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Lessons learned from the booming pet food industry

July 28, 2022
A dog sitting next to a food bowl

Carol Frank is the managing director of the BirdsEye Advisory Group, a boutique investment bank that helps pet companies and private equity firms in the areas of mergers and acquisitions. 

In this uncertain economic climate, investors are seeking solace in the growing pet food industry. Carol Frank, author of “Do As I Say, Not As I Did: Gaining Wisdom in Business Through the Mistakes of Highly Successful People” and managing director of BirdsEye Advisory Group, joins the Ag Future podcast to discuss pet food industry trends and how to learn from mistakes.

The following is an edited transcript of the Ag Future podcast episode with Carol Frank hosted by Tom Martin. Click below to hear the full audio or listen to the episode on Apple Podcasts, Spotify or Google Podcasts.

Tom:              Welcome to Ag Future, presented by Alltech. Join us from the 2022 Alltech ONE Conference as we explore opportunities within agri-food, business and beyond.


                        We all make mistakes. It's a human thing, and it can be invaluable if we're open to learning from what went wrong. I'm Tom Martin with another Alltech Ag Future podcast.


                        That pearl of wisdom is the message of the book “Do As I Say, Not As I Did! Gaining Wisdom in Business Through the Mistakes of Highly Successful People”. It's by Carol Frank. You may have read about her in the Wall Street Journal, the New York Times, Entrepreneur, USA Today, Businessweek, or the Dallas Morning News. Carol has been named among Pet Age's Women of Influence, in addition to being recognized as a Pet Age icon. She's a trustee at the University of Colorado Foundation, a member of the Leadership Council at the Denver Zoo, and a member of the Herb Kelleher Center for Entrepreneurship at the University of Texas in Austin. She is also the founder and managing director at BirdsEye Advisory Group, based in Boulder, Colorado. As a certified mergers and acquisitions advisor, major and very recent transformations of the pet industry landscape have kept her very busy. Welcome, Carol.


Carol:             Thank you, Tom. Super excited to be here today.


Tom:              2021 is going down in pet food industry history as one to remember — (it was) a year that saw a record level of mergers and acquisitions. I wondered if you would share with us that background that has equipped you with such an informed perspective on what's happening in this industry.


Carol:             Well, I have a very unusual background for an investment banker. I started my career as a CPA, but then I went on to start and sell four different tech companies over about 20 years. Then I decided to use my background as a CPA — I have an MBA — and then as an entrepreneur in the pet industry to help other entrepreneurs and founders realize their dreams when they're ready to sell their businesses. I've been doing that for 13 years.


                        We all were scared to death in the spring of 2020 when the pandemic shut just about everything down, and we were all wondering what was next for us. But then people decided to start bringing home more pets and started traveling less and spending more on their pets. Over the next two years, the pet industry has just exploded, even more so than it already had been.


                        2021 was a year that a lot of entrepreneurs said, “You know what? I've kind of had enough. The market is really strong. Maybe it's time for me to think about exiting.” (At) the same time, there are investors out there that are looking at the pet industry (and) going, “Wow, this is a recession-resistant, even a recession-proof industry. I'd like to get in on it.” There are record valuations out there and record numbers of transactions happening.


Tom:              It turns out that the pet industry may be one of those that was actually vastly improved by the calamity of the pandemic.


Carol:             That would absolutely be the truth. Yeah.


Tom:              I mentioned your book about learning from our mistakes. Boy, we all could do that. It contains the accounts of business leaders, who bear their souls about how they stumbled at some point in their careers and lived to tell about it. You have founded and owned a variety of pet companies, as you mentioned. You worked as an auditor at a big CPA firm, Ernst & Young, and served on the boards of more than a dozen nonprofit and business organizations. Did those experiences as an entrepreneur and a businesswoman, as well as all of that board service, provide ample opportunities to learn from your own mistakes?


Carol:             Well, I had a chance to make a lot of mistakes as I was entrepreneuring along. It started when I was in my mid-20s. Like a lot of us then, we thought we knew a lot more than we really did. The idea for the book came from when I got sued by a competitor. It almost put my business out. It almost put me into bankruptcy. What I did was, after some soul searching, I realized that I had made some pretty significant mistakes that were based on me being naive and me being trusting and just not executing as well as I could have that resulted in this lawsuit and me almost losing my company.


                        So, I started talking to other entrepreneurs and realized they were like, “Oh, yeah, I totally messed that up, and that happened.” Then I also realized that people like learning from other people's mistakes, almost more so than they like learning from their successes. People love a good story, a good horror story. So, I decided to put together a book. It's a little bit like (the) “Chicken Soup” format, where there are 29 chapters where I interviewed entrepreneurs who are willing to share their mistakes and their war stories and their setbacks and then the lessons that they learned from those. That's how that came about.


Tom:              What about that process of realizing that, “Okay, I really did make a mistake here, and I'm going to own it. I'm going to own it. I'm going to be honest about it.” That's difficult, isn't it?


