Pet Food & Treats

With major players like Mars Petcare investing heavily in their wet food manufacturing capabilities, and Petco Health and Wellness partnering with JustFoodForDogs on a new line of fresh and frozen dog food, all evidence points to super-premium pet foods remaining on a fast-growth trajectory.

Despite rising costs for their own food and other essentials, pet food appears to be a protected area of spending for most consumers—another trend that will propel robust growth for premium brands, even in challenging economic times. While a small segment of consumers might pull back on pet food spending, their behavior changes are expected to be minimal and the focus should remain on high-quality selections.

Given this sector’s strength, it’s not surprising that investors view the pet food and treats sector as an attractive market to deploy their capital. In fact, the pet category was one of the few that showed resilience during the height of the pandemic, posting a record year for M&A in 2021.

The industry has seen a wave of acquisitions, yet there are still many well-run branded pet food companies and co-manufacturers that are likely to attract investor attention. Additionally, private equity (PE) groups have a great deal of dry powder to deploy and many strategics have healthy balance sheets. Whether it’s a large strategic snapping up well-run smaller companies or a PE group rolling up multiple specialty businesses, what is now a highly fragmented market will begin to consolidate over time as the deal momentum continues.

And while the US remains a hot market for pet food M&A, cross-border transactions are on the rise among both PE groups and strategic acquirers.

Over the past three years, cross-border transactions accounted for 66% of the pet food company deals, with financial buyers especially active in this arena. Eager to expand their geographic reach, some of the major European brands have their eye on acquisition targets in the US. Conversely, US-based pet food businesses see an opportunity to boost their valuations by expanding into other parts of the world. Though many have chosen to keep their production facilities in the US or Europe to maintain greater quality and production control, the ability to sell into large international markets like China represents a significant growth prospect.

Of course, every business is unique, so these averages are only indicative of the trends and certainly don’t guarantee that every deal will fall within these ranges. Investors that are active in this space continue to value companies that demonstrate operational excellence and robust capabilities. The better the business can present a compelling, data-driven story that highlights its unique valuation proposition and ability to leverage the prevailing trends in the pet food sector, the higher the valuation is likely to be.

Though the entire pet food and treats sector is ripe for M&A activity, PE groups and strategic acquirers remain focused on finding A+ companies with a high likelihood of delivering strong returns on a relatively short timetable.

The following characteristics top the list for buyers seeking a pet food target business.

1. Innovation.

With today’s consumers passionate about providing their pets with the healthiest and most nutritious food options, the most successful pet food businesses will be prepared to innovate to meet shifting preferences. Buyers are most attracted to companies leveraging R&D to offer the novel products pet owners seek and positioned to adapt and enhance their offerings to keep up with new trends. Strategics that haven’t yet moved beyond the traditional formulations are interested in businesses that have already demonstrated success in the super premium food category, capitalizing on the premiumization and humanization trends.

2. Capacity.

Even with the most innovative offerings, a pet food or treats business will fall short if it doesn’t have the capacity to respond to rapidly rising demand. Yet, it can take significant capital to expand in-house manufacturing or warehouse capacity. While a buyer will bring much-needed capital to the table, they also seek pet food businesses with a good foundation for meeting current demand and generating strong revenue today, which the buyer can build on with additional capital investments to capture future opportunities. The ability to produce products efficiently, maintain high quality, and stay agile as new product innovations emerge are all critical to ensuring the business has the capacity to capitalize on this sector’s strong anticipated growth trajectory.

3. Entrepreneurial approach.

The same entrepreneurial spirit that encourages a professional to start a business is the same approach that will fuel its aggressive growth. Buyers seek founders that are passionate about improving the business, driven to do the hard work necessary to take the company to the next level, and willing to pivot, refine, and innovate to achieve higher levels of growth.

4. New markets and channels.

For many pet food and treats businesses, growth opportunities abound in new geographic markets and across distribution channels. Buyers find the target company appealing if it’s poised to achieve growth in one or both areas. Geographically, they look for opportunities to expand a domestic business’s reach outside the US to capitalize on international demand for super premium pet foods or help a small regional player compete on a bigger stage. They also seek businesses that can cash in on the increasing popularity of the subscription model, competing with both the big players (like Chewy and Amazon) and the many specialty companies (like The Farmer’s Dog and Nom Nom) offering subscription-based pet foods. And with omnichannel presence becoming a must—giving consumers the convenience and assortment they expect—buyers look for businesses that can distribute their products both online and in brick-and-mortar stores, encompassing grocery, mass-market retailers, club stores, and pet store chains.

5. Hyper growth.

PE groups seek to drive rapid growth that fuels high returns on their capital, so businesses poised for hyper growth are most appealing to them. For strategics, the ability to accelerate growth beyond what they can achieve organically is a prime driver for acquiring a pet businesses. In turn, they’re equally interested in companies with the potential to boost their growth quickly.

6. Sustainability.

Many consumers prefer doing business with companies that share their values—and often, that means finding companies that are good environmental stewards. Pet food and treat businesses that make sustainability a priority are likely to attract more customers, making them more valuable to PE groups and strategic acquirers.

While A+ level middle market pet food businesses likely view themselves as prime acquisition targets, depending on your size, lifecycle stage, and objectives you might find yourself ready to acquire another pet food company. Purchasing a business that complements yours can be a great way to fuel more rapid growth than you could achieve organically.

The factors that drive PE groups and large strategic acquirers to buy a pet food business are the same drivers that will propel you to consider purchasing a company in your sector. It could be access to new customer segments or new geographic markets, expanded production capacity, or an opportunity to innovate faster and more effectively than you could on your own.

If acquisitions are an important part of your growth strategy, it’s imperative that you know what to look for in a target company. Characteristics like these should be on your radar when evaluating another pet food business as a potential target:

• • A strong brand that has equity in the market, allowing you to command premium pricing for the newly acquired pet food products
  • High gross margins, ensuring the acquired operation is profitable right out of the gate
  • An innovative product or technology that allows you to extend your current pet food line, improving your ability to deliver the novel options today’s pet owners value and will pay for
  • Good synergies with your current pet food line, enabling you to sell the newly acquired products through your existing channels without cannibalizing other product sales
  • Strong relationships and a track record of success in sales channels you haven’t been able to break through yet, expanding your reach

Along with these essential characteristics, be sure to look for a target company that is serious about selling (so you don’t waste time negotiating a deal with a seller that pulls out late in the game) and shares your core values and objectives (ensuring the two entities can work together successfully). While the numbers need to make sense, it’s equally vital that you find a partner you can work with effectively for the long term.