Nordic #1 Pet Care E-Commerce and Omni-Channel Retailer

Be Stronger, Wiser & Kinder By Participating in the Quiet Innovators' Quest to Purpose

Nordic #1 Pet Care E-Commerce and Omni-Channel Retailer

January 10, 2021 Uncategorized 0

From a single store in Finland's Tampere, Europe's largest lake district wedged between two beautiful lakes, this quiet innovator has held firm to its mission "to support and safeguard the furry everyday life of pet lovers" to grow to become Nordic's #1 pet care e-commerce and omni-channel retailer. The first store that was opened in 1988 by dedicated dog enthusiast and award-winning dog breeder Mr. V has since blossomed into a network of 293 stores in Finland, Sweden and Norway, supported by over 1.15 million loyal customers and commanding over 22% market share in the Nordic pool of 5.2 million pets, particularly gaining market share in recent years, especially from grocery stores and small pet food stores.

The innovator is also ahead of the curve in providing customer convenience and an enjoyable total experience, in which over 22% of its sales are from its own e-commerce sites with deliveries made within 24 hours, and its online market share is 50% in Sweden. 90% of Finns also live a 30 minute drive from its network of stores. The company's service concept stands out from the rest in offering a wide, curated assortment of pet products and pet care services such as grooming, dietary planning, training and veterinary services, increasing customer loyalty and improving store success. Many of its stores already include a salon, which has gained great popularity among its customers. On 7 Jan 2021, the company announced the launch of a digital veterinary service on its website. The digital veterinary service veterinarians estimate that about 60 to 80% of pets’ minor ailments can be treated remotely. A remote veterinarian can be contacted when a pet suffers from, for example, indigestion such as diarrhea or vomiting, skin or urinary symptoms, or when it has eaten something inappropriate. If necessary, veterinarians will direct the client to seek a face-to-face veterinarian appointment.

The company has diverse, high-quality offering (over 13,000 items vs 2,000 in grocery stores and 8,000 in the loss-making German-listed zooplus) with strong own brands in pet food and specialty pet food, toys and accessories, health and care products that is not available elsewhere. The company first started selling its own private-label products with its dry food brand in 2005. These Own & Exclusive (O&E) sales is driving increase in profit margin. O&E as % of product sales in Finland is 61%, Norway 54%, Sweden 37% vs zooplus 17%. Relative gross margin is 10-15% higher in O&E products than in other products.

This week, we highlight one of our portfolio companies, Nordic #1 Pet Care E-Commerce and Omni-Channel Retailer, which is up +8.1% during the week (4 to 8 Jan 2021). It had earlier reported a set of resilient 4Q2020 (Jul-Sept) results in which sales +19.2%, online sales +30%, adjusted EBITA +44.6% with margin improving from 10.8% to 13.1%, with strong profitability and cashflow generation ability in CFROE (= OCF/Equity) of 27.6%, supported by its stable business model with pet food representing 52% of product sales in own channels – food is non-discretionary and sticky in nature, with recurring purchasing habits locked in monthly/annual subscriptions. This rising dividend-yielding profitable and cashflow generative innovator has also compounded +145% in capital gains since its listing in Feb 2020 vs MSCI ACWI World index +16.3%.

Right from the start, the innovator’s greatest strength has been its highly engaged, motivated and well-trained staff, who are "thoroughly familiar with their four-legged clients": nearly all of its employees are genuine pet enthusiasts themselves, in which 93% of them are "pet parents" themselves. A key element of the company's culture and fundamental to the success of its business model, these Experts are known for providing honest, reliable advice and excellent customer service which drives customer satisfaction and loyalty. Personal experiences increase the credibility of their recommendations in the eyes of customers. These Experts are also closely involved in the development and launch of O&E (Own & Exclusive) products, in the innovation of the store concept and in product group management.

The company's Loyalty Club with 1.15 million "pet parents" is designed to serve as a platform for engaging with customers and providing them with better customer service. Through the Loyalty Club, the company is able to leverage data to truly understand its customers’ behavior and provide them with relevant, targeted communication. These targeted messages include, for example, special offers and birthday gifts. Customers are encouraged to join the Loyalty Program by telling them about the benefits of the program, which includes, in addition to targeted messages, a subscription bonus, an annual spend bonus, and tips and advice. Loyal customers contribute over 63% of total sales.

