Central Garden & Pet Co – Strategic Update & Pet
Supplies – 28 April 2021
Disclaimer
The information, material and content contained in this transcript (“Content”) is for information purposes only and
does not constitute advice of any type or a trade recommendation and should not form the basis of any investment
decision. This transcript has been edited by Third Bridge and may differ from the audio recording of the Interview.
Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability
for the Content or for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the
Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge.
Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification,
reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from,
transferring or selling any Content is strictly prohibited.
Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Scott Link (SL)
Former VP, Marketing & Trade Marketing at Central Garden & Pet Co
Agenda:
1. Retailer relationships and brand strength
2. Home garden distribution drawbacks
3. Pet supplies innovation and e-commerce penetration
4. Inorganic growth through M&A
5. Central Garden & Pet's (NASDAQ: CENT) margin and profitability outlook
Contents
Q: Could you give an overview of the US pet supply industry, highlighting key trends, the main categories and
3
the top competitors?
Q: There has been a wealth of pet adoption recently. What was driving demand or trend pre-pandemic? How
4
did that change after March 2020?
Q: Is there a formula for assessing the benefit of each pet adopted and what that translates to for pet supply
manufacturer or supplier revenues? How might the impact aggregate over the next few years, even if demand
only grows 1-2%? Is there going to be a new normal in traditional net revenue, given that pets are fed every
day?
5
Q: Central Garden & Pet’s offerings are so diversified, including fish and other animals. Can you discuss
underserved markets where there is strong opportunity to build a big presence? How hard is it to build out
manufacturing capacity and expertise across so many reptiles and animals?
Q: Could you discuss the pet supply industry’s fragmentation and market structure? There are so many
categories and brands, as you mentioned, but what do you think it takes to be a market leader and stack up
against companies such as Blue Buffalo in the cat and dog category?
6
6
Q: Would you point to the highest margins being in toys, bowls and things as such, or is the food and treat
premiumisation margin profile much more attractive?
Q: Could you give an update on the US pet supply M&A landscape? Could the pandemic be a consolidation
catalyst?
Q: What role has Central Garden & Pet played in market consolidation? How has it built a business of
brands and assisted that? Might it be over-saturated with the amount of brands it has? How does its new
USD 400m capital raise plans affect the consolidation trend?
Q: What are your thoughts on Central Garden & Pet as a takeover target, especially for a player aiming to
enter the industry, perhaps Amazon, who has extensive distribution capabilities but would like a significant
private label presence?
7
7
8
9
Q: Where do you think Central Garden & Pet would fit in a roll-up into a much larger company, considering
the strength of its distribution? Do you think it fits better with a retailer such as Petco, PetSmart or Walmart,
10
or with a pure play e-commerce company such as Amazon?
Q: Where do you think Central Garden & Pet should innovate across the categories it already operates in,
particularly dog and cat? Should it only innovate its e-commerce and distribution capabilities? Where is the
opportunity to innovate new products?
10
Q: What might be Central Garden & Pet’s rationale for operating in the garden and pet business lines? They
seem fairly distinct, but are there synergies? What are your thoughts on playing in both fields?
11
Central Garden & Pet Co – Strategic Update & Pet
Supplies
Transcription begins at 00:00:01 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Central Garden & Pet Co – Strategic Update & Pet
Supplies. I am Nyree Hinton and I will be facilitating today’s Interview with Mr Scott Link, former VP of
Marketing and Trade at Central Garden & Pet.
Scott, before we could start with today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information and agree not to disclose any such
information, or any other information which is confidential, during this Interview.
SL: I agree.
NH: Could you start by giving an overview of your background?
SL: Basically, I’ve been in consumer packaged goods for the last 30-plus years. I spent the first 15 years of my
career on the retail side of the business, I came up through the Skaggs Alpha Beta organisation and worked for
four years for Albertsons in store merchandising, store operations and then in procurement, in purchasing. I
then moved to the other side of the desk where I was recruited by Kimberly-Clark, and I worked for Kimberly-
Clark in various sales positions for a little over nine years, and when I left there most recently, I was
responsible for the Kroger business in Cincinnati. My experience is pretty broad at Kimberly-Clark in
traditional food primarily, but also across mass value and drug as well. I then went to work for Henkel. At that
time it was Dial Personal Products located in Scottsdale, Arizona. They were subsequently acquired by Henkel,
a consumer products conglomerate out of Europe. I worked for them for four years in sales planning, which is
a hybrid position between both sales and marketing, did that for around four years and then I was recruited to
Central Garden & Pet to lead their health and wellness business on the customer development, sales and trade
marketing side. I did that for about three-and-a-half years, and during that time, I was promoted to Corporate
Trade Marketing. I actually headed up Central Garden & Pet’s first trade marketing department out of their
headquarters in Walnut Creek, California.
