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The flotation or sale of UK pet superstore chain Pets at Home is reportedly under consideration by owner KKR, the US-based private equity firm. What are the strengths and weaknesses that potential suitors should consider?
The UK pet care market has been remarkably resilient in recent years, exhibiting a real compound annual growth rate (CAGR) of 2.4% over 2008-2013, to US$6.6 billion. This came against the backdrop of a steep decline in economic activity, followed by prolonged stagnation (economic output remains below its pre-recession peak), with a dose of inflation (which peaked at 4.5% in 2011) mixed in. The Office for National Statistics estimates that real average hourly earnings fell by 8.5% between 2009 and 2012.
Pet humanisation (owners treating their pets like family members) has been the main driver of this growth. One regularly finds stories of fantastically indulged pets in the tabloids, while surveys repeatedly illustrate the depth and breadth of the pet humanisation phenomenon. For example, a study of dog owners that was conducted by website VoucherCodesPro.co.uk during summer 2013 found that owners spent an average of £276 (US$453) on dog food, £240 on dog treats, £180 on grooming, £106 on kennels/pet sitters, £251 on veterinary fees/insurance and £156 on accessories every year.
KKR is said to be considering an initial public offering that could value the pet superstore chain at £1.5 billion. Pets at Home’s previous owner, Bridgepoint, which acquired the company for £230 million in 2004, sold it to KKR for £955 million in 2009.
With around 350 outlets at the end of 2013, Pets at Home has been a major beneficiary of strong growth in the UK pet care market. The share of UK pet care sales accounted for by pet superstores rose from 7.1% to 8.6% between 2008 and 2013. In December 2103, the Financial Times newspaper reported that its loyalty scheme (which addresses mail directly to pets rather than their owners) had gained 1.5 million members during its first year.
It is also expanding into pet healthcare, acquiring Vets4Pets for around £40 million in spring 2013. Pets at Home is integrating the latter’s 93 veterinary practices into its 166 in-store vet business. Not only has this deal increased its presence in a rapidly expanding area of the market (value sales in pet healthcare exhibited a real CAGR of 4.9% over 2008-2013, to US$210 million), it will also help to drive footfall to its outlets by offering consumers the convenience of a one-stop shop for pet products and services. Pets at Home has also built a strong portfolio of private label products, particularly in dog food, in which it accounted for 1.6% of value sales in 2012.
However, it has not all been plain sailing, with same-store sales expanding by a relatively modest 2.2% during the 12 months to March 2013. Chief Executive Nick Wood noted that “Market conditions remain challenging, with disposable incomes under pressure for many of our customers”.
Having seen their share of pet care sales decline from 26.4% to 24.8% between 2008 and 2013, supermarkets are upping their game in private label pet food in an effort to recover lost sales. For example, Sainsbury’s launched The Delicious Collection, a private label dog and cat food, in May 2013. The food is served in a microwavable container, enabling pets to “finally enjoy a hot meal at the end of the day, just like the rest of your family”, according to the retailer. The new range includes a total of 18 products. With launches such as this targeting the mid-priced and even the premium segments of the pet food market, the large grocery retailers are better positioning themselves to compete with Pets at Home.
With the internet increasingly ubiquitous in the daily lives of UK consumers (87% of the population were internet users in 2012, with a whopping 16.9 million smartphones sold during the same year), the share of the pet care market accounted for by internet retailing more than doubled (from 2.4% to 5.9%) between 2008 and 2013.
Pets at Home has been rather sluggish in establishing a presence in this channel. Until recently, it was limited to a “click and collect” service that enabled consumers to reserve products online and collect them in-store by the end of the following day. However, it has now added a “click and deliver” option, enabling it to better compete with the likes of Amazon.com.
The latter is obviously the 800lb gorilla in the e-commerce room as it boasts a distribution network and economies of scale that its rivals can only dream of. Indeed, most of the pet food and pet products sold by Amazon.com in the UK are covered by its Prime delivery service, which offers free one-day delivery for a fixed annual fee of £49
In pet products in particular, Pets at Home may become more vulnerable to showrooming – the practice of going to a bricks-and-mortar store to inspect a product in person before searching for the best price online. On the other hand, the heterogeneity of the pet products market is such that such products are somewhat less prone to showrooming than many other types of goods, such as media products and even clothing.
Pets at Home has some potential for international growth, but it has yet to indicate any interest in such a strategy. It may begin to turn its attention to the continent once its growth begins to slow in the UK, but by then it may be too late. Apart from domestic pet superstores, German pet superstore chain Fressnapf had 417 stores outside its domestic market (in which it had 823) at the end of March 2013, establishing stores from Ireland to Poland and from Denmark to Italy. This makes it very difficult for Pets at Home to expand organically into neighbouring markets.
On the other hand, much of Eastern Europe is still virgin territory, and it could make an acquisition in a market such as the Czech Republic, where Fressnapf is absent and local consumers are almost as crazy about their pets as their UK counterparts. Nonetheless, Pets at Home can never hope to rival the economies of scale of Fressnapf in the region.
There is also the intriguing possibility that Fressnapf could acquire Pets at Home, but this would represent a significant break with its established strategy of using a franchise model to drive organic growth. Nonetheless, a merger between the two would be a good fit as it would help to engender the kind of economies of scale that would enable them to become a more potent rival to Amazon.com in the online channel.
Once it finishes carpet bombing the UK with pet superstores, Pets at Home may well turn its attention to opening smaller formats in urban areas, along the lines of PetCo in the US with its Unleashed by PetCo shops in urban areas. This would position it to continue to nibble away at the market share of pet shops, which accounted for 15.6% of pet care sales in the UK in 2013, down from 18.8% in 2008. Such a move would also better position Pets at Home to exploit the willingness of owners to make impulse purchases (pet treats and toys, for example) for their pets.
With unemployment falling, GDP growth picking up, inflationary pressure easing and house prices exhibiting strong growth, UK consumers may be getting their mojo back. However, the UK pet care market is maturing. It is forecast a real CAGR of 1.8% over the 2013-2018 period, significantly lower than growth during the previous six years.
With a strong integrated offering of pet food, products and services, the outlook is still fairly rosy for Pets at Home in the medium term. However, it needs to build a stronger online presence and diversify its store formats in order to combat the growing threat of Amazon.com in the online channel and renewed pressure from grocery retailers, in addition to the maturation of the pet care market.