🚨NEWS ALERT

Luna is now officially the most popular dog name in NYC, narrowly surpassing Bella.

THIS WEEK'S TOPICS:

• 🧫 Fake meat in your dog’s food bowl

• 💰 $4.5B to acquire 3 pet companies

• 📈 Luxury dog hotels can’t be stopped

 🧫 FAKE MEAT IN YOUR DOG’S FOOD BOWL

The pet food industry is on the cusp of a revolutionary shift with the advent of lab-grown meat.

Britain recently approved the sale of lab-grown meat for pet food, marking a significant milestone in the sector.

Meatly, a British biotech company, has spearheaded this movement by producing meat from chicken cells, aiming to provide a sustainable and ethical alternative to traditional pet food.

This development presents both promising benefits and notable challenges.

A Focus on Sustainability & Ethics

One of the primary advantages of lab-grown meat is its potential to address environmental and ethical concerns.

Traditional meat production is resource-intensive, requiring significant water, land, and energy. It also contributes to pollution and greenhouse gas emissions.

Lab-grown meat, on the other hand, offers a more sustainable solution. By producing meat from a single chicken egg, Meatly can create an infinite amount of pet food without the need to raise and slaughter animals.

This method not only conserves resources but also aligns with the ethical stance of many pet owners who love their pets but are uncomfortable with the factory farming of animals.

Andrew Knight, a veterinary professor and expert on sustainable pet food, highlights the substantial environmental footprint of pets.

Studies show that a medium-sized dog’s dietary impact is comparable to that of an average human. With lab-grown meat, the environmental burden can be significantly reduced, making pet ownership more sustainable.

Challenges: Regulatory Hurdles and Public Perception

Despite its benefits, lab-grown meat faces several challenges. Regulatory approval is a significant barrier.

While Britain has approved lab-grown meat for pet food, other countries remain hesitant.

The European Union, for instance, has stricter regulations and a slower approval process, hindering the adoption of such innovations. In contrast, Brexit has allowed the UK to expedite this approval, presenting a competitive advantage.

Public perception is another hurdle.

While many pet owners are willing to feed lab-grown meat to their pets, human acceptance of lab-grown meat remains lukewarm at best.

A study by the University of Winchester found that only 40% of meat-eaters would consider trying cultivated meat themselves, though 81% would give it to their pets.

Overcoming the "ick" factor is crucial for broader acceptance and success in the market.

The Market Potential

The pet food market is poised for growth, with an expected 5% increase this year to $151 billion globally, according to Statista.

Meatly’s entry into this burgeoning market could set a precedent for other companies, potentially transforming the industry. If successful, lab-grown meat could become a staple in pet diets, offering a blend of sustainability, ethics, and nutrition.

💰 $4.5B TO ACQUIRE 3 PET COMPANIES

In recent years, especially in 2023, the pet industry has experienced significant consolidation, driven by major acquisitions that underscore strategic plays by key market players.

Among the most notable are Blackstone's acquisition of Rover Group, Post Holdings' purchase of J.M. Smucker's pet food brands, and PAI Partners' acquisition of Alphia.

These deals highlight the ongoing trend of premium-everything and digitalization within the sector, positioning these companies to leverage growing market opportunities.

Blackstone's Bold Move: Acquiring Rover Group

In November 2023, Blackstone, a major private investment firm, acquired the pet marketplace giant, Rover Group for $2.3 billion. This acquisition represents Blackstone's strategic entry into the sizzling online pet services market.

• Deal Value: $2.3 billion

• Strategic Impact:

  • Digital Expansion: Taps into the growing trend of online pet care services.

  • Market Positioning: Purchasing Blackstone’s presence in the pet care sector, with very little competition.

Blackstone's acquisition allows it to capitalize on the increasing demand for convenient, high-end, online pet care solutions. With pet owners seeking more accessible services, this investment is poised to deliver massive returns as the market expands. Wouldn’t be surprised if they buy any new competitors that try to take a slice of market share.

Post Holdings Acquiring J.M. Smucker's Pet Food Brands

In 2023, Post Holdings made headlines with its $1.2 billion acquisition of several pet food brands from The J.M. Smucker Company, including well-known names like Rachael Ray Nutrish and Nature’s Recipe.

• Deal Value: $1.2 billion

• Strategic Impact:

  • Portfolio Strengthening: Enhances Post Holdings' pet food portfolio with high-growth, recognized brands.

  • Market Penetration: This allows Post to directly buy a massive existing pool of dog owners.

This acquisition aligns with Post Holdings' broader strategy to solidify its position in the competitive pet food industry, driven by the saturation of the pet food market and rising demand for premium pet food products.

PAI Partners Acquiring Alphia

In August 2023, private equity firm PAI Partners acquired Alphia, a significant player in pet food manufacturing, for approximately $1 billion. So instead of focusing on the consumer side they’re going after all of the pet food companies piling into the space and in need of manufacturing partners.

• Deal Value: Approximately $1 billion

• Strategic Impact:

  • Manufacturing Capabilities: Utilizes Alphia's extensive production facilities to meet rising demand.

  • Market Consolidation: Enhances competitive positioning through economies of scale and allows them to bring on other pet food brands at competitive prices.

PAI Partners' acquisition of Alphia enables the firm to tap into the explosion of niche premium pet food brands, as well as service some of the more well established players.

