Distributor Consolidation at Pet Food Forum - Part I


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I just got back from a great experience at Pet Food Forum in Chicago, where I—along with Steve King, president of the Pet Industry Distributors Association (PIDA)—gave a presentation on distributor consolidation and its impact on the pet specialty channel. The session, which was fairly well attended, incorporated a 30-minute PowerPoint presentation by Steve and I, followed by more than an hour of Q&A.

Given how many questions we ended up fielding, it is clear that distributor consolidation is a hot-button issue right now in the pet care industry. The inquiries ranged from, “How can I expand the distribution for my regional pet food brand?” to “Where will all of this merger and acquisition activity lead the industry in 10 years?” and covered a wide variety of issues in between. It turned out to be quite an engaging discussion on a topic that I personally find more fascinating every time I have a chance to converse about it.

Unfortunately, I can’t give you a word-for-word recounting of the Q&A portion of the session (my memory is good, but not that good). However, below you will find a synopsis of our opening presentation, along with some of the accompanying slides. I hope you find the topic as interesting as our audience seemed to find it, and if you have any questions, I would be happy to extend the Q&A session beyond the confines of Pet Food Forum. Simply email me at mkalaygian@petbusiness.com, and I will do my best to give you a timely response.


After introductions, Steve King set the stage for the consolidation discussion by providing some key facts about PIDA’s distributor members:



• Last year, PIDA surveyed its 53 distributor members to find out what portion of the $56 billion in annual pet services and product sales consumed by the American public is served by its members. The results reveal a segment of the market that is large and growing.

• PIDA-member distributors collectively did more than $3.3 billion in sales at wholesale last year—an increase of $3 million from the year before. This translates to more than $4.45 billion in retail sales, assuming an average gross margin of 35 percent.

• PIDA-member distributors have made huge investments in warehouse space, equipment and people to get manufacturers’ products onto retailers’ shelves and into the hands of consumers. PIDA members have 104 distribution centers, comprising 7.5 million square feet of warehouse space. They maintained, on average, $326 million in inventory, in stock, for immediate delivery. They made over 3 million deliveries to retail customers—that’s more than 8,200 deliveries a day—with an average invoice of $1,076 per delivery.

• PIDA distributor members employ 5,400 people to sell, pick, pack, deliver and collect payment for the products that manufacturers make. Nearly 1,000 inside and outside sales people call on retailers to promote the benefits of manufacturers' products.

• Distributors hold 51 trade shows and open houses each year to get manufacturers and retailers together for product demos and special offers. 21,000 pet store owners and their employees attended these events.


Once the size and scope of the pet specialty distribution channel was outlined, I moved the discussion on to consolidation:

• Consolidation is being driven by two formerly mid-sized distributors racing from opposite coasts to build a national presence. Animal Supply Company in Federal Way, Wash., and Phillips Pet Food & Supplies in Easton, Pa.

• Both companies’ M&A activity has been fueled by an infusion of venture capital. It is just another example of how an increasing number of investors are looking to the pet category as an attractive, growing industry.

• The slide below provides a look at some of the key acquisitions made by both Animal Supply and Phillips over the past two years. While much of this activity was concentrated in the first half of 2013, there have been some key moves made since then—the Animal Supply merger with RFG Distributing and the recent Phillips’ acquisition of Wolverton are two examples.

 



Of course, all of these acquisitions have significantly increased the size and reach of both companies. Illustrating this point perfectly, King presented a pretty significant statistic about the size of the big-three distributors in the pet specialty channel—Animal Supply Company, Phillips Pet Food & Supplies and Central Pet:

• The two biggest consolidators, Animal Supply Co. and Phillips, have a total of 31 distribution centers. Central Pet Distribution has another 10 for a total of 41.

• PIDA members have a total of 104 distribution centers, so three companies control 40 percent of the pet product distribution facilities in the U.S.


Whenever you have this level of consolidation within the supply chain, it is going to be a cause of concern among retailers—and the pet specialty channel is no exception. With this in mind, Pet Business conducted a survey of pet retailers to gauge their level of concern and uncover some of their specific worries: 


• Independent pet stores are heavily dependent on pet specialty distributors as suppliers, especially when it comes to food. More than 85% of surveyed retailers said that more than half of their pet food selection is purchased through distributors, and 70% said that distributors supply 75% or more of their pet food products.

 


• Pet stores also depend on a certain level of diversity within the distribution channel. When asked how many distributors they use for sourcing pet food, more than 75% said that they utilize three or more distributors.

 


• In some cases, the use of so many distributors is due to price shopping. However, this is not typical, as the time and effort required to manage so many suppliers will significantly undercut any resulting savings. More often than not, retailers utilize multiple distributor partners based on the access those suppliers provide to different product lines.



For more insight into pet retailers’ concerns about distributor consolidation, as well as analysis of the impact that the consolidation trend is having on the pet specialty channel, check back on Monday for part two of this blog.

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