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INVESTING IN THE (NOT SO) SECRET LIFE OF PETS

November 2016

By MLC

You may not be surprised that over 90% of pet owners think of their pet as a family member, but how many special occasions do you celebrate with them?1 If you didn’t celebrate your pet’s birthday, you will soon be among the minority who don’t, with nearly 50% of pet owners doing so today.2

Pets are people too

Humanisation is one of the key drivers of increased spending per pet and has seen private equity capital investment in pet-related companies globally. This includes not only pet food and accessories, but also a range of pet services. You’ve probably taken your pet to be washed and groomed in the past, but when was the last time you let your pet truly unwind in a pet hotel?

Pet services account for the largest share of the Australian pet industry, at 42% or A$4.1 billion pa; with veterinary services accounting for over half of this.2,3 This is not surprising when 18% of pet owners place their pet’s medical needs before their own.1 A healthy diet is just as important with pet food the next largest category coming in at around A$3.3 billion.³ Australia may be behind the USA in terms of grain-free and all-natural (fresh and preservative free) products, but the trend towards health and wellness is set to continue.

A large and continually growing market

The pet market is not only a large, but also a growing market. While the overall macro environment is one of lower growth, private equity is able to benefit from targeting sub-segments that benefit from secular growth trends that are independent of this macro environment. The pet market has grown each year since 2000 and has the attractive characteristics of being higher growth and less volatile than other retail segments.4 Economic cycles have not historically impacted the pet care market, which is why we have also made a number of investments in the space for MLC’s investors.

Turning an attractive market into a great investment opportunity

But it takes more than investing behind an attractive sector to make the kind of returns we expect from private equity managers. At the end of the day, we are typically backing strong management teams to build great, sustainable companies. In one example of a pet deal in the US that we have invested in, the private equity manager brought in a new management team with a strong track record of turning around retail companies. The large publicly-listed specialty retailer was taken private. Without the short-term pressure of public markets, the new management team has been able to implement long-term value creation initiatives; including new store roll-outs, a new IT system and operating initiatives such as an effective loyalty system and an expanded product range (particularly into more fresh, raw and dehydrated foods). The business is performing very well and has already returned nearly half of its invested capital within the first year, proving to be a success for both investors and customers alike.

So what’s next for our pet owners and their beloved pets?

Petcare is a category built on emotion, with the relationship between pets and their owners continuing to intensify, supporting the humanisation trend. As businesses work hard and think creatively to gain a share of this attractive category, the profile of our beloved pets is likely to grow higher than ever before. ‘Doga’ - yoga with dogs - and Virgin’s Velocity frequent flyer points for pets are just two of the innovative examples of how companies are tapping into this growing trend. So next Christmas or Valentine’s Day, don’t be surprised if you see a section for pet presents in your local store, or if you receive a flyer reminding you of your pet’s birthday, because it’s no secret how much you love your pet! 

 

1. Harris Interactive survey, 2012.

2. Mars Petcare pet demographics study, 2013.

3. IBISWorld industry reports M6970, OD4086, OD5128, OD5476, 2014.

4. Euromonitor, 2014.

 

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