Spectrum Brands – Retailer Strategy & Household
Consumer Update – 12 May 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Brad Jeffrey (BJ)
Former Senior Director, Sales & Team Leader, Target at Spectrum Brands Holdings Inc
Agenda:
1. Spectrum Brands' (NYSE: SPB) retailer relationships and shifting operating environment
2. Consumer trends across household, home appliances and personal care
3. Global Pet Care unit overview
4. Vertically integrated segments' efficiencies streamline
5. Strategic outlook for portfolio
Contents
Q: Could you give us an overview of the home appliances and pet care industry? What are the main
categories and drivers, and who are the top players?
Q: How would you compare market trends pre-coronavirus and now? Were some pet suppliers struggling
even in an already fragmented market?
Q: Why would a typical CPG company want to enter the pet industry, given the category is already highly
competitive?
Q: Could you outline Spectrum Brands and the different categories it operates in? The business is very
diversified. What are your thoughts on Spectrum playing in so many unique markets?
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Q: Did you note typical integration risks with Spectrum’s acquisitions while you were at the company? What
are your thoughts on its strategy of buying a lot before selling?
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Q: What are your thoughts on the performance of Spectrum’s home and personal care divisions? These
categories have benefited from the recent stay-at-home trend. How would you compare the company’s
performance to the wider industry’s? Is it sufficiently capitalising on this short-term trend, or do the
numbers look good but you think it is underperforming compared to other players?
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Q: Where do you think Spectrum has prioritised innovation, given how diversified the business is? You
mentioned a lack of innovation during your time at the company. Which groups within it are most
important?
Q: Could you discuss any supply chain disruptions you’ve noticed? I recall there were some disruptions
when coronavirus hit. Are most of the disrupted products manufactured overseas in countries that were
subject to political risk?
Q: What’s your overview of the retailer-manufacturer relationship and how it has evolved?
Q: Do you think retailers are demanding more from CPG companies and suppliers? How is the shift to e-
commerce impacting that relationship?
Q: How do retailers react when a company such as Spectrum initiates a D2C approach? Obviously, it would
still need exposure to Walmart and other large retailers, but do large retailers think Spectrum should be
selling through them?
Q: How does private label play into the dynamics you just mentioned, where retailers are demanding more,
but are also switching out products directly competing with some of their third-party suppliers?
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Q: Could you discuss brand loyalty among Spectrum’s products or divisions? Do you think many consumers
of the company’s products are driven purely by pricing, or is quality just as important?
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Q: What are retailers and manufacturers at CPG companies doing to fend off the threat of high discounting
and very competitive pricing? The prices at retailers such as Best Buy are almost 2-3x Amazon’s prices for a
product such as an HDMI cable.
Q: You mentioned that higher-margin products provide some type of insulation from retailers entering the
market through private label. Could you elaborate on which categories or products you think are higher
margin and where barriers are slightly higher in that liability aspect?
Q: What do you think is Spectrum’s appetite for further acquisitions and deals within its divisions? Could
any of its business clients be the next to go?
Q: What’s your assessment on Spectrum as a global company, given you touched on imports and the
competitive pressure from China? Are there any markets you think the company has dropped the ball on by
not penetrating? How could it fend off competition from a country such as China, given what players there
can achieve with pricing and imports?
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Q: What disadvantages has Spectrum had in the pet care segment? You mentioned the company has a few
strong brands and is doing fairly well.
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Q: Could you elaborate on the fragmentation throughout specific pet care categories? You mentioned
aquatics, which was a stronghold for Spectrum, but are its cat foods more consolidated than its dog foods?
Do you think all of these segments are fragmented?
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Q: Could you elaborate on the margin profile between pet care categories? Which specific segments seem an
attractive place for Spectrum or other companies to further expand in?
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Q: Why would Spectrum jump into inconsistent categories that have higher operating costs and are not
performing or growing as well? Do you think it would make more sense to pick one pet care segment, scale
the business and make it as efficient as possible?