I then subsequently left, did a small stint with a smaller private equity company, but in the pet space, and then
was recruited to a company Dogswell, which sells dog food and dog treats primarily. I did that for about two-
and-a-half years and then subsequently was recruited back to Central Garden & Pet, where I ran marketing
and trade marketing for the health and wellness department at Central Garden & Pet. Currently, I work for a
company called Kadenwood. I was brought to Kadenwood a little over a year ago to help them launch the pet
division. It is a start-up CBD company and I’ve been doing that for about 14 months now.
[00:03:06]
Q: Could you give an overview of the US pet supply industry, highlighting key trends, the main categories and
the top competitors?
SL: Pet supplies is a big ubiquitous term. It’s generally anything other than consumables, meaning
consumables like dog foods and dog treats primarily, so you have everything from bedding, apparel, collars
and leashes, toys, again a wide array of macro categories, but then you have a lot of segments that fall under
those. Again, all of those categories are broken up into more granular pieces of the business. Again, Central
Garden & Pet is the largest pet supplies company in the country. I think the market cap today is about USD
Private and confidential 3
2.8bn. They do provide products across all retail channels, and they really play in all pet supplies categories for
pretty much all pet species. Again, when we say pet supplies, generally people default just to dog and cat, so
companion animals, however, there’s also equine which Central plays in. They’re a large player in equine with
Farnam. They also play in aquatic, so fish, they play in small animal, rabbits and hamsters. They play in
reptiles, so they really play across a broad array. They have, not necessarily leading brands, but tier 2 brands in
the companion animal space. They are bigger players as you get into some of the smaller species outside of
companion animals. Again, depending on which of the pet supplies categories we are talking about, there are
different leading brands in each of those categories, so it’s hard for me to say broadly, other than Central
Garden & Pet, which is a house of brands, who’s the largest or big player in pet supplies because we would
really have to dig down deeper into each particular category.
[00:05:31]
Q: There has been a wealth of pet adoption recently. What was driving demand or trend pre-pandemic? How
did that change after March 2020?
SL: Really pet adoptions were very stagnant prior to COVID. 2-3% adoption rate, new pets every year. Pet is
really a tale of two cities. If you had looked pre-COVID, you saw a lot of pet retailers struggling, especially pet-
specific retailers struggling, so companies like Petco and PetSmart were really struggling to get new customers
for a couple of reasons. Number one, very slow pet adoption rates, pretty stagnant pet adoption rates, but also
you saw traditional food, drug and mass allocating more space to pets and pet supplies because these other
food, drug and mass retailers realised that big-box pet speciality like PetSmart and Petco were making 60%
and 70% margin off of selling pet supplies. Companies like Walmart realised pretty quickly that they don’t
need to make 70 margin points, they can make 50 margin points, undercut big-box pet speciality by 10 or 20
points and start to attract all of those customers and pull all of those dollars back into their format. That’s one
of the reasons that you saw this trend in 2016, ’17, ’18, of big pet brands jumping the shark, leaving pet
speciality and independent pet to take their brands into more mainstream retailers because it was just more
attractive. We all know there are more customers that walk through a Walmart, as an example, or a Kroger, as
an example, than walk into a PetSmart or Petco.
From a supplier perspective, it was a very calculated decision on, do we continue to partner with the Petco and
PetSmart who are losing traffic, who are inflating the retails on our brands and products to 50%, 60%, 70% or
do we partner with a retailer like Kroger or Walmart? Who will make our products more affordable because
they’ll only need a 40% or 50% gross margin, retailer margin, and they have people in their stores already,
one-and-a-half to two times per week? Again, put your brands where people are shopping. That was the case
all prior to COVID, and a couple other dynamics that happened in the pet space in general are, whether it be
two macro trends. Number one is that humanisation of pets. We saw a real rise up of people treating their pets
more like family members, and so where people were not having kids, they were having pets. They would
indulge those pets, and that’s really why the supplies business boomed in the early 2000s and up to 2016-17.
Everybody was indulging their pet and giving them more premium products, whether it be consumable
products or supplies, because they were part of the family. The humanisation of pets drove a lot of the growth
prior to COVID. The other thing that drove a lot of revenue prior to COVID was the premiumisation of pets. At
one point, feeding Ol’ Roy dog food to your dog chained up in the backyard was fine, but people’s perspective
on owning a pet has drastically changed since the ’90s, and people are now spending more on their pets, and
so the premiumisation of pets really drove a lot of the growth. What happened in about 2016-17 is dog food
had gone from about USD 0.30 to USD 0.40 per pound in 2019 to in 2020-21 to USD 2 and USD 3 per pound.
