Consolidation trends in the food and pet food sector

Europe remains the second largest consu­mer conti­nent, accoun­ting for just over 30% of the global market for pet supplies (inclu­ding pet food). Within Europe, the market is driven by the UK and Germany, each with a share of around 20%, closely follo­wed by France. Due to the rather weak deve­lo­p­ment in Germany, in contrast to parts of Europe and the USA — which also turned nega­tive once in the first half of 2016 by more than 1% — further diffe­ren­tia­tion of the product ranges was also essen­tial. The busi­ness, which has alre­ady been domi­na­ted by food retail­ing for the past 10 years with a constant share of around 54% of total volume, was also influen­ced by the growth of private labels. Manu­fac­tu­r­ers incre­asingly coun­te­red this trend by intro­du­cing premium products, which were also incre­asingly well recei­ved due to the growing ‘huma­niza­tion’ of pets. In the mean­time, the premium retail brand with vitamins and other addi­ti­ves is a common sight on the shelves.

Conso­li­da­tion in the specia­list retail sector by market leaders such as the pet specialty chains Fress­napf and Das Futter­haus, both of which conti­nue to show growth rates in excess of 5% p.a., appears to be deve­lo­ping to the further detri­ment of drugs­to­res and tradi­tio­nal pet (zoo) specialty stores. Further conso­li­da­tion will take place as a result of the shift to online busi­ness, which, for exam­ple. will in the medium term coun­ter the current ship­ping models of large pack­a­ging units with subscrip­tion models of smal­ler units. MyMously indi­vi­du­ally for the cat seems not too far away. As an online pure player,Zooplus achie­ved sales growth of 24% to EUR 257 million in the first quar­ter of 2017 alone, which means that the sales billion mark in Europe is likely to be within reach. Nevert­hel­ess, the online giants, which in Europe include Pets-at-Home in the UK, curr­ently account for far less than 10% of the total market in Germany, with more than EUR 450 million. There will still be some chan­ges here.

Inter­na­tio­nally, the mega­trends of ‘huma­niza­tion’ of the pet, conve­ni­ence — also in pack­a­ging -, and health conti­nue to persist. Toge­ther with the above-mentio­ned deve­lo­p­ment of online sales as well as popu­la­tion growth and the simul­ta­neous reduc­tion of dog tax in China, the market is esti­ma­ted to exceed EUR 130 billion in 2020 at a CAGR of 4.7%. KKR’s invest­ment in China’s Gambol Group, which is Walm­art ’s private label supplier in addi­tion to its own market, announ­ced in Febru­ary, points the way. Inter­na­tio­nally, the same deve­lo­p­ments are evident ‘for the animal’ in the better-off econo­mies as for the respec­tive owners. This is demons­tra­ted not only by the purchase of shares in the Brazi­lian Mogi­ana Alimentos and the orga­nic-focu­sed pet food produ­cer Nature’s Variety by the Spanish Agro­li­men Group but also by the above-mentio­ned sale of Yarrah Petfood from the invest­ment company Vendis to AAC Capi­tal. The company offers orga­nic and vegan food “without chemi­cal anti­oxi­dants, arti­fi­cial fragran­ces, colors, flavors, refi­ned sugars or gene­ti­cally modi­fied ingre­di­ents.” Simply put, the pet’s bowl beco­mes the owner’s refri­ge­ra­tor. Even the much-discus­sed Paleo diet approach, “eating as in the Stone Age” is mirrored accor­din­gly for the dogs and now also cats.

A mild form of this, is the B.A.R.F. (Biolo­gi­cally Appro­pi­ate Raw Food) trend to raw food feeding, which was initi­ally parti­cu­larly prono­un­ced among Ameri­can dog owners, this has also prevai­led in Germany and found its follo­wers. The sustaina­bi­lity of these deve­lo­p­ments is under­li­ned by tran­sac­tions from stra­te­gic inves­tors such as Nestlé Purina, which alre­ady in 2015 acqui­red the first certi­fied produ­cer of orga­nic dog food, Merrick. The growth theme of “snacks and treats” remains unaf­fec­ted by this. Here, the content chan­ges, but the buyer may not want to do without the conve­ni­ence-friendly small pack­a­ging. The produ­cer, who values sustaina­bi­lity, will proba­bly change the pack­a­ging mate­ri­als so that the custo­mer can just about tell the diffe­rence between an orga­nic pet snack and the vegan chips for the mistress or master by the shelf heading.

As in the human medi­cal world, opini­ons differ as to whether and how “important nutri­ents” need to be supplied via dietary supple­ments or feed. What is certain is that in addi­tion to osteo­ar­thri­tis medi­ca­ti­ons, which are now alre­ady reaching a wider circle of owners of large dogs through the vete­ri­na­rian, specialty retail­ers or online portals, a variety of products will supple­ment the normal mixed feed. The omega‑3 and omega‑6 fatty acid enri­ched products we consume will bene­fit our pets as well. There are still only a few products in the ‘Super­foods’ cate­gory, which is alre­ady exten­sive in the human sector, on rele­vant websites, but we believe this will change. Terra Canis, which you mentio­ned above, alre­ady offers a Super­foods powder blend, which is consis­tent from the point of view of Nestlé’s new part­ner, which wants to further expand Healthy Nutrition.

From our point of view, due to the still stron­gly oligo­po­li­stic, regio­nal and medium-sized provi­der struc­ture, many tran­sac­tions will tend to be in the lower three-digit and espe­ci­ally in the two-digit million euro range. The very large tran­sac­tions in animal health, such as the acqui­si­tion of Novar­tis Animal Care by Eli Lilly in 2015, prima­rily focu­sed on farm animal health in addi­tion to the smal­ler Pet Care share. Simi­larly, the acqui­si­tion of the U.S. company announ­ced in Janu­ary 2017 played a role in the vete­ri­nary clinic opera­tor VCA by the number 1 in the Pet food Mars for $9.1 billion in addi­tion to secu­ring a stra­te­gic posi­tion in the value chain, certainly profi­ta­bi­lity and the divi­sion alre­ady owned by Mars Banfield Pet Hospi­tal, with 900 vete­ri­nary clinics, plays a role.

About Stefan Constantin

Stefan Constan­tin is a foun­ding part­ner of C§H§Reynolds§Corporate Finance AG with a focus on the consu­mer goods & retail, e‑commerce, indus­trial products as well as healthcare/pharmaceuticals and chemi­cals sectors.

The busi­ness graduate, who gradua­ted in Frank­furt in 1992, initi­ally worked for the corpo­rate finance firm Doer­ten­bach & Co. where he hand­led cross-border mid-market tran­sac­tions, acqui­si­tion manda­tes of foreign compa­nies and auctions with the parti­ci­pa­tion of finan­cial inves­tors. In 1998, he foun­ded C§H§Reynolds§Corporate Finance AG toge­ther with Felix Hoch. Over the past 20 years, he has assis­ted a large number of mid-sized compa­nies and renow­ned finan­cial inves­tors in dives­ti­tures and has supported nume­rous inter­na­tio­nal acqui­si­tion projects of listed companies.
Stefan Constan­tin is a member of the Asso­cia­tion for Chemis­try and Econo­mics VCW e. V. and the German Chemi­cal Society GDCh. He is also a member of the Busi­ness Advi­sory Board of FIZ — Frank­furt Biotech­no­logy Inno­va­tion Center and the Frank­furt Society for Trade, Indus­try and Science.

He was Chair­man of the Asso­cia­tion of German M&A Advi­sors until March 2014.