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Spectrum Brands – Retailer Strategy & Household
Consumer Update
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Spectrum Brands – Retailer Strategy & Household
Consumer Update. I am Nyree Hinton and I’ll be facilitating today’s Interview with Mr Brad Jeffrey, former
Senior Director of Sales and Team Leader, Target, at Spectrum Brands Holdings.
Brad, before we get started 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.
BJ: I agree.
NH: Thanks, Brad. Could you start by giving the audience an overview of your background and various roles
you’ve held in the industry?
BJ: I’m Brad Jeffrey. I am the Director of Sales for Bona US, which is a cleaning and wood-floor company. I’ve
been with them for almost four years. I’ve been in retail since I was 17 years old, so almost 35-plus years, and
really been in CPG since I graduated from college, going from Solo Cup Company, to Coca-Cola, to Reckitt
Benckiser, Spectrum Brands, normally 4-6 years at each company. I’ve managed the largest teams in really
most companies, whether it’s a Reckitt, managing the largest desks at Walmart in the world, and then also the
same as some of the other companies. At Spectrum Brands, the pet division was the biggest desk in the world
at Pet Walmart. I’ve got category management experience, trade promotion experience and several senior
leadership roles at different companies.
[00:02:07]
Q: Could you give us an overview of the home appliances and pet care industry? What are the main categories
and drivers, and who are the top players?
BJ: Pet is very fragmented. It’s a growing industry. Last year was a banner year in pet. Spectrum is a fairly
significant player in there. You’ve got Hartz, obviously a very big player. It depends on what category you’re
looking at, because there are several dog food brands that have really emerged with a lot of the premium dog
foods that have been introduced. I can’t even run through all of them. Obviously, Purina is another big player
in the food side of things. When it comes to hard goods, meaning anything from dog leashes to litter pans or
bird cages, you have a plethora of smaller companies that usually have a very low overhead and they can
import very easily. There are literally thousands of different brands in the pet side of things. The food side of
things tends to be more consolidated with the bigger brands, but there are a lot of more boutique or premium
brands that have been merged over the course of the last, probably, 5-10 years.
From the appliance side of things, there are, kind of the same thing. You have several people that have made
some decent inroads. We’ve got a Conair, which is a very large supplier in the personal care. You’ve got
SharkNinja has been a very big winner in that space, whether it’s blenders or toaster ovens. They have made
significant strides recently in being a mid-tier and premium brand, and then you’ve got Hamilton Beach that is
obviously a big player in that industry as well, and Spectrum has been pretty decent. You’ve got some other
brands that have emerged recently. I think there was a Bella brand that I think now has gone into a, it’s not
Simple Choice, but it’s basically a Target brand and Walmart has it as well, but several people, and that barrier
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to entry into the home appliance sector has been relatively low, because it becomes really a cost and margin
play for a lot of the retailers. They, a lot of times, will look for the same features and benefits, and look to
where they can get the best costing on similar features and benefits.
Like I said, 2020, with COVID and stay-at-home, and people working from home and kids being at home has
been very beneficial in some categories, and then in other categories not so much, from what I’ve seen.
Personal grooming, a lot of people have grown their hair out, and beards and not necessarily, even the beauty
industry definitely took a hit, because people aren’t really leaving the home that often. That was a challenge
across that sector. Then conversely, in home appliances it was a banner year, because people were trying and
cooking at home significantly more, and trying new appliances, whether it be air fryers, or some of the Instant
Pot-type items, some premium fast-grilling or toaster ovens, and even take a look across the board, and almost
everything did pretty well in that business. Then in pet, the business, again, exploded. Same reason, pet
acquisition was at an all-time high with people staying at home. That business is on a very healthy trend for
the foreseeable future, because pets stick around for quite a while.
[00:07:20]
Q: How would you compare market trends pre-coronavirus and now? Were some pet suppliers struggling
even in an already fragmented market?