You just got to a maximum saturation point where people just weren’t willing to pay any more, that’s what had
driven a lot of the growth in pet speciality and independent pet, is people spending more per pound of dog
food and treats, but again, they hit the point of diminishing returns, and so they hit a ceiling, and you would
see in 2016, 2017, 2018, 2019, this slowing of growth. It’s one of the reasons you even saw companies like
Central Garden & Pet really struggling to maintain their business, and they started to pivot away from bricks
and mortar, traditional pet speciality bricks and mortar in the traditional food, drug, mass, but also start to
emphasis and focus on places like Amazon and Chewy, and at that time, Foster & Smith and some of the other
big e-tailers. That’s a long way to go to say really it’s a tale of two cities, really, really healthy pet and pet
Private and confidential 4
supplies business. Throughout the early 2000s, we hit about 2015, ’16, ’17, ’18, things really started to slow
down, and then unfortunate for us, fortunate for a lot of these manufacturers, when COVID hit, people really
hunkered down in home. Pet adoption rates went through the roof because families needed to occupy their
kids in many instances, with things to do at home, and one of the easy things for them to do was to go to a
shelter and adopt a pet to occupy their kids.
What we’ve seen since that time is a lot of rehoming of those pets, so we’re not really loading back up the
shelters. It is very hard to find a shelter pet even today, but there’s rehoming of the pets, so the people that
adopted a pet in 2019 are now rehoming because they’re finding either they’re getting back to their normal
routine, their normal life, having to work away from home or the pet just didn’t acclimate to their house and
their living situation. My forward-looking forecast is that things will get back to pre-COVID. It’ll be a slow
attrition, but I think shopping patterns have changed too. People have become accustomed to not going into a
traditional bricks-and-mortar store, and so you’ll see even suppliers are starting to figure out how to be
successful with these online retailers. Whether it’s the Petco, PetSmart dotcom side of the business, whether
it’s a Walmart.com or whether it’s Amazon, Chewy or others, you’re seeing suppliers focus more on the e-
tailing side of the business as opposed to just exclusively bricks and mortar. Again, that is going to hurt the
Petco, PetSmart, and probably to a lesser degree, independent pet.
[00:13:17]
Q: Is there a formula for assessing the benefit of each pet adopted and what that translates to for pet supply
manufacturer or supplier revenues? How might the impact aggregate over the next few years, even if demand
only grows 1-2%? Is there going to be a new normal in traditional net revenue, given that pets are fed every
day?
SL: Yes, it’s what’s called lifetime value. We all as suppliers or manufacturers, we all take a look at, what’s the
lifetime value of that shopper in terms of what type of animal is it, what products do they use, what price tier
do they buy at, good, better, best, and then how much revenue can we expect over the lifetime of that pet
ownership. Yes, that depends pretty broadly across if they’re buying USD 4 per pound dog food vs, I don’t
know, one leash once a year, one USD 3 leash one time a year, but we do, all manufacturers, look at that as a
data point, which is lifetime value, and I’ll just give you an example. The lifetime value of a dog owner is
greater than the lifetime value of a cat owner because for a dog, you’re going to buy not only food, but you’re
going to buy crates, you’re going to possibly buy apparel, you’re going to buy leashes, you’re going to buy
treats, you’re going to buy all of these other ancillary items, so you’re going to load up the basket over the
course of owning that dog. For a cat, you’re of course going to buy food, and then you might buy treats, but
beyond that, you’re not buying much more on a regular routine basis. For fish, once you buy your fish and set
up your aquarium, your only purchase is potentially a USD 3 container of fish food. There are pets that you
own that drive more revenue than other pets, and so yes, the reality is when we talk, and again, it’s hard for me
to know if you’re just only interested in companion pets, meaning dogs and cats, but if it’s dogs and cats, yes,
we’ve seen a lot of adoptions in 2020.
Like I said, a lot of what’s happening is rehoming, but I think my bias is that we got this influx of new
adoptions, and so there’s immediate need to set up that dog in new homes, so you immediately need things
like a bed, a training crate, dog food, treats, a leash, puppy pads. All of the things that you would need, just like
bringing home a new baby from the hospital, you’ve got to set yourself up. Once you’re set up, then the
purchases would be less moving forward. I do feel like, because of all of the adoptions in 2020, late 2020, you
saw a lot of loading up of all of these new products with new pet owners, and they’re going to get to some level
of normalcy. I would say we’re going to cycle that in 2021, and then by 2022 and early 2023, we’re going to be
looking at pretty standard, pretty normal levels of purchasing of pet products, like we used to see prior to
COVID. I was going to say, the one thing that I don’t want to neglect at least commenting on is, we do know
that birth rates are down and younger people are choosing to have pets, fill their family with pets as opposed
to kids, and so I do feel like pet ownership rates will continue to be +1%, +2%, +3% every year, there will be a
continual increase in pet ownership. I don’t see that going down, and there is a bit of a difference between the
rates of pet ownership vs the pet adoption rate, so that’s an important distinction.
Private and confidential 5
[00:18:11]
Q: Central Garden & Pet’s offerings are so diversified, including fish and other animals. Can you discuss
underserved markets where there is strong opportunity to build a big presence? How hard is it to build out
manufacturing capacity and expertise across so many reptiles and animals?