Carol:             It really is, except for — I just feel like it's a little bit cathartic to do that. It's also, for me, I like to give back when I can. When I share my own mistakes, where I tell people, “You need to get things in writing. You can't just take people for their word.” It's something super important — like a manufacturing contract, which is one of the things I did. I didn't get a patent on my product, which ended up really being a huge mistake. When I learned those things, I might as well save all those other people from the costly errors they could make by sharing with them what can happen. That was kind of a combination of wanting to give back and also just really realizing how valuable sharing these mistakes were.


Tom:              Well, you mentioned catharsis. Do we need to give ourselves a break here and say, “You know what? It’s okay. We all make mistakes. We just do it.”


Carol:             Oh, absolutely. I think there's a gazillion slogans out there about how important it is to make mistakes and how much we can learn from making mistakes and how failures are just one more step toward success.


Tom:              How has the insight gained from chronicling stories of others who have made the most of failure come into play as you've helped clients who are navigating the dynamics of, say, mergers and acquisitions?


Carol:             Well, I've learned a lot about that in the 13 years (on the job) as well. One of the things — I'm giving a speech this afternoon at the Alltech (ONE) Conference, and one of my slides is all about what the top deal-killers are. Some of those are around how people hide their skeletons and aren't transparent and aren't authentic with their advisors. I've experienced firsthand deals completely falling apart because my clients weren't completely honest with me. I ask a lot more questions than I ever used to. I also am a lot pickier on the types of companies that we want to sell, because we've learned over the years just what it takes to be a really great client and how to sell a really great company.


Tom:              In service to that transparency that you're talking about, is it best to just in a presentation say, “I made these mistakes, and here's what we did about them”?


Carol:             I think so. I think there is something completely disarming when somebody looks at you and says, “You know what? I made a mistake. I'm going to own up to it. Here's what we're doing about it. Here's what I can do about it in the future. Here's what you can learn from this.” I think that's so much better than someone trying to cover it up and dance around it and do a shuffle when, really, in reality, most people can see right through that.


Tom:              In your mind, what are the qualities and assets of a premium-value company that you're looking at?


Carol:             Well, I like to use the analogy of a three-legged stool. When you have all three legs of the stool, then you will get premium valuation. One of those legs is having a strong brand, having a well-known brand, one that resonates with your clients, with consumers. That's one leg. Another leg is having good gross margins, if we get into financial speak here. But the gross margin is such an important aspect of a company's financial health, so having strong gross margins — and that depends on the industry you're in. But if you're in the pet food or trade industry, that usually means somewhere around 40% to 50%.


                        Then third is how fast are you growing as a company. If you are growing at a double-digit rate, 10% or above, then you're in that solid growth territory. Fortunately, most companies in the pet industry are growing at that rate now. If you're not, there's probably something wrong. Now, I do see that slowing as we move into 2022 and things are getting a little crazy with the economy. But if you have a strong brand, good margins, good growth, then you're going to realize premium valuation.


Tom:              We were talking about mergers and acquisitions earlier and about 2021 in particular being a really robust year — a record year, I believe, in the pet industry — driven by private equity. What do you think captured the attention of private equity? Why is the pet industry so attractive, beyond the fact that we all went out and purchased pets?


Carol:             Private equity has been very interested in the pet industry ever since I've been — I joined investment banking in 2009. I started realizing pretty quickly when I was getting all these calls, because we specialize exclusively in the pet industry. We're the only investment bank in the country that does that. Private equity groups would find out about us, and I would get call after call. “Can I have a talk with you? We want to get into the pet industry.” That's been going on for 13 years. I'm wondering if and when it's going to slow down.


                        But the primary drivers of that interest are (that) it's sticky. People rarely get a pet and then don't have a pet later. They usually are loyal pet owners. The millennials in particular are driving the growth in premium foods, natural, organic, those sorts of things. That is not expected to slow down at all. But it all really started with baby boomers. Once upon a time in the '60s, the dogs were sleeping in the barn. Then they moved in the backyard. Then they moved onto the porch (and) into the house. Now they're sleeping in our beds. Well, that's caused a growth in the pet industry of about ten billion (dollars) in the '80s to 120 billion last year. That growth definitely attracts investment capital.


Tom:              Well, how has this wave of mergers and acquisitions also been characterized by strategic moves within the industry?


Carol:             Well, there are two types of buyers. A strategic buyer — which is, for example, if Alltech were to purchase a company in the industry, then that would be a strategic buy. Strategic buyers have a lot of money on their balance sheet. They need to deploy that capital. Acquisitions is one way that they're definitely looking to do that and to grow vertically or horizontally within their companies.


Tom:              There was a pretty big leap in pet food and product sales when COVID was keeping everybody home in 2020, '21. Do you regard that as a temporary response to the pandemic or an indicator of something more sustained, more long-term?


