Pets at Home – from unloved mutt to prized pooch

When it was floated on the stock exchange in 2014, the debut of Pets at Home was considered the worst IPO of the year. Shares got pummeled over the following months, as concerns about high levels of debt and a weak Board abounded in the City. Even though sales revenues were growing, shareholders had lost a third of their cash within 6 months.
At the time CEO Nick Wood, said “in the long term the share price will reflect the strength of our proposition”. Fast forward to late-2019 and it seems he was right. Pets at Home (PAH) was a star performer and somewhat of an analysts’ darling with share price growth of 140% over the year.
Pets at Home’s story is a great example of a good & simple strategy, executed well. While the turnaround has been undoubtedly driven by skillful choices, PAH has also benefited from the helpful tailwind of a category in value growth.
Anthony Preston opened the Chester store in 1991 and at the stage ‘only’ had ambitions to open 5 or 6 stores
History
Their first store was opened in Chester in 1991, the firm scaled up in a big way in 1999 with the purchase of Pet Smart taking the number of outlets to 140. In 2004 Pets at Home was acquired by Bridgepoint for €361m. Sales continued to rise, helped in part by the introduction of PAH’s own brand pet food “Wainwrights”. Over five years and now trading from 250 stores and operating 53 veterinary practices, sales doubled, and profits quadrupled.
The firm changed hands again in 2010 being acquired by KKR, another venture capitalist. Two years later, Pets at Home introduced its “VIP” (Very Important Pets) loyalty scheme which remains a central pillar of its strategy. In 2013, the business acquired Vets4Pets, a national chain of veterinary practices before its IPO the following year.
Are you a dog or cat person? Data shows that where you live can affect your preference.
Today’s context
The pet care market in the UK is estimated to be worth about £6.3bn and growing at around 3-4% a year (that’s stronger than many consumer goods categories). Food is the biggest segment (accounting for about 43% of the category) and veterinary is the other big segment (about 38%). Whilst pet accessories (13%) and grooming (4%) are smaller segments these are growing around 50% faster than the rest.
Demand for pet care is driven by a large dog & cat population, with around 40% of UK households owning a pet. About 55% of spend is on dogs and 44% for cats, with fish and other animals accounting for the remaining 1%. The average Brit’s love for their pet manifests in them ‘humanising’ animals (projecting human wants and characteristics) with a resulting willingness to spend on premium products and services.
Petplan is a leading pet insurer, owned by Allianz
Meanwhile the growing market in pet insurance is stoking demand for veterinary services. In fact, a recent survey found that consumers are twice as likely to insure their pet’s health than their own. There is perhaps no better illustration of the convergence of humanisation & insurance trends, than recent reports showing that pet insurance pay-outs for canine anxiety and other psychological issues increased by 50% during the last year.
About 15% of pet food sales are now online (and growing). Encouraged by Pets at Home, there is also a growing omnichannel business (for example where products are bought online for subsequent in-store collection).
Recent performance
In the largest categories of food and veterinary, Pets at Home has market share of around 14-16% and gradually gaining. The business has a staggering 40%+ share of accessories and a smaller (c.10%) share of grooming – although it’s a space where the firm wants to grow aggressively.
18 months of share price growth may be predicated on expectation that sales growth will deliver more cash
In its last full year, Pets at Home delivered sales of £961m and profit (EBIT) of around £93m (growth of 6% and 5% respectively). A few weeks ago, the firm released its interim six-month results, which showed sales had accelerated further to +9.4% (+7.6% life-for-like when new store openings are excluded). It is almost a certainty that revenue will have exceeded the £1bn mark when the current financial year closes.
The UK retail sector has been the source of much negative news and disappointment over the last 3+ years (with lower footfall in physical stores, switching to online, aggressive price competition, lower consumer confidence & Brexit uncertainty, rising business rates and uneconomic rents all featuring among the reasons cited).
That context makes the sales performance of Pets at Home even more impressive, given that they too are subject to many of the same challenges.
The really big challenge for PAH is to grow its profit delivery (which has oscilated around the £85-90m mark for the last six years) and create more free cash flows by keeping costs down (including interest payments). But, given that a lot of retailing costs are fairly fixed (stores and staff etc), continued sales growth should flow through to better profits.
Pets at Home aims to offer products/services across the pet “ecosystem”
Competitive position
Grocery retailers comprise an estimated 70% of the market for pet food, selling a combination of own label and brands like Whiskas, Felix, Pedigree, etc. Outside of food, their range of pet-related products is typically limited.
In comparison with other retail categories, pet care still has a large number of ‘specialist’ stores. Of these Pets at Home is by far the largest, but there are other chains such as Pets Corner (premium) and Pets Hut (owned by Poundstretcher) each with 90-100 stores. In addition, there are many hundreds of small independent pet shops and garden centres selling pet care products.
Online retail accounts for a small but growing portion of sales. Across Europe there are a couple of big sites – like Zooplus (a specialist with c.50% share) and Amazon (est. 20% share) – plus several smaller or local sites in the UK, like Monster and Fetch (owned by Ocado).
Pets at Home operates as a pet specialist and trumpets the fact its ability to operate across the “whole ecosystem” of pet ownership – something grocers cannot feasibly do. Its reach in terms of physical locations – as well as fairly established use of digital channels – gives it quite a defensible leadership position.