In its logistics reform in 2017, the company improved its efficiency and product availability by moving to one of its own central warehouses and six outsourced warehouses. Its own central warehouse is located in Eskilstuna, Sweden. In Finland, about 95% of the stores' products are delivered from Eskilstuna. In Sweden and Norway, the corresponding figure is about 70%. The significant IT renewal and centralization of logistics in 2017-18 has also eliminated the need to make major IT and warehouse investments in the near future and de-risking its business model.

The company believes that the trends driving the pet care market, such as the pet parenting megatrend and pet population growth, will remain robust also during and after the coronavirus pandemic. Pet parenting is a major development in pet care that continues to have a profound impact on the global pet care market. People are increasingly treating their dogs and cats like members of their family, spending more on higher quality and more premium food, as well as on a more diverse range of products and services. The company estimates that Pet Parents occupy close to one third of the total pet owning population but account for one-half of the total market spend.

It has been evidenced that historically, the amount of puppy registrations has increased during economic downturns. The pet care market is resilient, underpinned by nondiscretionary purchasing behaviour. Non-discretionary categories such as food, cat litter and veterinary services make up approximately 75% of total market spend and are characterised by repeat purchasing behaviour that is consistent through the cycle. Consumers display a willingness to sustain spending on pet care through economic downturns, preferring to cut expenditure on alternative spend categories. As a result of the trend of Pet Parenting, people are spending more on higher quality and more premium food, as well as a more diverse range of products and services. the company believes it is able to continue its strong performance, as it is focused on the high-quality products and services the Pet Parents seek.

The Nordic pet care market, worth EUR 2.9 billion includes food, products, services and veterinary services. In the past, the number of puppy registrations increased during economic downturns. This has happened, for example, in Finland during the recession of the 1990s and the economic crisis of 2008–2009. The resilience of the industry has also been noticeable during the coronavirus pandemic. The number of newly registered puppies increased by about 14% in Sweden during April-June 2020, compared to an increase of about 5% in January-March 2020. A similar trend has also been seen in Finland and Norway. Puppy owners typically spend more money on their pets during the first years of life, so the increase in the number of puppies is also positive for the overall market.

The company has also launched innovative services with its Puppy & Kitten Club. As puppies and kittens often require specialized food and services, with a heightened need for accessories, pet parents are highly engaged at this stage of the journey with an increased sense of novelty and heightened purchasing activity. The company has a wide range of different initiatives, campaigns and activities planned to best serve the important phase of the puppy and kitten first year. As part of the puppy and kitten customer journey, the company has launched a VIP club that focuses on the puppies’ and kittens’ very important and fun first year, giving pet parents the best offers, communication and advice. The VIP club is released in the Nordic markets during September-October 2020 and is a part of the existing loyalty program with the aim to attract and retain more puppies in the market. In Finland, the company has put a lot of effort into giving puppy owners a possibility to have dates with other puppies in its network, an initiative that has been highly appreciated by the customers. Service concept also includes puppy training in Finland, and it will be launched also in Sweden and Norway in 2021. As an important part of the pet expertise, the company has also re-built the puppy and kitten guides online and piloted puppy corner in stores to help the customers select good puppy products.

CEO Mr. R summed up: "Our mission is to make the lives of pets and their owners easier, safer and more fun. The pet care market has proven to be resilient to economic downturns in the past, and during the COVID-19 pandemic, the resilience of our business has been apparent. Following the strong and ongoing pet parenting trend accelerated by the COVID-19 pandemic, the number of pets in our operating markets has seen accelerated growth demonstrated by the increased registration of puppies. The continued increase in puppy customers during the upcoming financial year will continue to underpin our growth outlook in each of our markets. Our strong omnichannel strategy and scalable platform serve us well. We expect the favorable momentum in the market to continue during 2021. We will increase the number of owned stores by 25 to 35, allowing us to reach even more customers through our efficient omnichannel business model, which combines the convenience of store and online purchasing. Stores provide an essential and convenient touch point and allow Pet Parents to explore products, receive trusted advice from our Experts and access pet services. This is then complemented by the added convenience of our integrated, user friendly, fast, and efficient online platform. We remain committed to doing our best as we build upon our position as the pre-eminent pet group in the Nordics."