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Michael Van Aelst:
Hi everyone. I'm Michael Van Aelst. I'm the TD Cowen Canadian Consumer and Retail Analyst. We're here at TD Cowen Consumer Conference in New York, and I have with me Richard Maltsbarger, President and CEO of Pet Valu.
Welcome, Richard.
Richard Maltsbarger:
Thank you, Mike.
Michael Van Aelst:
So I think what we'd like to do today is start off by talking a little bit about the industry. The growth of the pet industry has been quite spectacular over the past two decades. Pre-Covid it was growing at 6% CAGR. Can you talk a little bit about some of the drivers, the main drivers for that growth, and what you're seeing at this point?
Richard Maltsbarger:
Certainly we've had a great industry to be in. Pet is wonderful. People love them. They're part of the family. They have been for many years, but most especially over the past 25 years or so in Canada. Like you said, we've grown at six plus percent per year, of course a little faster than that over the last five years within the industry.
So what we really love is really two drivers. The two drivers are the pet population growth alongside Canadian population growth, and then really the key driver is humanization and premiumization. So many years ago, I like to make this joke, 25 years ago, dogs lived in dog houses. Right now it's only boyfriends and husbands that are in dog houses. The dog has moved into the house, possibly into the bedroom, maybe even up onto the bed. Well, as you do that with your pet, you want to make sure that you're really giving them the best possible of all things, whether that's human grade food quality ingredients that go into what they eat every day, or premium bedding to make sure that they're comfortable within the home. So those drivers are really helping to propel this industry, not just over the past few years, but of course over the past few decades.
Michael Van Aelst:
And this doesn't seem to be changing because the younger pet owners that I know, they seem to treat their pets more like their children, the ones that don't have children in particular.
Richard Maltsbarger:
Well, it's not just younger too. I think my wife might actually treat our pets better than our kids, so.
Michael Van Aelst:
I won't tell her you said that. And so the Covid years were even better. We saw growth, double-digit growth at Pet Valu for a few years, and now we're starting to see it slow down. We saw it in the second half of '23 slow down, and so far in early in 2024. Is this a weakness in the consumer strictly or is there are people getting rid of their pets and focusing more on other activities that they didn't do during Covid?
Richard Maltsbarger:
So we're not seeing anything happening within the overall pet population or the pet adoptions beyond what's normal, and what we would experience prior to Covid. Really what we have seen though is a bit of a pullback in consumer discretionary purchasing across Canada. So for our category that would impact things like toys, or beds, or crates, or collars, or leashes, some of the categories where you can put off the replacement cycle for a little bit, or perhaps with adoption as not being at the high levels that they were during Covid, there's not quite as much demand in those areas.
We've continued to see really strong results for our food, our treats, and our cat litters, or what we call consumables, those purchases that you make every week or every month. In those categories, we're really not seeing any pullback. In fact, our fastest growing categories continue to be our super premium kibble and our culinary. And for us, culinary is frozen raw, gently cooked, and shelf stable freeze-dried raw, the most expensive food that you can actually purchase for your pet.
Michael Van Aelst:
And that's an area that at value itself has just gotten into with private brands?
Richard Maltsbarger:
We have just this past month, and the marketing just went live last Thursday, for our own performance and culinary line. So 15 skews, eight of which are frozen raw meals, seven of which are gently cooked, or what others may refer to as the fresh part of the segment, that are human-grade quality ingredients, significant price points, but yet even there, our proprietary brand brings a 5 to 10% value to the customer over what they see in the national brand.
Michael Van Aelst:
Okay, great. Some of our viewers are probably going to be Americans or internationals, so maybe you could spend some time just talking about the differences between the Canadian market and what others might be used to in their home market.