Potential Future Acquisitions

As the pet industry continues to evolve, several companies are emerging as attractive acquisition targets:

• Chewy, Inc.: Their user growth has plateaued post-covid adoption frenzy. Stock price has tumbled quite a bit, and there’s a constant struggle to realize a profit. It will take somebody with really big bags and impeccable operations to sensibly nab this one though.

• Premium Services: As mentioned in this newsletter, small businesses are recognizing the increasing demand for premium pet services, such as luxury dog boarding. These companies are refining their business model, proving it in 2-3 more markets then expanding rapidly across the country. Many of these companies are franchising their operations.

• Niche Brands: Companies focusing on sustainable and organic pet products are also likely targets as larger firms seek to diversify their offerings and tap into new market segments.

📈 LUXURY DOG HOTELS CAN’T BE STOPPED

Some dogs (or really their owners) have champagne tastes and want to be catered to as such.

Most product categories will serve those fancy individuals with high-end offerings (ex. Mercedes for cars, or Louis Vuitton for purses).

This week we are digging into one of those high end options for dog care, which is luxury dog boarding with K9 Resorts.

We noticed K9 resorts when they announced a recent investment of $10 million from Partners Pacific Resorts. That level of investment is always interesting, but what is kind of unique in this situation is that Partners Pacific actually owns a number of K9 franchises.

We'll dig back into some of the numbers on franchising and investment in a bit, but first we wanted to explore what luxury boarding looks like.

The 5 star dog hotel treatment

Our first question was "what makes it luxury"? After some perusing, it seems like it boils down to a few main areas:

• Amount of space for the dog 🏠

• Cage vs. "space" 📦

• Food 🍵

• Bedding 🛏️

• Staff interactions 🧑‍🤝‍🧑

In K9s own words, here are their differentiators:

Their top of the line accommodation is the luxury suite, which offers the following:

• Approximately 8' x 8' cage free space

• Choice of all day group play or individual play time with staff

• Luxury Kuranda® dog bedding

• Premium Blue Buffalo meals

• Fully enclosed, providing a sound resistant environment

• Beautiful decor & in-suite entertainment featuring Dog TV

• Ideal for multiple dogs

Dog TV! What will they think of next.

You can see the rest of their options and compare the different levels of each:

It all sounds like a pretty great stay for a pup if their owners are gone, but of course price is most important consideration when thinking about getting fancy.

Their Luxury Suites run $85 per day, with the Executive Rooms coming in at $72/day and Standard at $55.

We found the average range is $25 - $85 per day, so they definitely sit on the higher end with their top options.

K9 has been in businesses for 19 years and has 170 locations open or in development to open, so this isn't a new unproven vendor.

The Boarding Biz

Let's get back to some of the numbers we found regarding the investment and franchises.

The company reported that 16 new franchise licenses were sold halfway through 2024.

Their keys to growth have been partnering with experienced multi-unit franchise owners who can take on the task of opening multiple stores rapidly due to capital and experience. In fact, the investor Partners Pacific is just that, and their $10m investment also gave them the rights to open 30 more locations under the K9 brand.

We've covered franchises in the past, and K9's options reflect their higher end service. They estimate an initial investment of $1.5-$2.5m, but an average annual gross sales of $1.7m and an average EBITDA (earnings) of $480k:

Some quick back of the napkin math puts the return at around 20-30%, which on the higher end is pretty solid for franchises. So if you have the means and experience, K9 seems to be a pretty good brand to get into.

As with a lot of luxury goods, margins and business can be pretty sweet, you just have to be able to get your foot in the (doggy) door.

DOGGYDEX™

Winner 🏆: DOGGYDEX

Proudly introducing the DoggyDex™, an index comprised of 10 publicly traded companies whose primary focus is the dog/pet industry.

List of tickers used can be found at the very bottom of the newsletter.

The yellow line-plot in the chart represents these companies above (DoggyDex™) and their combined performance against both the S&P 500 and Bitcoin on a weekly basis.

Pawformance is measured by % gains & losses.

• ⚾ Layla, the Bat Dog retires: Layla is the Bat Dog for a single-A baseball team called the Clearwater Beach Dogs. Watch her as she grabs her last bat before retiring.

• 🛞 Pittie can ride a Onewheel: This pittie named Greyson has impeccable control while riding a Onewheel around his neighborhood.

• 🍦 Dog sanctuary has cabins for dogs: This rescue & sanctuary in Maine has cozy cabins just for dogs, as well as a mini golf course and ice cream shop helping bring the community together with the dogs on-campus.

A REALLY GOOD DOG

• $CHWY - Chewy: E-commerce platform for pet supplies

• $IDXX - Idexx Labs: Vet point of care instruments and vet software

• $FRPT - Fresh Pet: Pet food company

• $PETQ - PetIQ: Pet health products and medicines

• $PETS - PetMeds: Online pet pharmacy

• $ZTS - Zoetis: World's largest producer of meds and vaccines for pets and livestock

• $TRUP - Trupanion: Pet insurance company

• $WOOF - Petco Health & Wellness co.: Pet health & wellness company

• $BARK - BarkBox: Subscription service providing dog products, services, and experiences

• $PET - Wag! Group Co.: Tech platform that allows pet owners to connect with industry professionals for services such as, walking, training, etc.