The pet supply sector is soaring during the pandemic, as demand for companion animals, particularly dogs and cats, is rising with people turning to comfort while quarantined. Consumers continue to spend more money on their pets even while cutting back in other areas, and are treating pets as family members. Earlier in 2020, Petmate acquired Pet Qwerks, a maker of dog chews and toys. Carl Marks Advisors advised the target. Mergers & Acquisitions' spoke with Carl Marks managing director Chris Parisi about the deal and M&A trends in the sector.
Describe how the deal came together
Jim Glick, the founder, is in his 70s--started the company in his 50s--and he had been thinking for some time about next steps, his own personal exit/liquidity and how to enable the company to grow with the right partner. A fair number of parties had been asking him about his objectives over the past few years. We were introduced to him last summer and pitched the idea of doing a broad sell-side process targeting strategic and financial buyers. Given the strength of the Pet Qwerks brand and the company’s position in durable chews, we were confident that we’d receive strong interest from all of the major strategic buyers. Petmate saw Pet Qwerks’ product line as ancillary, a good complement to their own, so it worked out to a win-win for both.
Tell us what attracted Petmate to the target?
Pet Qwerks has been a strong player, a rising star, even, in the 'durable' pet goods section for quite some time. Meanwhile, Petmate has long been a leader in offering products that strengthen the bonds between pets and their families. Pet Qwerks offered another product – nylon chews - to their extensive product portfolio. It also offered them a product that has a more frequent replacement cycle, giving Petmate another opportunity to be in front of their customer base more often. Additionally, as an upstart brand just a few years ago, they developed their sales channels in the “off price” and online categories. Amazon and Chewy have been incredibly strong channels for them, and they're very well established not just online but on social media as well. The Pet Qwerks deal allowed Petmate to continue to build out its own extensive online presence.
What were the biggest challenges about closing the deal under current circumstances?
We entered into exclusivity with Petmate shortly before Covid hit. Understandably, we had to initially pause to assess the environment and how the pandemic would affect business and the broader economy. Because of that strong online presence mentioned previously, Pet Qwerks was fortuitously positioned during the pandemic as brick and mortar pet stores were shut down. Couple that with an initial surge of pet adoptions and Pet Qwerks’ business only picked up steam during Q2. We were fortunate in that the buyers got to meet Jim and Pet Qwerks leadership before Covid travel restrictions grounded everyone. However, the lenders and the operational teams weren't so lucky. We had to run virtual walkthroughs, showing manufacturing plants with YouTube videos. There was quite a bit of learning on the fly and adapting quickly, but in the end we had a great management team and a dedicated buyer which is why it all worked out.
Why are investors interested in the pet supplies space?
Pet Qwerks participates in the $70+ billion U.S. pet industry and currently, 68% of U.S. households own pets (84.6 million households), with dogs and cats making up the vast majority of ownership. “Pet humanization” has been driving higher spending per pet: Pet parents increasingly view pets as part of the family and are willing to spend increasingly larger dollar amounts on higher-quality goods and services for those family members. According to Packaged Facts, approximately 90% of dog owners and 86% of cat owners in 2018 considered their pets to be a part of the family. The pet industry is one of the most resilient categories during economic downturns because of the nature of the pet parent / pet relationship. For example, during the recession of 2008 to 2010, overall consumer spending in the United States declined while pet spending in the United States increased by 12%, according to the American Pet Products Association.
What will drive M&A activity in the sector?
Projected growth in pet spending: According to American Pet Products Association, spending on pet products and services is projected to continue its historically consistent growth at a 5.0% CAGR from 2019 to 2023.
Rapid shift to online, with significant remaining runway: The pet industry, like many others in the United States, is in the midst of a shift from in-store to online purchases, with e-commerce representing a 14% share of the food and supplies market segment in 2017, up from 4% in 2015, and projected to grow to approximately 25% by 2022.
According to third-party estimates, online spending on pet food and supplies is calculated to be $6 billion in 2017, and is expected to grow at a 17% CAGR from 2016 to 2022 as a result of the secular shift from offline to online spending and the expected consistent growth in overall market spending—though third-party estimates have historically under-forecast the speed of the shift from in-store to online.
Growth in number of households with pets: As of December 31, 2016, there were almost 85 million households in the United States with at least one pet, up from nearly 73 million in 2010, according to the APPA. The growth in pet households occurred across generations, with the percentage of young adults (ages 18 to 24) that own dogs or cats growing from approximately 44% in 2010 to approximately 53% in 2017, according to Packaged Facts.
So you have the perfect storm for M&A – an industry that continues to grow, a shift in where customers spend their dollars, and the percentage of Americans who will own pets. Layer on top of that the “humanization” phenomenon which results in pet owners willing to pay for premium products and you have an acquisition environment that will continue to experience massive demand.