BJ: Some of the premium brands were doing very well. I know there has been a lot of acquisition. That seems
to be what happens in pet, where you’ve got a decent brand that takes off, and then they get acquired by one of
the bigger guys that didn’t have the innovation pipeline. I know that I believe Spectrum made an acquisition
that was along those very lines, where rawhide was falling out of favour because of the consumer backlash on
rawhide. DreamBone was a brand. I think it was PetMatrix I believe, that own that brand, and they had a
rawhide alternative that was very appealing to the market, because it was a vegetable-based product and was
gaining significant traction in not only the marketplace but with consumers, as an alternative to rawhide. Pet
had always been doing pretty well. The trajectory on pet was nice growth, mid to high single-digit growth in
the categories. There were certain categories that were certainly declining or having more challenges. Aquatics
was one that was having a bit of a challenge, and bird acquisition was also down, because people just weren’t
purchasing birds, and a lot of birds, some of the bigger ones, can last 30-40 years. That particular category was
a little soft, but the dog and cat markets had always been very strong.
[00:09:47]
Q: Why would a typical CPG company want to enter the pet industry, given the category is already highly
competitive?
BJ: As far as why getting into pet, it’s huge, it’s a massive category. It has steady growth. People are waiting to
have families longer, or waiting to get married longer, but they’ll get a pet sometimes right out of college. From
a market standpoint it’s very stable, and also the way that consumers look at, say a lot of them call them their
pet kids, because they spend as much, some of these consumers spend as much money on their pets as they do
their children. They celebrate their birthdays. They buy them costumes for Halloween. There’s a lot of
disposable income that is associated with the pet market, and at the same time, it’s not highly regulated, so the
barriers to entry are not substantial. You may find a company. I don’t know if anybody has been to the Pet
Expo, but there are literally thousands of companies that are out there that have good innovation that they can
acquire, and there’s not a massive acquisition cost. If they see some innovation that they think there’s a lot of
potential behind it, it’s easy to make an acquisition, because there’s usually not a lot of overhead that is
associated with some of those smaller, innovative-type companies in that pet industry.
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[00:12:17]
Q: Could you outline Spectrum Brands and the different categories it operates in? The business is very
diversified. What are your thoughts on Spectrum playing in so many unique markets?
BJ: Spectrum is always interesting. I came to them from some other bigger and smaller companies. They tend
to be very much an acquisition-based company as I was mentioning, where some of these people grow through
a lot of their own innovation. Others grow by finding good brands and folding them into their operations and
getting some synergies and trying to strip out some costs when they make that acquisition, whether it’s a
synergistic sales force or finance or IT. There are several savings that they can make on that front.
They just shed the auto care business as I understand, and the battery business recently. I know they were
looking to shed a lot of the home appliance and/or the personal grooming categories. They’ve got their home
and garden business, which is doing, I think, very well. The pet is part of pet, home and garden. They may
have spun that off, if I read right, to be a little bit separated, and then they have the HHI, which is the home
hardware and locksets and that business, and then Armor All, they shed that business. Then I think they just
recently made an acquisition of Rejuvenate, which is actually a competitor of mine today in the floor-care
segment, which I thought was somewhat interesting because it doesn’t really fit with their core products, but
I’ve seen them do that before, like when they acquired Armor All years ago. They don’t always stick to their
expertise. They sometimes will purchase a good company, or what they feel has a potential to continue to
grow, and maybe they need an influx of cash or some other factors that made them a target for acquisition.
[00:15:35]
Q: Did you note typical integration risks with Spectrum’s acquisitions while you were at the company? What
are your thoughts on its strategy of buying a lot before selling?
BJ: Yes. I always thought it was a little interesting. I couldn’t tell personally if it was just that we needed to get
some more revenue here, but their acquisition strategy was somewhat interesting. They even put it in their
annual reports more than once, that I’ve seen, where they say, “A loss of management may affect our ongoing
operations or growth, or strategic direction,” and they didn’t tend to keep the talent that they acquired. It
seemed to be more of a, “Let’s fold this into our operations and we’ll pick the people that we like, and then the
rest, we’ll find a way to exit,” and I thought they maybe lost some expertise on that front when that happened,
but they do put it in their report, which I find interesting.