Carol:             Well, nobody is expecting there to be any contraction in terms of the growth in the pet food business. Now, what we are seeing is a shift in the type of foods that people are buying for their pets, and particularly with the millennials and Gen Z's. The dog kibble, which we call brown and round, the ultra-processed foods, I believe they're — well, they're not, I don't believe — I know they're slowing down. If you look at the categories of what's growing in the pet food space, it's the alternatives. It's wet. It's frozen. It's freeze-dried. It might be air-dried. But kibble is definitely slowing down and not seeing the type of growth that the other types of foods are. But I do think that the pet foods category in general will continue to grow.


Tom:              Again, we've been talking about mergers and acquisitions, but I wonder: What does all of that activity mean for retailers and for the consumer?


Carol:             Well, in most cases, it’s really a good thing, because when you have a sophisticated buyer with a lot of resources that puts their name behind a brand, that means, usually, that they're going to do more research. It's going to be available in more places. They're going to make sure they keep the quality up. But usually — not always, but usually — (there’s) a lot of upside when a company does get acquired. For example, we sold a company called Bocce's Bakery last fall. They were owned by two ladies in the West Village of New York. They'd done a great job in the 11 years (after) they bought it, since they started it. But in the fall, a company called Alpine Investors acquired it. They are a two-and-a-half-billion-dollar private equity firm, but they've committed $200 million in capital to grow not only Bocce's but to add some additional brands and really increase the authenticity, the transparency, the messaging and the quality of the product.


Tom:              If you don't mind, Carol, I'd like to tap into your experience as a businesswoman, if I could. From what you have seen and experienced, is it fair to say that women are now more widely recognized and respected as equals among leaders in the industry?


Carol:             Boy, that's a good question. (It’s) funny; I was thinking about this this morning. When I joined the pet industry back in the late '80s, I was one of very few women. There are more now, but I am often the only woman in the room when it comes to — like, I was on the board of the Pet Industry Distributors Association. There usually weren't very many of us. Here at the (Alltech ONE) Conference, I'd say there might be about 30% women. That's probably significantly higher than it used to be. But I've never thought of myself as, “Okay, I'm a woman, so I have to be different, act different; things are different.” I just am a human being who's smart and capable and really excited about being in the industry. I do believe that most women are feeling that way. There are amazing women in the pet industry. The last two of the last four companies we've sold have been female-owned. I just don't see that slowing down at all.


Tom:              Well, these certainly are challenging times that we're in. Life is always a challenge, but the events we're living through these days seem pretty extraordinary. What advice would you offer to visionaries in the startup phase as they strive to gain that toehold in this marketplace?


Carol:             I love that question, Tom, because I've been answering that now since I'd graduated (with) my MBA 30 years ago, and I speak to classes and I speak to a lot of entrepreneurs that have ideas. I tell them, “First of all, how can you be differentiated? If your product or idea isn't better or different than your competitor, then you're going to waste a lot of time and resources, and you're going to have a bloody head, because you're going to be (banging it) against the wall. Be differentiated. Try to find a way that, if you can, protect your idea with intellectual property — even better, build a moat around your product so that it can’t be just knocked off because, unfortunately, there’s a lot of people out there that like to copy ideas. Then get consumer buy-in or customer buy-in. If you’re a B2B, you’re going to get your customer buy-in. Do they want your product, or does your consumer want your product? Just because you think it’s a good idea doesn’t necessarily mean the market is going to think it’s a good idea. Before you launch, do a bunch of market research, and make sure there’s buy-in for whatever it is that you have to offer.”


Tom:              Well, currently, the lion's share of pet treats sold on the market are for dogs, but cat treat sales have been growing at a faster rate than dog treats since about 2016. Carol, is this an indicator that we cat owners are finally caving to the persistent, the unrelenting and often vocalized demands of our feline friends?


Carol:             Are you a cat owner?


Tom:              I am a cat owner who seems to have a watch. It's time for treats now.


Carol:             Well, cats have been underserved, and we don't really know why, because cat owners are crazy for their animals just like dog owners. I happen to also have a bird. I'm a crazy bird lady. We're not really sure why that has been neglected, but the market is catching up. Cats are definitely not like — they don't sit at your feet and beg for a treat. But, boy, they love their treats. I do see it being one of the fastest-growing categories right now. I don't see that changing or slowing down. I mean, don't you want a great treat to give your cat?


Tom:              Sure, and she makes sure that I do. Carol Frank, founder and managing director at BirdsEye Advisory Group (and) author of “Do As I Say, Not As I Did! Gaining Wisdom in Business Through the Mistakes of Highly Successful People,” which can be found on Amazon. Thank you for the conversation, Carol.


Carol:             You're very welcome, Tom. Thank you.


Tom:              For the Alltech Ag Future podcast, I'm Tom Martin. Thank you for joining us. Be sure to subscribe to Ag Future wherever you listen to podcasts.