SL: The big issue with the other small animals, so whether it’s rabbits, chicken, hamsters, guinea pigs, parrots,
fish, lizards, turtles, the reason that that is so difficult is because, I’m an old guy and when we came up, we
didn’t have the computer or the internet, and so that’s how we occupied our time, was by getting and taking
care of a pet. Nowadays, kids are not as interested in owning a pet because they can have a digital pet and
they’re entertained in so many other ways. Truthfully, parents are a little bit more selfish where they don’t
want to have to take care of these small pets because they know that’s what ends up happening, is that the kid
wants the pet, but the parent ends up having to take care of it. Parents are more adverse to bringing small pets
into their home, and then you have kids who are less interested in pets. There are, especially in areas like bird
ownership, in reptile ownership, big marketing efforts underway to re-engage families and kids on the joys of
pet ownership because in those instances, new pet households are down, and so what’s happening there to try
to maintain some level of normalcy is they are doing more premium products. They’re creating cheater packs
for hay or premium foods for rabbits or more engaging in entertaining aquariums to attract kids with lighting
and music and things like that, so for those smaller animal groups outside of dog and cat, so companion
animals, marketers are having to be more creative on how to sustain their business over the longer periods.
That’s why truly, even Central Garden & Pet realises that. They’re super aware of that, that companion pets,
dogs and cats, is really the driving force behind their growth, and the premiumisation and the humanisation of
companion animals is really what is driving all of the growth. The Farnam business, the equine business is
pretty flat. Horse ownership rates are very flat. That’s a very focused group. They’re spending more per
animal, but there are not more animals necessarily. Central is in a bit of a precarious place. Would I have ever
thought two years ago that their stock could be trading at USD 50? No way. I was intimately involved in all
aspects of the planning of that business and pre-COVID, it was a very challenging business. COVID has been a
blessing, not only to Central, but to all of pet and all of retail in general.
[00:22:06]
Q: Could you discuss the pet supply industry’s fragmentation and market structure? There are so many
categories and brands, as you mentioned, but what do you think it takes to be a market leader and stack up
against companies such as Blue Buffalo in the cat and dog category?
SL: First of all, when Blue Buffalo came along, first of all, I’ll tell you, the food drives all activity at all retailers.
They’ve got to get their food assortment and pricing right first because that’s the primary purchase driver for
all pet owners. Knowing that, everything else becomes ancillary and smaller. Once they get their food
assortment curated and optimised and their pricing strategy optimised, then everything else is about loading
up the basket. It’s the brands they choose, what they price them at, where they merchandise them, who they
promote, everything else falls off of the food strategy. That’s really true in every retailer, regardless of whether
it’s a pet speciality-specific retailer or if it’s a traditional food, drug, mass retailer. Once they get their food
right, then it’s treats, because those two things are very routine purchases for a pet owner. Then like I said, all
of the other, and in those two categories specifically, food primarily, treats less, brand leadership is critical.
You see a lot of these big, major companies investing a lot of dollars in innovation and in marketing because
they need to maintain their category leadership, and really, retailers are looking at a couple of things. They’re
looking at how relevant is their brand, what’s their market share. Again, retail stores are not getting bigger, but
retail stores are bringing in more pet products, so retailers are being even more demanding in terms of what
suppliers provide to them in terms of differentiation, innovation, price leadership, margins and value. That’s
why it’s getting harder for these big manufacturers even to maintain their space on the shelves because you’ve
got a lot of people getting into the space.
Private and confidential 6
Again, they’re seeing exactly what you all are seeing, which is, pet is through the roof. Historical gains on pet
products and pet categories. Again, so when I look at the categories, food drives everything, treats is secondary
and brand leadership matters. Beyond that, other than I would argue maybe for toys, there is some brand
leadership in toys, Kong being one of the major toy companies that has brand awareness and brand equity,
Nylabone in long-lasting chews or hard chews. Where there’s brand equity, those brands are fairly safe.
However, there are a lot of private label companies and a lot of retailers who are interested in private label
because of the margin potential. That’s why companies like Central Garden & Pet are always trying to walk the
balance of making their brand relevant and irreplaceable with the consumer. Otherwise, there’s always the
potential from the bottom that a retailer will knock it off as a private label item.
PetSmart is infamous for this. They look at the successful brands on their shelves and they have a very
aggressive strategy to launch private label, comparable items that deliver them a much higher margin, and so
that puts the branded products all at risk. Again, where the brand matters, like on dog food and dog treats,
retailers are less inclined to do that, but where brand doesn’t matter, like on dog bowls, on leashes, on collars,
on bedding, retailers are very comfortable looking at private label options and pursuing private label options
and actually prioritising private label options because the consumer doesn’t care about the brand, and the
retailer is only going to make 30, 40, 50 points on that. Why wouldn’t they launch their own private brand
where they can make 50 margin points? A customer is already in their store for dog food or a customer is
already in their store for dog treats. What do they care if they buy a branded collar or a labelled collar, would
the consumer ever even know? Probably not.
[00:27:43]
Q: Would you point to the highest margins being in toys, bowls and things as such, or is the food and treat
premiumisation margin profile much more attractive?
