A agenda; UK PE-backed premium brands become takeover targets by bigger PE and certainly by trade; continued strong interest in the pet food space from large food businesses keen to diversify revenues; and with health becoming more of a focus for consumers, strong interest in the supplements and veterinary arenas.
1: Pets at Home Annual Report 2: PFMA Report
2: PFMA Report