[00:17:17]
Q: What are your thoughts on the performance of Spectrum’s home and personal care divisions? These
categories have benefited from the recent stay-at-home trend. How would you compare the company’s
performance to the wider industry’s? Is it sufficiently capitalising on this short-term trend, or do the numbers
look good but you think it is underperforming compared to other players?
BJ: I think they’re underperforming vs the segments, and the innovation was too slow. They didn’t heavily
invest. I think they had decent innovation teams. I believe, and I’m guessing they still have a China-based
team over there that works with all the different suppliers that they procure from, but a lot of times they
weren’t quick enough to hop on a trend, whether it’s the air fryers or the Instant Pots, and they spent too much
time thinking about it and not enough time moving on it. They’ve really had a hard time getting, especially
with their Black+Decker brand, that was a licensed brand that put them at a bit of a disadvantage because of
the licensing fee, because it’s a very low, it’s all about dollars and very low margin, and having that innovation
pipeline to be successful in that space, as well as being able to hit those mid-tier and top-tier price points like
SharkNinja has been able to do, and develop some really premium products that are trusted. It seems like the
Black+Decker brand laid in that opening price point sector and there’s so much competition and a lot of the
retailers can procure those things direct import themselves on special-buy-type programmes, or whether it’s
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for a holiday or for back-to-school or whatever those key periods are.
It put them at a competitive disadvantage at times, and really in the coffee industry in particular, really
evolved into more of a premium market. It couldn’t establish a strong footing there, whether it’s with the K
Cup advent or some of the premium Nespressos and items that entered that market that are probably 4-10
times what an average Black+Decker coffee maker might cost at retail. On the personal care side, it was kind of
the same thing. You had a lot of people, same thing, where you’ve got Chi and some of the Revlon brands that
came with more premium products, and it wasn’t that the performance of the products, say the Remington
products, wasn’t there. It was the price perception that people would pay for those particular brands. They had
some really great premium products, it just couldn’t get there from a retail perspective on the premium side.
[00:21:50]
Q: Where do you think Spectrum has prioritised innovation, given how diversified the business is? You
mentioned a lack of innovation during your time at the company. Which groups within it are most important?
BJ: I thought honestly, when I joined, I worked at pet. I thought pet was very innovative and they seemed to
move rather quickly. They were on trend and I thought they did a nice job of procuring. They folded, they
collapsed several divisions shortly after I joined the company, and I think, of the pet people, there were 80
internally and maybe two or three stayed. They lost a lot of, it’s the same way that acquisition, they lose a lot of
their talent and then they’re restarting the clock with either new people, or trying to get their existing people to
learn new categories, and that takes time, and then the R&D. Sometimes, they could have just taken
something straight from China and packaged it up and sold it, and instead they’d be making tweaks or maybe
doing something that took too long, and you might have had three or four competitors beat you to the punch,
and by the time you get to market it’s just a little too late. I’m not saying you can’t sell it, but it’s mostly the
market. Especially in the appliance category. That thing is innovative, and people buy things and then it’s onto
the next. It’s what’s new in that appliance category? You have to be moving rather quickly, and also taking
costs out of your current products so that you make sure that you’re keeping your costs the same, but adding
benefits. What I meant to say is you’ve got to, whether it be simple things, like an automatic timer or
automatic shut-off, or just some simple things that maybe weren’t done or were considered, and then they got
displaced because of somebody that has a very similar coffee maker with just a couple of extra bells and
whistles that replace your SKU.
[00:24:48]
Q: Could you discuss any supply chain disruptions you’ve noticed? I recall there were some disruptions when
coronavirus hit. Are most of the disrupted products manufactured overseas in countries that were subject to
political risk?