SL: Definitely in supplies, it’s way more margin accretive. There are higher margins in the supplies side of the
business. I will tell you that for dog food as an example, if you’re a clear brand leader and a retailer wants to
have price leadership, they’ll take the leading brands and make the least margin. If you’re just a fighter brand,
or if you’re a private label, you’re expected to generate greater retailer margins, and so what a buyer will do,
and I was a buyer, is they will mix out their assortment to make sure that if I have to deliver, I’m just making a
number, 40 margin points because I’m responsible for dog food, I might retail my more premium brands, my
high-demand, high-traffic brands at a 30 and my slower-moving, less price-sensitive brands at 50, 60 or 70,
but at the end of the day, once you mix it out, I land on 40 margin points. Retail buyers are always doing that
exercise of, they have to generate a category gross margin, and they’ll use different brands at different price
points to deliver that full category margin. Hopefully, that makes sense.
[00:29:35]
Q: Could you give an update on the US pet supply M&A landscape? Could the pandemic be a consolidation
catalyst?
SL: For sure. Yes, I think this is a super attractive market right now for M&A. I think that manufacturers are
seeing that their values were probably never higher because they’ve had a record year. If you’re going to sell,
now is the time to sell, and I think you could see a lot of folks like yourself and other investor groups who go,
“Pet is really on fire. We want to jump in and be a part of this.” If you’re not intimately in the weeds on what
the drivers are, on why we are where we are, you’re probably going to miss some pretty important things, and
so that’s why, again, I’m cautioning that we’re in an anomaly year. We were last year, and I think we are this
year, and for the most part, we’re going to be in 2022 as well. I really foresee, again, I don’t have a crystal ball,
but I would foresee we’re going to get back to some level of normalcy in 2022-23. I think pet adoption rates,
pet ownership rates, all of that stuff will be fairly flat.
I think what’s going to happen is you’re going to continue to see consolidation because of a lot of the M&A
Private and confidential 7
activity that’s taking place, and what will happen is, as the consolidation happens, as the bigger brands and the
bigger companies get bigger, they’ll start to brand rationalise. They’ll realise that, “I already own two brands. I
bought two more over the last 2-3 years. I can’t sustain and build critical mass over four brands,” so they will
start to prioritise. It’s this attrition that happens naturally in the industry which is, when it’s good, everybody
wants it, and I’m in CBD right now, which is this is exactly what’s happening in the CBD category, everybody
jumps in because there’s money to be made, but over time, that money that was to be made, starts to be
normalised, and that’s in your historicals and you can’t cycle it. Then people start to panic and go, “Now, I
need to get out.” That’s the cycle that just exists in consumer packaged goods. I’ve been doing it for over 30
years and I’ve seen it time and time again repeat itself. There are different causals, there are different drivers
of why that happens, and in this particular instance, COVID has made that happen, and I would say COVID,
probably more so than anything I’ve seen in the past. We all know that in the ’90s, the Walmart factor or in
2000s, the club factor or the dollar factor in the early 2000s, there are big pivotal things that are happening
that cause the industries to change. COVID was definitely one of them.
[00:32:50]
Q: What role has Central Garden & Pet played in market consolidation? How has it built a business of brands
and assisted that? Might it be over-saturated with the amount of brands it has? How does its new USD 400m
capital raise plans affect the consolidation trend?
SL: My opinion of Central Garden & Pet, and again, this is my opinion from being intimately involved pre-
COVID was, it was a struggling business. It was a struggling business. For the most part, Central is a big
player, but they don’t have any leading brand. You could argue that Nylabone, out of all of the brands under
their house of brands, you could argue that Nylabone is probably the strongest brand with the strongest
awareness and equity, and even that isn’t a top brand. Truth be told, one of the biggest struggles with Central
Garden & Pet is that they are not leading brands nor do they offer price leadership, they’re what you call a
mid-tier brand. Those generally, the mid-tier brands, when you look at good, better, best brands, the best
brands, retailers keep on the shelf because they drive generally innovation, interest and traffic. The good
brands show price leadership. The mid-tier brands really find it difficult to find a point of difference, and so
they’re always teetering between trying to bring innovation, but it really doesn’t matter because they’re not the
brands that consumers are looking for. The good brands, Central doesn’t have the price-leadership brands
because they have a very costly infrastructure, and so they really can’t beat some of these lower-cost operators
and offer the best value to retailers. Central Garden & Pet is challenged a bit by not having clear brand
leadership in the categories that they compete in, and that really had hindered them, and that’s the reason you
saw the stocks struggling so significantly, really prior to Q4 of 2019.
