Ice cream is literally going to the dogs -- at least if Ben & Jerry's gets its way. The Unilever-owned ice cream purveyor turned heads when it announced that its newest version of frozen treats was not designed for human consumption, but rather for our four-legged friends.
Ben & Jerry's "Doggie Desserts" might initially seem like a gimmick, but the trends underpinning the company's announcement are serious. If you've been paying attention, one of the biggest shifts in the American household in recent years is pets' status as a member of the family. According to the American Pet Products Association, spending on companion animals has grown to become a nearly $100 billion industry.
However, investing in a conglomerate like Unilever isn't the best way to profit from our furry friends. Investors should look to Freshpet (FRPT 0.98%) instead.
A focus on pet nutrition
Sorry Ben & Jerry's, but this might not be the best time for your new product. There's a downside to the trend of treating our pets like family: In recent years, our companion animals have been suffering from the same diet and lifestyle-related health issues that affect humans. In 2016, Banfield Pet Hospital published its five-year report on the state of pet health and found that canine diabetes had increased by 80% in the prior decade.
As a result, owners are starting to pay closer attention to their pets' diets and are trading in highly processed bulk food to focus on nutrition. Freshpet has been among the biggest beneficiaries of this trend. In its June 2020 investor update, Freshpet shared data from Nielsen that its line of refrigerated food is growing significantly faster than the overall dog food category, typically 25 to 30 percentage points higher, depending on store category.
Supplying fresh food is hard...and that's a good thing for Freshpet
Freshpet faces more operational challenges than traditional dog food companies due to the nature of its product. Fresh food requires refrigeration, which takes up valuable floor space. It's difficult to convince retailers to add refrigerators to an area that has been unrefrigerated historically. Fresh food also requires more logistical expertise and costs to prevent stockouts and spoilage, from standing up regional kitchens to creating a last-mile distribution network to deliver food to grocery and pet stores more frequently than shelf-stable bulk food.
However, Freshpet has addressed these challenges. The company added 801 net new stores to its distribution network through the first three quarters of 2020, putting it well on the way to its goal of entering 1,000 net new stores for the year. Freshpet recently noted that retailers are increasingly opting for larger fridges and multiple chillers. In addition to affording Freshpet more selection, this proves that retailers are comfortable giving it more floor space.
The coronavirus pandemic exposed Freshpet's delivery network to a stress test, but even under these difficult conditions, it bounced back quickly. The company should be back to normal delivery; it was able to complete its Kitchens 2.0 planned expansion in October.
Freshpet's more difficult distribution model relative to bulk pet food could be a positive for Freshpet investors in the long run. It serves as a barrier to entry, making it harder for traditional dog food companies to enter the refrigerated grocery space forcefully.
Freshpet is primed for growth
Despite providing investors a 140% share-price gain in 2020, Freshpet still has room for growth. At a $6 billion market cap, the company remains significantly smaller than other consumer food companies. While the stock is expensive by traditional valuation measures for a consumer goods company, it is growing very quickly: approximately 30% per year.
Freshpet has laid out an ambitious goal for growth branded as Feed the Growth 2025, which includes doubling its household penetration from 3.9 million to 8 million. Even that might be understating its true potential, as the long-term trends that are underpinning consumer behavior -- increased pet spending and heightened awareness of pets' diets -- are just beginning. Look for this increased awareness to drive growth for years to come.