BJ: Yes, and I think that on the pet side, at least what I remember, most of what they would purchase
inherently had some production built into it, meaning they were buying factories. They were buying
production capabilities along with the brands, and I thought that was well done at the time, and that’s where I
think they still have some competitive advantage with some of the acquisitions that they’ve made there. On the
appliance side and on the grooming side, all that’s imported. You’re playing an importer’s game at that point
and there are, obviously, tariffs that have had an impact, and what becomes of those tariffs, which could be a
challenge moving forward, as well as any service disruptions or shutdowns of factories. Those are certainly
challenging. The home and garden side, I don’t know if you’d want to talk to home and garden. It seems they
did, that the business has been doing very well. They had some of their own manufacturing and filling
capabilities on that side. Their demand really has gone through the roof. Really, the Roundup Monsanto issue,
they benefited greatly from that, with the cancer scare and a lot of things that were associated with Roundup.
That was very beneficial for their business. They did have some supply challenges. I see some supply
challenges on the shelf still, where they have some fill rate issues, and the demand, same thing with COVID.
People are spending a lot more time taking care of their homes and their lawns and planting gardens, growing
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their own gardens. They did very well on that, but I do think they still have some supply challenges on that
front.
[00:27:47]
Q: What’s your overview of the retailer-manufacturer relationship and how it has evolved?
BJ: I think they used to have pretty strong relationships, at least when I started with them. They had a lot of
people that had been there, I’d say, a fairly long time. There’s been a lot of churn with their upper management
and with their, even, middle management. I know they’ve gone through several, I don’t know what you want to
call them, downsizing, right-sizings, management shifts. The lack of consistency, I think, has made it
challenging for them to get seats at the table. When I was at Pet at Walmart, we had very high-level and strong
relationships with Walmart and we had regular meetings with their entire team, and I don’t know where it’s at
today with those folks, but like I said, I know there’s been a lot of disruption in the management structure
there, which makes it challenging. I wouldn’t say they’re in the best position from a senior-level engagement.
[00:29:29]
Q: Do you think retailers are demanding more from CPG companies and suppliers? How is the shift to e-
commerce impacting that relationship?
BJ: I would say definitely more demanding. I know the margin asks for the retailers were continuing to grow,
and that’s really across the board, not necessarily specific to their categories that Spectrum plays in, but, yes,
they’re under a lot of pressure because of the growth in e-commerce and the cost associated with taking care of
that customer. The expectations of Amazon are, they expect them to grow, but the margin expectations of
Amazon really put brick-and-mortar in a difficult position, because Amazon operates on 1% or 2% margins
and these other guys are high single digits or sometimes even better than that, and any time, every sale they
make in e-commerce, a lot of times they’re losing money. They’ve got to find ways to either increase their
margins or ask more of the suppliers from a support standpoint, whether it’s advertising dollars or programme
costs. You’ve got people charging warehouse allowances, lotting allowances that used to be more associated
with distributors and/or wholesalers and grocery, and now you’re starting to see that enter really almost
everything, whether it’s Target, a Walmart, you name it. They’re just constantly asking for more money.
[00:31:56]
Q: How do retailers react when a company such as Spectrum initiates a D2C approach? Obviously, it would
still need exposure to Walmart and other large retailers, but do large retailers think Spectrum should be
selling through them?
BJ: Overall I see it, we try, at my current company we had a direct-to-consumer, where we sold through our
website, and it’s a losing proposition. We ended up jettisoning that business because it just wasn’t worth it,
and we really didn’t have a lot of retailer backlash per se, but we’re small, so that wasn’t unexpected, but it can
be a problem. I know P&G has tried several things, but they’re not always in the best position with retailers
anyway, because P&G does whatever they want, but for some of the smaller to mid-sized companies, it can
cause a problem and especially e-commerce becomes a problem on highly-promoted products, such as
appliances, because people are always dropping the price to get sales, because that’s been the history of those
products, and what it ends up doing is, a minimum advertised selling price becomes almost everyday price. It
puts more and more margin pressure on the retailers, and why Amazon has the crap that can’t realise the
profit mechanism where they just shut your items off, so then people would try to develop SKU-specific items
for different channels, but Amazon algorithms pick up on that now. That strategy worked for a couple of years
but it’s quickly fading. It becomes a challenge to manage that business. We’re lucky in that we don’t earn a
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highly-promoted category that I’m in today, so it’s not near the challenge, but at Spectrum it seemed like I
fought four days a week at trying to fix retailers on e-commerce.