Richard Maltsbarger:
The Canadian market today is much stronger penetrated within pet specialty retail, primarily through stores. So today market share is still roughly 50% or higher amongst pet specialty retail stores. That share in the US is about half of that, or possibly even a little under 20%. In addition, e-commerce penetration is much higher in the US market, depending upon source, somewhere between 30 and 40%. But in Canada, that's only in the mid to high teens of penetration. So structurally, the Canadian market's a bit different. You have a population roughly the size of the California population in a geographic landmass bigger than the contiguous US 48 states. So in that environment, lots of small towns really built well for our model. Our model can go urban, suburban, or small town. We're franchise owned and we have about a 3,500 square foot target for those rural markets.
Michael Van Aelst:
All right. So that's quite a bit different from your competition in Canada, mostly as larger boxes, some big boxes like Walmarts and other large chains. And they're also often corporate owned. Correct?
Richard Maltsbarger:
They are, as opposed to we're 70% plus franchise owned.
Michael Van Aelst:
Okay. So it's easier for you to go into those rural markets and set up shop with a smaller format store with a local owner?
Richard Maltsbarger:
Yeah, Didsbury Alberta is a great example. It's a really small town outside of Calgary. Our owner in Didsbury, she and her husband who works at the local Home Depot just built the house on their family farm. So she's been there her whole life. She opens up the store in this small 5,000 person town and immediately has a million dollar store within her second year. That's a great type of success, knowing someone in that small town, who's committed to that small town can bring to the format and bring to the market.
Michael Van Aelst:
So Pet Valu is looking to add 40 to 50 stores a year for the next decade or so, and a lot of that growth is going to come within those rural markets. How is your distribution set up and what are you doing to prepare for that?
Richard Maltsbarger:
So we have undertaken $110 million transformation of our distribution. So great for us during Covid. Our business grew organically over 50% across the three-year period, and including inorganic or acquisition growth over 70% in a three-year period.
The challenge of that is we actually did outgrow our own supply chain capacity. So starting in 2022 and running through 2026, we're undertaking a transformation, moving from nine facilities, four of which were managed, five of which were outsourced, to three facilities that are modernized and automated, including robotic picking solutions for goods to picker automation. This allows us to continue to grow 40 to 50 stores per year. It allows us to improve our productivity on picketing by over 50% and allows us to be able to tap into becoming the wholesaler to our Chico stores within Quebec.
So we acquired our way into Quebec two years ago through the Chico acquisition, acquiring 66 stores at that time, now having 89 stores within the province, with a growth path to more than 200. So this really kicked off the ability for us to become a wholesaler to that new acquisition.
Michael Van Aelst:
And e-commerce, of course, is growing everywhere, but not as much in Canada as we see in other parts of the world, at least as far as the penetration is concerned. So can you talk about... And you have had some new entrants come in as well, so can you talk about the e-commerce penetration as a whole in Canada, but also how your penetration is and how that's growing?
Richard Maltsbarger:
So we have seen e-commerce grow from high single digits, to mid teens, to high teens in terms of penetration, primarily the most significant lift occurred during the first two years of Covid, which of course in Canada, our Covid lockdowns were far more significant than those that occurred within the United States.
We've really seen the e-commerce level stabilize over the past year or two into that high, call it teens penetration level. It's disproportionately to hard lines, things like toys, things like beds, things that are really lightweight that you can put into a box and ship easily. The litter business, the food business, especially the larger dog food and cat food sized bags do not really travel as much to the e-commerce channel, just given the geographic dispersion of Canada, and Canadians higher propensity to still want to shop in store.
Regardless of that, we have built a full nationwide direct to customer e-commerce capability out of our warehouses. We have full nationwide click and collect, with the exception of Quebec, where we're still integrating the new acquisition. And the great news for us is the supply chain we're building, since we pick all of our stores by eaches, the same way other retailers pick only their e-commerce orders, whether we grow e-commerce or through stores, we get the productivity of this new investment.
So we do like what we're seeing. E-commerce is a critical part of the business, just maybe not so much for selling online as it is to bring our brand to customers online. So much so that just last Tuesday, we launched our brand new e-commerce platform, improving our speed, improving our ability for customers to go to the cart and to check out, and improving some of the ability for us to compete through things like Google web links, etc., when we're showing our prices to the marketplace.