It’s a tale of two cities. They absolutely have benefited from COVID, and so their challenge is that they’re not
known for innovation. Their challenge is that they are way more heavily invested in bricks and mortar than
they are in online and e-tailing, and that’s a detriment to them, because remember, when you’re already
invested in bricks and mortar and they sense that you’re shifting your priority or your focus away from bricks
and mortar to online, you’re going to get punished. Companies like Petco and PetSmart, where Central Garden
& Pet is the leading supplier to both of those retailers, when PetSmart and Petco feel that your focus is not on
them and it’s on Amazon or Chewy, you’re going to get penalised, you just are. They, more than some other
suppliers who can hide in the woodwork, Central Garden & Pet will not be able to hide in the woodwork, and
actually, the traditional bricks-and-mortar retailers, where they are so invested, the more success online
retailers have, the more desperate the bricks-and-mortar retailers become and the ask of Central Garden & Pet
will get greater. In other words, they’re going to come to Central Garden & Pet, meaning PetSmart and Petco,
independent pet, even traditional FDM, is going to come Central Garden & Pet and they’re going to say, “I now
have to shop for my customers, Amazon doesn’t have to do that or Chewy doesn’t have to do that. I have to put
people shopping the store and then delivering product into the back seat of their vehicle or into their trunk,
those are all additional costs that me as a retailer, I have to bear. I need more money from you, Central Garden
& Pet, to pay for it because you’re benefiting from it.”
Again, you can just see it’s already happened, these bricks-and-mortar retailers are asking more and more
from manufacturers, and manufacturers like Central Garden & Pet are having to make very calculated
Private and confidential 8
decisions. Do I continue to invest invest, focus and overinvest in bricks and mortar, who are losing traffic, or
do I pivot and my focus, energy and efforts becomes more on Amazon and Chewy and e-tailing primarily, but
then I do that at my own peril? Like I just said, the more I focus on e-tailing as Central Garden & Pet, the more
they run the risk of getting sideways with traditional bricks and mortar. It’s always this dance of strategy vs
execution, and so that was a long way to go to say, I think Central, because they don’t have leading brands,
they’re in this really awkward position of retailers could make a decision to whack their brands. It happened
all the time when I was there prior to 2019. There were a lot of brands that Central Garden & Pet had
distribution on, that were being pulled of the shelves, and again, that’s why I would say, do your due diligence
into the company prior to COVID because it was a very different story, and then do it post-COVID because it’s
been really a windfall for them. Then I would tell you, the one thing I do know is that even when I was there in
2019, there was a USD 500m fund for M&A.
Unfortunately, at that time, and again, this is just absolutely my opinion, Central Garden & Pet has a history of
not buying anything unless they can get it at bankruptcy rates, and so the acquisitions that were made, yes,
they were accretive and yes, there was money and revenue to be made year one as they optimised that business
or integrated it and optimised it. What happened is that, in general, it wasn’t sustainable. They didn’t invest to
the degree that they would take that business that they acquired, invest in it over in a long term. There was a
reason that business wasn’t successful. There was a reason that Central got it for bankruptcy or pennies on the
dollar. What needed to happen was best practices needed to be instilled or deployed onto that new business,
because it wasn’t, they never really mushroomed to their full potential, and you see that over and over again
previously with DMC or Segrest or some of the other businesses that Central Garden & Pet had purchased.
They always had money to do M&A, they sat on a USD 500m fund in 2019. They went and bought bankrupt or
close-to-bankrupt companies. They never really turned that into anything overly profitable nor did they ever
really take a leadership position in any category, which is what really they should have done. I do know now
that they have another USD 400m that they have plans to do the same type of M&A. What I don’t know is if
their approach to M&A will change at all.
My bias, and again, this is my bias, is that their leadership team is generally not playing to be brand leaders in
anything. They are a company with its origin in distribution, and so they’re primarily focused not on
marketing and brand leadership, but they’re focused on breadth of distribution. Again, Central Garden & Pet,
when you think about Central Garden & Pet, yes, it’s garden, yes, it’s pet, but we can never forget that a big
driver of that revenue is the distribution of pet products to retail. Their distribution business is a major driver
to their overall business, it’s not the house of brands exclusively. It’s the combination of the two. The fact that
they have brands and the fact that they’re a major distributor to retailer of Central brands as well as
competitor brands.
[00:41:59]
Q: What are your thoughts on Central Garden & Pet as a takeover target, especially for a player aiming to
enter the industry, perhaps Amazon, who has extensive distribution capabilities but would like a significant
private label presence?
SL: I think it’s ripe for a takeover, because again, my opinion, and I am very biased, I come from big consumer
products companies like Kimberly-Clark and Henkel, and I use them as best-in-class, and then I look at
Central Garden & Pet, and they are absolutely ripe for some best practice to be interjected into that operation.
They’re still operating as though it’s the 1990s and they’ve got new leadership, but they’ve also got, at the head
of the stern, the exact same person. I’m not sure if they’re capable of getting out of their own way, as is. I think
they’re primed. Because they have scale, because they have connectivity to retail, because they’re diverse, they
have a house of brands, they have a distribution business, they have a pet and a garden business. They’re very,
very diverse, which I think is an advantage, but the problem with Central Garden & Pet is that they don’t
leverage that diversity and that scalability and that breadth of assortment. Somebody coming in from the
outside could leverage that, where I don’t think Central Garden & Pet can get out of their own way to do that.