[00:35:08]
Q: How does private label play into the dynamics you just mentioned, where retailers are demanding
more, but are also switching out products directly competing with some of their third-party suppliers?
BJ: Yes, especially in the appliance business it’s very challenging, because they have almost access to the same
products that a Spectrum or Hamilton Beach or whoever would have, unless they have their own proprietary
factories or their own factories. They can access very similar products with a very similar look and feel, and do
it much more efficiently, because, let’s say Walmart. Walmart has got a buying team that, that’s all they do.
They go to China and see what the next great coffee maker looks like and, “I can sell that thing for USD 10 vs
USD 20,” because they just don’t have the overhead. It certainly puts a lot of pressure on the lower-tier brands,
for sure. The higher-end products, they tend to be a little, meaning the retailers, tend to shy away from those
more, because that’s not their expertise. They don’t want the liability. In that space, private label is not much
of a threat, but it definitely is in the lower-end products.
[00:37:12]
Q: Could you discuss brand loyalty among Spectrum’s products or divisions? Do you think many consumers of
the company’s products are driven purely by pricing, or is quality just as important?
BJ: I think their quality is a consideration, but it’s highly price-point driven, and especially in a coffee maker,
if somebody’s coffee maker goes on the blink, they might look at ads real quick, but they’re normally going to
the store and buying a coffee maker. In those instances, where it’s an immediate need, the pricing isn’t such a
consideration, but when it’s a planned purchase, it becomes extremely competitive. I can’t tell you how many
times I saw, and I still see it, consumers on their phone. They’ll go look at a Target display and look at the
features of a toaster oven or whatever it is. They’ll pull it up on Amazon and you can tell they’re buying it, and
then they walk out of the store. You could have just gone, because usually Amazon is going to ship it right to
the store, or they might have a lower price because of some of those price scraping things that Amazon does on
those particular models. Yes, it’s a challenge.
[00:38:59]
Q: What are retailers and manufacturers at CPG companies doing to fend off the threat of high discounting
and very competitive pricing? The prices at retailers such as Best Buy are almost 2-3x Amazon’s prices for a
product such as an HDMI cable.
BJ: It’s going to put some manufacturers in a really challenging position, because it can be replicated so
quickly and so easily. That’s where it comes down to the innovate or die scenario, where you’ve got to keep
moving, keeping the model numbers fresh, and there’s a high cost to doing that. When you’re dealing in low-
margin categories, it puts a lot of pressure on the P&L and a lot of pressure to move quickly. Continuing to
keep the momentum going unless you have something that’s like an iPhone, it’s a challenge for manufacturers
and retailers, because the access to information is not the Sunday ad anymore. It’s right at your fingertips, so
you can find the best cost instantly. They have to be razor sharp in what they’re doing. It’s going to be
interesting to see what happens to promoted price points as people move forward, because of that price
scraping or being on promotion all the time. It becomes, “What’s the point?” Because a lot of them are going to
have to restructure. That’s why department stores are struggling so bad, because they operated on a high-low
mentality for so long, and it just doesn’t work anymore. People want the best price right now.
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[00:41:40]
Q: You mentioned that higher-margin products provide some type of insulation from retailers entering the
market through private label. Could you elaborate on which categories or products you think are higher
margin and where barriers are slightly higher in that liability aspect?
