Commentary: Animal Attraction

We love our pets in the Pacific Northwest. In fact, Seattle boasts more pets than children. A recent survey ranking the 10 most dog-friendly metropolitan areas in the United States placed Portland first and Seattle third. To support this affinity for animals, the region boasts a thriving business ecosystem. Washington and Oregon are home to important service providers, iconic brands and innovative retailers in the industry. Their rise has helped propel our local economy and the pet industry to record levels.

The pet industry has always been big business. More than 82.5 million American households 68 percent have at least one companion animal. Awareness of the industry, which exceeded $55 billion in sales in 2013, became headline news when it continued to thrive straight through the recession, delivering average annual growth of 5.4 percent between 2008 and 2010. During the past decade, the industry has been fueled by the humanization of pets the notion that they are part of our families and, therefore, entitled to equal treatment and expenditures as well as a revolution in pet nutrition, including a proliferation of natural and organic food offerings.

The near-term outlook for the industry is promising, with the pet population projected to reach a new apex in 2015. Growth in the pet population is tied to macroeconomic conditions such as unemployment and housing starts, both of which are favorable locally and nationally. These factors are leading to more pet adoptions. However, the industrys growth rate is expected to taper slightly as a result of limited gains in discretionary income among the labor force and as rotation into premium pet foods slows.

Due to its growth rate and economic resiliency, the pet industry has attracted considerable interest from venture capitalists, private equity firms and strategic investors. A number of Pacific Northwest companies have benefited from this trend. In 2010, Federal Way-based Animal Supply Company, one of the nations largest independent pet product distributors, received an undisclosed investment from The Halifax Group, based in Washington, D.C. The company used a portion of the proceeds to make a number of consolidating acquisitions, expanding its footprint nationally. That same year, Clackamas, Oregon-based Strategic Pharmaceutical Solutions, operating as VetSource, a provider of transaction enablement technology and fulfillment services for companion animal health products, received an investment from publicly traded Patterson Companies of St. Paul, Minnesota. The funds were invested in sales and marketing as well as pharmacy automation equipment, enabling the company to expand its customer base and reduce operational costs.

Other Pacific Northwest pet companies have received investments from sources closer to home. Seattle-based Trupanion, a leading provider of pet insurance, received funding from local consumer and technology venture capital firm Maveron; Blue Dog Bakery, a manufacturer and marketer of pet treats, was acquired by Montlake Capital and Halibut Flats Partners, both local private equity firms; and A Place for Rover, doing business as Rover.com, a matchmaking service for pet owners and pet service providers, founded by local venture capitalist Greg Gottesman, received an initial investment from Madrona Venture Group, a local technology venture capital firm. In total, we estimate the regions pet companies have received more than $250 million in third-party investment since 2007.

This investment cycle will ultimately lead to a period of consolidation. Generally speaking, institutional investors look to harvest their investments in three to five years. Local pet companies have recently been the subjects of acquisition. Seattle-based Canine Hardware, owner of the iconic Chuckit! brand of pet play products, was acquired by Doskocil Manufacturing Company, doing business as Petmate, in 2012. That same year, Portland-based Castor & Pollux Natural PetWorks was acquired by Merrick Pet Care.

Other acquisitions will surely follow. Its a sign of a healthy ecosystem. Pacific Northwest pet companies are creating jobs and wealth, which, in turn, will lead to further local investment. Whats good for companion animals is, in fact, good for you.

Bryan Jaffe is a managing director at Cascadia Capital, a Seattle financial services. Reach him at 206.436.2534 or [email protected].