Who Let the Dogs Out?

Woofers and Floofers Unite

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90% of Dog owners consider their pets to be a part of their family. 

And just like Vin Diesel in Fast and the Furious, dog owners take care of their family.

According to a Packaged Facts 2019 survey, 69% of pet parents are spending more on pet products than they used to and 85% of pet parents are willing to pay more for pet foods and products that are healthier for their pets.

This is all at the centre of a megatrend surrounding our furry friends: Pet Humanization. 

You can follow Jiff Pom or Doug the Pug on Instagram and they have 10M and 3.9M followers respectively. 

While this all seems quite ridiculous (there is no way that dog made that pizza!), pets and pet lifestyle are a huge business.

Crazy fact: “About one million dogs are the primary beneficiary in their owners' wills in the U.S.”

This week, in less than 5 minutes, we’ll cover the business of pets:

  • Increasing Dog Ownership 👉 Dogs over Kids

  • Traditional Pet Retail Channel 👉 Brick and Mortar + Services

  • A New Approach 👉 Focusing on D2C keeps overhead low

  • Tertiary Services 👉 Walking, Sitting, Veterinary, Insurance

  • Examples in the market today 👉 Some of my favourite names

Let’s get started!

1. Increasing Dog Ownership 👉 Dogs over Kids

Young couples these days are stressed, depressed, and overdressed. But what better way to ease your woes than to find an ethical breeder (or better yet a rescue) and get yourself an affection addict. 

We’ve been hearing more and more how millennials are now the largest cohort by age group in all of the U.S., so the consumer world is paying close attention to how they live, what they like, and what they do. 

They live mostly in either their parent’s basement or a tiny condo as they pay off egregious student debt. They like keeping their options open when it comes to dating and are now marrying much later in life. And what they do is prioritize their career in the early stage of their lives. 

This confluence of factors leads to delaying marriage (usually, therefore, kids) and to “mind the gap” they are instead buying pets instead of taking on real responsibility.

All joking aside, even the Center for Disease Control and Prevention (CDC) states that that are many benefits to pet ownership: 

  • Can increase the opportunity to exercise and get outside

  • Regular walking or playing can decrease blood pressure, cholesterol levels, and triglyceride levels.

  • Pets can help manage loneliness and depression by giving companionship. 

According to the American Pet Products Association’s (APPA) 2019-2020 survey, about 67% of US Households own a pet, up from 56% in 1988, which was the first year the survey was conducted. 

Similarly, the expenditure on these furry friends has also been rapidly expanding. 

In the chart above, the APPA expanded their criteria of expenditure, so it is not an apples to apples comparison, but the trend is your friend and can still be seen in the most recent four years. 

When you think of the business of pets, you immediately think - OK, they have to eat and need accessories like leashes, homes, and all that so let’s start with the business of retail. 

2. Traditional Pet Retail Channel 👉 Brick and Mortar + Services

We got a great glimpse into the world of pet retail as Petco went public again in mid-January this year. The company also might have the best ticker of all time: WOOF. It opened at $18, soared 63% to close at $29.40, valuing the company at more than $6 billion. It has since pulled back a bit, but still a decent bump from the issue price. 

I always love when a S-1 hits the tape because you can give it a deep dive through - or just wait for someone else on Twitter to put together a stellar summary thread on it. 

In Petco’s S-1 you find tasty tidbits on the overall industry like these:

The industry is massive, at around $119B and the consumables side is the biggest, although vet care takes up a good slice as well.

The story of Petco is one that we’re familiar with. A company that has been around for a long time that is trying to keep up with the massive explosion in ecomm adoption, further accelerated by COVID-19.

Petco has approximately 1,500 pet care centers located within three miles of 54% of their customers. This creates more of a localization approach as opposed to the online-dominated retailer that is also public, Chewy (more on this company below).

However, when you have extensive overhead, yet you deliver mostly low-margin retail goods, this simply can’t compete with online ecomm when it comes to pricing power. 

It is very prevalent throughout the course of the S-1 that they have changed their strategy to become a “Fully-Integrated and Comprehensive Pet Care Ecosystem”, which is the right move in my opinion, because of the bottom portion of the chart above - the service section. 