BJ: That’s where Spectrum I think has the real, they have a good brand in home and garden, and they have a
lot of expertise in that area. It’s highly regulated by the government. You can’t just move into that space, and
the liability is extremely high. In that particular category, they have a lot of good things going on for them, and
pet, their aquatics business. Their two aquatics brands are highly recognised, Tetra and Marineland, and they
have high loyalty, and that business has been very good for them. Like I said, they made some really good
acquisitions, I think, in the alternative rawhide and rawhide area. I think that’s been pretty decent for them. In
the appliance business, I was only in it for a while, but then I wouldn’t want to be in that business personally,
and if you are, you had better be lean and mean and going to China a lot. You can make money in that area,
but it’s a very challenging space, and shaver, same thing with the grooming. Braun and Norelco have excellent,
super-great e-commerce capabilities. I’d heard at one point that Braun sold 50% more online than they did in
stores, and that’s five years ago, which is incredible to me and shows how engaged they are with their
consumers. Remington wasn’t in that, didn’t have that same connection and/or, at the time, they may have
gotten a lot better, but they didn’t have e-commerce dialled in like some of their competitors did.
[00:44:45]
Q: What do you think is Spectrum’s appetite for further acquisitions and deals within its divisions? Could any
of its business clients be the next to go?
BJ: I think you’ll continue to see that. I was surprised at the Rejuvenate announcement a couple of weeks ago,
because that really doesn’t fit into their core capabilities, but that doesn’t mean they won’t do it. Auto and the
Kwikset locks weren’t in their core capabilities at the time either. I think they will continue to look for
opportunities. As far as what would go next, I would definitely think the appliances, and I think they were
openly trying to get rid of them when I was there, and I know that they’ve had a lot of leadership changes on
that side in the last several years, so that could go away. They sold the battery division, which was really the
bulk of what was going out of Madison at the time, as far as having their own capabilities and having some
technology, but the other stuff is all imported, so they don’t really have a strategic advantage in that space.
They get some good brands. I think if the right person were to acquire them and change their structure, they’d
be a good fit for somebody, but I would think those would probably be the next brands that would go.
[00:46:51]
Q: What’s your assessment on Spectrum as a global company, given you touched on imports and the
competitive pressure from China? Are there any markets you think the company has dropped the ball on by
not penetrating? How could it fend off competition from a country such as China, given what players there can
achieve with pricing and imports?
BJ: On that one, I’m probably not the best person to ask. I haven’t studied their global operations that well. I
know they made some decent pet acquisitions. It might have been Iams in the UK, but I don’t know a lot about
their global operations and where they were really strong or not. We just didn’t get into it.
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[00:48:01]
Q: What disadvantages has Spectrum had in the pet care segment? You mentioned the company has a few
strong brands and is doing fairly well.
BJ: It’s similar declining segments like the bird and small animal, which is like rabbit and bird. Those
segments were soft and the trends weren’t good in that area. They had a very good stronghold on aquatics
while I was there and it seems to be, and they were willing to look at doing private label for the main pet
suppliers. The challenge I know on pet was, Walmart got out of live fish in most of their stores if not all of their
stores. It makes it challenging to sell aquatics supplies and tanks to somewhere where they’ve got to sell a tank
and then they’ve got to go to Petco to get their fish. That’s a bit of a challenge for them, because the loss.
Walmart was, the fresh fish or live fish was a losing operation for them. With the turn that they had in
employees, it was very challenging to keep the fish alive and keep the tanks clean and all that fun stuff. That’s a
challenge for them, and aquatics, it will remain to be seen what happens with Petco and PetSmart, because
that business, a lot of it is going online. I believe PetSmart bought Chewy, and Chewy is a very formidable
force. I get all my stuff from Chewy because it’s awesome, but same thing, it’s kind of like Amazon. It comes to
my door and they have great pricing, so that puts some pressure on that business. Still pretty viable right now,
but as more and more of that stuff moves online, it makes the shopping experience or your brand experience
more susceptible to what’s happening on e-commerce over the long haul.
[00:50:42]
Q: Could you elaborate on the fragmentation throughout specific pet care categories? You mentioned aquatics,
which was a stronghold for Spectrum, but are its cat foods more consolidated than its dog foods? Do you think
all of these segments are fragmented?