Strategic choices

One of the lessons I believe we can take from Pets at Home, is the huge impact on performance that a well-figured out, simply expressed and well-executed strategy can have.
The firm’s plan is straightforward: (1) increase sales in retail by being closer to the consumer and providing the most relevant product/service offers at fair prices; (2) increase the proportion of sales from pet services to 50%.
VIP club members get direct mail addressed to their pets, containing personalised offers
These two strategies are facilitated by focusing on better use of the VIP loyalty scheme and other customer data, and by training & empowering store staff (with the aim of growing sales revenue per colleague).
Better retail
Pets at Home has cut the costs of key lines after its price perception suffered from historic price hikes. The firm has developed a segmentation that shows products on which it needs to be either acceptable on price difference (<5%), or price-matched for the products most important to customers.
Pets at Home has also rationalised its ranges to free up space to introduce more services such as its Groom Room grooming brand. It is now able to tailor product ranges to suit location – for example having found urban areas to have more owners of cats and aquatic creatures than dog-centric rural areas.
Track Fido’s walkies in real time with the Tailster app, now partly-owned by Pets at Home
Expansion into services
It its latest update, PAH announced that over 35% of sales now come from services. A few months ago it acquired a 12% stake in Tailster (an online brand that provides dog-walking, a market already estimated to worth be a staggering £500m).
Recurring revenues are every CFO’s wet dream and Pets at Home is driving the uptake of subscriptions – for example of flea and worming treatments – where it offers VIP members preferential rates in return for regular payments.
Smart use of data
Since its introduction 8 years ago, the VIP loyalty scheme has become ever more central to PAH’s marketing strategy. Around three quarters of all sales are made to loyalty-card holders with the firm currently holding individual data on around 5 million animals.
Puppy and Kitten clubs have also been introduced, with around 270,000 members between them. The firm has found that owners spend 21% more over the lifetime of the animal compared with those who haven’t been part of the initiative.
Vets4Pets are vet-owned concessions operating in store. Increasing numbers of pets are part of a subscription plan that covers vaccinations, flea and worming treatments
Re-engineering the vet’s P&L
Vets4Pets practices have historically been owned by ‘business partners’ – individual vets who receive branding and business operations support from PAH in return for revenue share. However, after years of swift expansion, some practices still aren’t profitable. PAH has been simplifying the fee structure and, in about 55 cases, is spending £49m to buy out practices where the license fee makes it unprofitable. Sorting out the vet practices is regarded as a necessary adjustment that will ultimately unlock more market share.
Fortunes transformed
It has become evident over the last 18+ months that Pets at Home has proved its earlier critics wrong. Although helped by steady demand from a nation of pet-lovers, it has still faced many of the same challenges of other retailers, but its record of growing sales is far better than most.
Ironically, at the time of writing and after such a strong year, there is some concern that the share price might now be slightly overcooked. However, if the trajectory is maintained, that’s likely to be a temporary concern.
Buried somewhere in its annual report is a stat that 93% of its staff are pet owners themselves. I suspect that speaks volumes. Although the strategy is strong and supported with investments in areas like customer data, I suspect this innate organisation-wide understanding of its customers has also been a very significant – albeit immeasurable – factor in the firm’s transformation from unloved mutt to prized pooch.
At Brand Ambition we help clients to conquer complexity and develop simple, effective and actionable strategies to succeed in their marketplace. If you’d like to have a chat, please get in touch.
Note – Pets at Home is a not a Brand Ambition client and this article is not intended to imply any endorsement of our business/services.

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