Primrose Hill must be one of the only wards in London with more pets than owners! Leaving our office, you are immersed in a sea of pets – especially dogs – of every breed, size, colour and personality – and, of course, serviced by the finest pet shops, grooming salons and vets.
It is clear that there is big money from pet ownership – but is Primrose Hill an island? From what our clients and candidates are telling us, most certainly not – and today, pet food, pet retail and pet services (including insurance products) are a major industry – and are undergoing a revolution. Indeed, the petfood category alone is worth some US$75bn in sales globally – up an impressive 4.8% on the previous year, despite a decline in the most recent years in pet ownership. So, what is driving this growth?
Broadly speaking, it has come from the emergence of a collection of challenger brands – much like what Ben & Jerry’s did to ice-cream, innocent to soft drinks, and Method to cleaning products. The pet food category has traditionally been dominated by a small number of global FMCG companies such as Mars (Pedigree, Whiskas, Sheba) and Nestlé (Purina, Felix and Winalot). Walking down the supermarket aisle a decade ago, it was clear these were very much ‘brand-led’ products – consumer excitement was driven not by the pet food per-se, but by excellent consumer marketing and packaging innovation.
In the last few years, however, it has been all change. Walking down that same aisle now, we are greeted with a colourful, enticing and inventive array of brands. Premium to healthy, fun to cheeky, heritage to natural – there is an abundance of innovation happening in this dog-eat-dog category (excuse the pun!).
Pet enthusiasts and would-be founders identified a gap in the market and created brands that spoke to the needs of the owner and their pet. These challenger brands recognized that pet-owners are savvy and critical – and have a deep emotional bond with their pets – and are willing and able to spend to buy the best for their pet.
Lily’s Kitchen is one of the brands at the forefront of reinventing the pet world. Henrietta Morrison, the founder of the brand, was looking for a solution for itchy skin issues suffered by her own dog, Lily. She began cooking for Lily, which remedied the ailment, and the founding philosophy of Lily’s Kitchen was born: feed your pets good quality food made with nutritious, recognisable ingredients.
Sold at a premium price point, owners can now buy a wide range of recipes from the ‘Venison and Wild Boar Terrine’ for dogs through to a ‘Lamb Casserole’ for cats. Today, the business has consistently been listed in the Virgin Fast Track 100, winning numerous Grocer awards and even a Queens’ Award – not bad for a business yet to celebrate its ninth birthday.
The feedback on Lily’s has been overwhelmingly positive and pet owners – and, more importantly, their pets – are in love with the product, and it is not just because of the quality of the pet food. With a mantra of “warming hearts, feeding souls, enriching lives”, Lily’s is seen as a truly authentic brand – evidenced by being a UK founding member of the B-Corporation (certification for companies who benefit society as well as their shareholders). Indeed, it is no coincidence that Ben & Jerry’s and Method are also members of the B-Corp. Customers, especially millennials, love commercial transparency and ethical businesses – and this seems to be particularly resonating with pet owners.
Many say the pet food category is recession-proof – and evidence suggests that owners will even sacrifice their own needs over that of their pets. It is therefore no surprise that the category has become a favourite for private equity investment: low ingredient costs, high margins and stable cashflows from committed owners all provide a solid investment case. Additionally, with so many global FMCG companies looking to acquire proven brands, there are multiple viable exit routes. Within the last year we’ve seen PE acquisitions of Yarrah in the Netherlands, United Petfood in Belgium and MPM in the UK.
Within pet retail, we have also seen a dramatic shift. Historically, the industry was dominated by the grocers (with a very limited and transactional range) and thousands of independent stores. Now, national specialist pet retailers are gaining dominance – most notably Pets at Home in the UK, with 420 stores. Similarly to Lily’s, they are succeeding by creating an environment where pets are put first. As they say in their values statement: “We will put pets before profit; We have world class shopping with friendly experts; We place our stores at the heart of every community; We are always new and exciting.”
This focus on the pet is delivering returns – after a successful IPO, Pets at Home has been going from strength to strength, with group revenue increasing 9.1% last year. In particular its services and veterinary care divisions grew by 47.6% – highlighting that pet care is more than just food, and there is a significant industry to ‘service’ the needed of pets.
These ‘service industries’ were traditionally very functional – insurance, veterniary, grooming – however, are now rapidly expanding into more premium offers such as New York-esque poodle clubs and dog walkers through to vets with cutting edge medical technology. Our neighbourhood Village Vets, in addition to their 20+ vetinerary practices, now boast three 24 hour hospitals offering emergency care for pets. Again another business offering a bespoke service as ‘special vets for your special pets’. Even pet insurance has now evolved to meet the needs of the pet sector – for instance, insurance provider PetPlan has recognized a growth in health-aware owners keen to make provisions for trending ailments such as pet obesity.
Whilst the challenger brands are still small, when challengers disrupt, big business must react. Mars Petcare, Nestlé Purina and Hill’s Nutrition are amongst those with the greatest market share of the industry and are those who have the most to lose – or win. Their response has already begun as we see some of the most established and most-loved brands begin to adapt to the new era of pet-centric food. The next few years will be critical as we carefully watch giants learn from the small innovators and drive through change on a global scale. The entire pet sector – across FMCG, Retail and Consumer Services – will undoubtedly see significant growth, development and increased sophistication – and there are no guarantees as to who the winners will be – other than the pets!
Elliott@thembsgroup.co.uk | Huw@thembsgroup.co.uk | @TheMBSGroup