BJ: Yes, it seems to be the cat is a little bit less innovative and more mainstream, and I’m guessing, probably
because of just the intake, whether it’s food or treats or litter maybe, it’s probably a highly-consumable sector,
but it’s very commoditised, so cat would be less attractive, but the dog area continues to be very strong. The
innovation from, and the willingness for consumers to pay more for their dogs, definitely there, whether it’s
food or treats or some bags of dog jerky for USD 20, it’s close to what you get for people jerky. Consumers are
willing to splurge on their dogs. You name it. I get amazed every time I go into a PetSmart at Halloween and
how many dog costumes are there.
[00:52:31]
Q: Could you elaborate on the margin profile between pet care categories? Which specific segments seem an
attractive place for Spectrum or other companies to further expand in?
BJ: Like I was saying, the premium dog food and the dog treats are definitely attractive areas. I think people
are much more cognisant of what they’re giving their dogs, because of, there’ve been some challenges with
some lower-end or lower quality products. People are a little more conscious about what they’re giving their
dogs, and the social media, the word gets out quickly if something is not good, and some of it is accurate. Some
of it’s directionally accurate. Some of it’s maybe not so accurate. I think that the premium space definitely
continues to have room to grow, especially as people delay having families. That might have changed a little bit
during COVID here, but I think the long-term family unit will probably continue to get a little smaller and be
delayed like it had been, but that makes that pet piece more attractive for companies to get into.
There are a lot of things that have been completely commoditised, whether it’s puppy pads, dog leashes. All of
the hard goods can be a challenge. Some of the cleaning products are still good, like Nature’s Miracle, that they
own. I think that’s a fabulous brand. It’s a well-sought-after brand. People will pay the premium. It works.
That’s really good for those guys. That’s a great brand. I’m trying to think. Like I said, some of the other
ancillary categories. The retailer tends to make all the margin on pet. People can still make money selling pet,
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but I was astonished at the level of retailer margins that they got. It was more than double what the
manufacturer was making, which, usually, it’s the other way around. Retailer margins are 50% to I’ve heard
sometimes 80%, and you might be making 40% of 50% TM1 on some of your stuff. Some of that stuff is not
even that. It might be 25% or 30%. When you add your operating expenses in there, there’s not as much
margin, and the retailer is asking more and more margin, but if you’re in a premium space, you’re a little
better off.
[00:56:17]
Q: Why would Spectrum jump into inconsistent categories that have higher operating costs and are not
performing or growing as well? Do you think it would make more sense to pick one pet care segment, scale the
business and make it as efficient as possible?
BJ: Yes, that makes, to me, a lot more sense and it’s like what Blue Buffalo has done, where they focus on food
and treats, and I haven’t looked at their full product portfolio, but they sell premium dog food and premium
treats and a whole bunch of different varieties, and they continue to innovate, and I’m sure they’re printing
money. I’m sure they’re doing extremely well, but, yes, to be in everything, that was a challenge. At Spectrum,
we were like, “How do we get out of this?” On some of this stuff, because the cost of innovation, coming up
with the next new dog leash, or coming up with the next new kitty litter, it’s really challenging to get kitty litter
to be premium. I think they’re trying some different things with some litter boxes and things, but, at the end of
the day, Tidy Cats is a pretty good cat litter, and their manufacturing facilities have been paid for for decades.
Yes, it does make more sense to really pick. If I could buy a brand from them, I’d be buying Nature’s Miracle,
which Spectrum did years ago, but that’s where they excel. They excel in cleaning chemicals, and chemicals
typically make a little bit more margin than anything hard-good-related, and manufacturing isn’t that
challenging. It’s just formulas, at the end of the day, from that side of things.
[00:58:55]
NH: I think that’s a good place to end the Interview. Let me close by saying thank you, Brad, for your input.
Really interesting Interview, and thank you, clients, for joining Third Bridge Forum’s Interview today. Clients,
if you would like to speak to Brad in a private call or meeting, please let your relationship manager know.
Brad, thanks again. Goodbye.
BJ: Thank you.
Transcription ends at 00:59:08 of the recorded material
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