They have done this through bolstering their offering of vet services, grooming, training, insurance, and subscription-like services. 


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3. A New Approach 👉 Focusing on D2C keeps overhead low

Chewy takes a different approach. 

For a while, in ecomm land, the general consensus was “Don’t F*ck with Amazon.” 

But then we had Shopify come in and start “arming the rebels”, and what Tobi and the team have achieved is nothing short of spectacular. 

Chewy is an online retailing platform that focuses solely on the pet market. 

The reality of any platform or marketplace is you have to think of the supply side build as well as the demand side build. If you get the balance right and provide the proper incentive structure for all parties, this is a very visible moat. Wayfair has done this with mid-large sized furniture and home décor and Chewy has done this with pet products. 

Supply side: They offer the widest assortment of pet products available of any pet specialty retailer, with over 2,000 brands. Their fulfillment centres across the US provide for 80% of the US population for overnight shipping and 100% completed within 2 days. 

Demand side: a differentiated model that offers the convenience and selection of an ecommerce platform AND the customer-centric focus of pet specialty store (aka the "WOW" experience.)

The following will be drivers of growth for Chewy:

  • Grow sales from existing customers --> "Autoship" functionality has drastically increased -creating really solid recurring revenue with how dependable it is. 

  • Acquire new customers

  • Leverage technological and operational efficiencies

  • Continue to grow the private brand products (higher margin)

  • Expand further into pet healthcare

  • Explore broader platform opportunities

This is DEFINITELY one to put on the radar. 

4. Tertiary Services 👉 Walking, Sitting, Veterinary, Insurance

We also saw a lot of pet-related headlines when Private Equity firms started snatching up veterinary clinics. 

It started in mid-2014 when Ares Management bought National Vetinary Associates (NVA) from Summit Partners for $920M, a multiple of 13x its EBITDA runrate. 

A run of more acquisitions from PE and Pension funds would follow:

  • Mars Incoporated paid $9.1B, or 18x EBITDA for VCA and its 800 animal hospitals

  • KKR bought PetVet Care Centers From OTPP

  • OMERS acquired a minority stake in NVA

Any time you have a highly fragmented business with decent EBITDA margins (Vet’s typically around 15%), you get these big PE guys coming in, strapping on leverage to torque returns, doing a bit of restructuring, then exiting at similar multiples. 

When the exit multiples remain elevated over time, it shows the attraction of the industry as well as the staying power that a lot of these businesses have. 

If you think about the nature of a clinic, it’s one of those businesses that is very resilient to downturns in the economic cycle. 

The pet vet bill is one that is very rarely skipped. 

Wrapping up…

When you look at a company like Roblox (which I own and love), your investment thesis is that kids will bug their parents enough to finally give in and fork over their credit cards. 

People work as hard as they do, just to take care of their family’s wants and needs. 

Since pets are now part of the family, the annual spend on pleasing these fury friends will only increase.

Until next time. Always Yours. Incessantly Chasing ROI,

-Genevieve Roch-Decter, CFA

P.S:


What else we Grittin’ On?

DINOSAUR BANKS. Tell me big bank branches are dead without telling me they are dead: RBC Headquarters for Sale as Oxford, CPPIB Seek $1 Billion-Plus.

PFOF. Tanks after SEC chair tells Barron’s that banning payment for order flow is a possibility. That sound you just heard was Vlad Tenev shaking in his boots.

BUFFETT. Over 1.1MM views of our Twitter thread celebrating Warren Buffetts 91 birthday with 91 life lessons from the investing genius.

PASSIVE RISK. Did you know 5 stocks now make up a record +22.8% of the S&P 500? Given there is +$11 trillion dollars is invested in passive index funds… I am flagging global concentration risk here!


Sources:

https://www.factslides.com/i-3869

https://www.cdc.gov/healthypets/health-benefits/index.html

https://apnews.com/article/business-pets-coronavirus-pandemic-cats-initial-public-offerings-5d53484c74998e6febfbfb4b932a3294

https://www.forbes.com/sites/mergermarket/2018/05/07/pe-firms-still-drooling-over-veterinary-practice-management-space/?sh=4083acd378af


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