They operate like a bunch of independent small businesses, and it creates complexity for retailers who they’re
so dependent upon because they have to deal with whole different buying groups, whole different operations
side of the business, for the exact same company. I think that somebody who understood where there are
Private and confidential 9
synergies to streamline that operation, if they came in and took over Central Garden & Pet, I do think that the
sky is the limit for them, because then they could start investing in brand building, they could prioritise
different parts of the business, not working on everything at the same time, but prioritise parts of the business.
They could see what’s profitable, what isn’t profitable, divest the unprofitable, but also have money to invest in
growth areas. One of the areas specifically is e-comm. They’re completely understaffed and under-talented,
under-resourced in being able to accommodate where retailing is going. They’re really good at where retail has
been. They’re not good at all in where retail is going, and I do think Tim Cofer brings some of that big, best
practice, CPG expertise to his role, but again, yes, he’s the CEO, but he’s not a traditional CEO and he has
complete latitude to make all of the calls and call all of the shots.
[00:45:31]
Q: Where do you think Central Garden & Pet would fit in a roll-up into a much larger company, considering
the strength of its distribution? Do you think it fits better with a retailer such as Petco, PetSmart or Walmart,
or with a pure play e-commerce company such as Amazon?
SL: I think it’s not either, or, I think they have to do both, but to differing degrees. Meaning, they’re currently
extremely entrenched in traditional bricks and mortar, primarily pet speciality and independent pet, that’s
where their strength lies. However, that’s a dying channel. Pet speciality mostly and independent pet partially,
that’s a dying channel. One of the things that we’ve been talking about, especially prior to COVID was either
Petco or PetSmart are going to go away. Those two businesses, there are just not enough customers any more
to sustain both, that’s why they’re both private equity-owned. I think they’re both targets right now. I think
there’s been talk for five years about them merging or one being purchased by another. For me, Central
Garden & Pet needs to ride the pet speciality horse into the sunset, so don’t walk away from it, but manage the
decline. I think what we’re seeing is traditional food, drug and mass, the Walmarts, the Targets, the Krogers,
the Safeways, the Albertsons, the Walgreens, the Family Dollars, I do think that Central Garden & Pet is nicely
positioned to take a disproportionate share of that business, but it needs better strategy, it needs to be a part of
their focus and it needs expertise. As long as they’re focused on protecting pet speciality, a declining channel,
they’ll never fully optimise traditional food, drug and mass. I think that when you just talk bricks and mortar,
that would be my strong suggestion, is you ride pet speciality into the sunset, don’t walk away from it
completely, manage the decline as best you can, but really have a concentrated focus on, how do we become
more relevant and bigger players where consumers are buying their pet products?
Then, I would say, while you’re managing your bricks-and-mortar channels, then you go, “What is it going to
take to win online?” We do know that for the most part, people who go online are primarily looking for either
food, the convenience of food being delivered on a regular and routine basis or they’re looking for high-ticket
items like crates and pet beds and apparel, and not the cheaper stuff. Those are basket fillers. To me, Central
Garden & Pet should have an e-comm strategy that is aligned to their corporate strategy, but they should think
about how they’re going to prioritise bricks and mortar vs e-comm and not have all their eggs in either, or, but
really be working strategically to have both be successful. Hopefully, that answers your question.
[00:49:21]
Q: Where do you think Central Garden & Pet should innovate across the categories it already operates in,
particularly dog and cat? Should it only innovate its e-commerce and distribution capabilities? Where is the
opportunity to innovate new products?
SL: I will tell you this, my belief of Central Garden & Pet is they will never be amazingly relevant for retailers
until they get into, in a big way, dog food or cat litter. If it was me, again I think they squandered what could
have been a strong dog food business, they had Breeder’s Choice, Pinnacle and AvoDerm, but they never
invested to the degree in their dog food business, to where they became big enough and relevant enough. They
ultimately sold that part of the business off, but as I talked about on the front end, dog food really drives the
Private and confidential 10
pet category. It just does. It’s very expensive to compete in dog food but again, it’s where all of the dollars are
and it’s what drives the category. As an example, if they had a strong dog food brand, then there’s immediate
relevance for all of the other ancillary dog supplies that they provide. Those are all basket fillers. They become
a one-stop shop, but as long as they’re not providing dog food, and really they don’t have a strong dog treat
business. You could argue that Cadet is somewhat relevant, but they’re not building that out. Most people
don’t know of the Cadet brand. They’re not marketing experts, Central Garden & Pet are not marketers at all,
they’re distributors, and so, yes, they own Cadet, yes, it’s a priced treat brand, yes, it’s sold by Costco, but the
consumer probably and likely has never heard of Cadet. The only reason they’re picking up Cadet off the shelf
is because they find it in Costco or because they happen to walk by and meet the cheapest thing hanging on the
shelf at Kroger.