Michael Van Aelst:
I know you're seeing your customers be agnostic to channel. Are they buying both in the store and e-commerce?
Richard Maltsbarger:
They are. Our omnichannel customers are by far our most valuable customers. So those who buy both online in-store generally have four times as many trips and five times as much spend as the customers who only buy online, and even have more spend and more trips than the ones who only buy in-store. Again, we are completely agnostic as much as our customers. We don't run any online only promotions, so every one of our promotions and every one of our offers is equally available to someone who wants to shop online and someone who shops in the store. For us, it's most important that we live up to customer choice.
Michael Van Aelst:
So I think that flexibility is something that would protect you against some of the other e-commerce entrants or dedicated e-commerce competitors?
Richard Maltsbarger:
Our targeted devoted pet lovers, it absolutely gives us exactly what they're asking of us to be able to continue to earn their business.
Michael Van Aelst:
Okay. Yeah, we've seen the consumer struggle. We've seen the consumer pulling back, going into discount channels, going down to either trading down in a lot of categories, trading to private label. What are you seeing in the pet industry and how is it affecting Pet Valu?
Richard Maltsbarger:
For us, we do see proprietary brand as the option there. So really customers are trading over to our brands. And I use the term trading over because we're not asking to drop a quality tier. So if you're buying holistic grain-free food from one of the national brands, we have our performance or an ultra solution for you at roughly a 5 to 10% per pound discount. If you're buying a scientific solution, we have our Performatrin Prime solution for you. So if you need urinary care for your cat or you need sensitive stomach for your dog, we've got a solution for you there, similar formulation, 5 to 10% per pound, less cost. This allows our customers to stay where they want to be, for what they would want to feed their pet, because again, that pet is part of the family, without having to trade down to our lower quality tier.
We are seeing a bit of trade down though for certain consumers, and that's why our Performatrin NATURALS, which is a comparable quality to a Blue Buffalo, is really one of our fastest growing skews in this market. So again, for us, it's all about having the right choices for the customer to ensure regardless of where they are socioeconomically or where they are within their household income, they can love the pet and continue to treat them as part of the family.
Michael Van Aelst:
That's great. And I think in seeing a lot of your stores, I think one thing that comes across is just the relationship that the pet store owners, or the franchise owner, or the corporate store manager in the location has with the pet owners. And seeing that the communication, the assistance levels, that you have a very hard time seeing in big box stores. So can you talk a little bit about your strategy around your employee training and how your smaller box helps you in that manner?
Richard Maltsbarger:
First of all, we don't use the term employee. We use ACE. So ACE is animal care experts, specifically in both our franchise stores and our corporate stores. Just as you pointed out, we develop the compassion and expertise to be able to assist you with your pet. Oftentimes, you come across as a pet owner, a first. The first time they're ill, the first time something's wrong with their stool, the first time you need to change your leash, or collar, or halter, because they're growing. So we really train around those first moments to make sure that we provide, again, the compassion and the expertise necessary to serve.
It really is a standout difference. In most of our stores, you can walk in the front door, you can see the whole store laid out in front of you, and you can see the people. One of the great things I love though, is sometimes you can't exactly see the front door, and sometimes we're in a very back of a store, and a dog will walk in with its owner and it'll bark, and the store manager or the franchisee will say hello to the customer because they recognize the dog's bark. That level of relationship is really key within our model. And that level of connection is a point of difference. It's one of the reasons why our customers continue to love us and continue to come in.
Michael Van Aelst:
Well, that's great. I mean, clearly the customers are responding because you're the largest player, 18% market share in the country, growing fast and adding stores at a quicker pace than pretty much any of your competitors, from what I can tell. So it's been a great growth story up until now, and I wish all the best for the next decade, and see those next 500 stores coming through in Canada.
Richard Maltsbarger:
Wonderful. Thanks, Mike.
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