To me, if Central Garden & Pet really wants to innovate and grow, it’s one thing to innovate, to innovate for the
sake of innovation is not going to do it because you’ve got to let consumers know you’ve innovated. You’ve got
to let retailers and consumers know that you’ve innovated, and I will tell you the one weakness of Central
Garden & Pet is they are not marketers of brands. They do not build brands, where you look at big best
practice companies like Blue as an example, there is nothing novel about Blue. Blue is just another natural dog
food, but you know what? They realised the importance of branding, realised the importance of consumer
marketing, national marketing, regional marketing, customer marketing, and they blew that business up to
where nobody had been before. Again, I would say that the reason Central is ripe as an acquisition target is
because there are some things they do well, but there’s a lot they don’t do well, that somebody who knew what
it took to be successful could come in, identify and fix.
To me, the way Central becomes relevant is own the dog food or a cat litter, but then you have to build that
brand, either it’s already an existing number one or number two or number three brand or they have the
marketing chops to make it a top brand, and then they continue to innovate and market that innovation and
become thought leaders in the space. So that not only do retailers recognise them as a leader, but also the
consumer recognises their brand as a must-have brand. Again, I’m not telling anybody anything that they
don’t already know because this exists in every other human category today. Think about it in canned juice,
canned vegetable, cookies, yoghurt. You’ve got to make yourself an amazingly relative brand. Think of how
many brands have come along in yoghurt alone, that have tried to find space on the shelf, only to be crushed
by the Yoplaits and the Chobanis and the other leaders, it’s the same thing in pet.
[00:54:36]
Q: What might be Central Garden & Pet’s rationale for operating in the garden and pet business lines? They
seem fairly distinct, but are there synergies? What are your thoughts on playing in both fields?
SL: I think again, because Central Garden & Pet’s foundation is as a distribution company, back in the ’80s
and ’90s, they cobbled together this group of brands that ultimately they ended up integrating into the larger
Central Garden & Pet business model. That’s really the inception of why garden and pet, and yes, they were
heavily steeped in farm ag, traditional hardware, independent pet where the dog food back then in the ’80s
was Ol’ Roy, and then all of a sudden in the ’90s, Petco and PetSmart came along and they really upgraded that
whole pet shopping experience, so that really is the reason. If you look back at Central Garden & Pet’s history,
they were a distribution company, not really connected to food, drug, mass, and they were primarily connected
to equine, to farm and sleep, to hardware, to the home improvement shops, and in those shops, think about it,
even today, if you go into an Ace Hardware or a True Value, you’re going to find garden products and you’re
going to find pet products, and that’s how all of that originally formulated. It was to serve that customer base.
Then what happened over time is, just like what happened in pet, the home improvement trend in the ’90s
really benefited Central Garden & Pet, and then they started adding on additional brands and became more
and more relevant. Again, because their expertise is not marketing, because they don’t invest to the degree
that’s necessary to be a brand leader, they always are a second or third-tier brand, in any of the categories that
they compete in.
They just are not willing and not able to invest to the degree of others who want to be a brand leader, and I
don’t know that they know what that takes to be a brand leader. Number one, I’m not sure they know what it
Private and confidential 11
takes to be a brand leader or how to get to be a brand leader, so I think that’s their biggest challenge on the
garden side as it is on the pet side. The garden team, I feel that the garden team and I know them pretty well,
they have a much better-run leadership team on the garden side than they do on the pet side. Pet, like I said, a
flip way to say it is, the pet side of the business had a foot in the grave and the other on a banana peel. Thank
goodness for them for COVID, because as Petco and PetSmart struggled pre-COVID, more and more of
Central Garden & Pet’s business was at risk, and it was a very, very slippery slope. They were overinvested in a
declining channel, hadn’t made much progress at all in traditional FDM bricks-and-mortar, and were not at all
equipped for e-tailing, and then COVID happened and it really bought them time. They were forced to learn
things they didn’t know and they fortunately benefited because of such significant interest in pets and pet
ownership across the board, and that helped them both on the, again I’m going to say the same thing which is,
that really helped them, again let’s not forget, it helped them on their branded side of the business. All of those
other retailers who got this halo benefit in this windfall of pet ownership had to buy pet supplies, and Central
Garden & Pet is one of the biggest pet supplies distributors in the country. Not only did Central Garden & Pet
benefit on the branded side of the house, but they benefited significantly on the distribution, pet distribution
side of the house.
[00:59:25]
NH: We’re just about out of time, so we’ll end our Interview there, but let me close by saying, thank you, Scott,
for your input. It was a really, really interesting Interview. I’m sure clients will be pleased with all the
knowledge you had to say today and the perspective you gave. Thank you, clients, for joining Third Bridge
Forum’s Interview today. If you’d like to speak to Scott in a private call or meeting, please let your relationship
manager know. Goodbye.
SL: Thank you. Bye-bye.
Transcription ends at 00:59:50 of the recorded material.
Private and confidential 12