Deal focus: L Catterton sees value in the Drools recipe

L Catterton has a taste for pet food globally, having made more than a dozen investments in the space, and this interest has spilt over into Asia over the past 18 months. The consumer-focused private equity firm started in China, backing two premium pet food producers, and it recently entered India as well – though it deliberately targeted the value-for-money segment.

“We found, based on our primary research, that 85% of key recommenders – largely vets and friends and family – opted for value-for-money brands,” said Anjana Sasidharan, a partner with L Catterton Asia.

“Even higher income households may start their pets on premium products, but after one year, they move to value-for-money. It is a very unusual, India-specific trend. Value for money is core to what consumers are looking for, and it means local manufacturing and pricing become critical.”

In committing USD 60m in growth capital to Drools Pet Food, L Catterton believes it has secured an asset that meets these criteria. Mars is the dominant force in India pet food, with Sasidharan estimating that it is 1.5x larger than Drools. But these are the two clear market leaders, a status achieved on the back of assiduously building value-for-money brands and establishing local manufacturing capabilities.

Producing pet food in India is complicated by quality concerns and the absence of a deep contract manufacturing pool. Many companies conclude that shipping from overseas is the only option, but these incur import duties; they must compensate by raising prices or taking a heavy margin hit. Unable to scale in an economically viable way, they are effectively restricted to the premium segments.

Taking advantage

Where Mars has Pedigree, Drools has its eponymous brand, which is priced 10%-15% cheaper. Sasidharan attributes the company’s success to several factors. First, it scaled local manufacturing in a far more efficient manner than most consumer products players, minimising capital expenditure by building its own equipment rather than ordering expensive readymade equipment from Europe.

Second, Drools leveraged the geographical advantages of its manufacturing base in Raipur in the central state of Chhattisgarh. Nestling in the heart of India’s rice belt, the company could source one of the two key carbohydrates used in pet food at more attractive prices than most competitors. The founder’s family business in poultry was also helpful in sourcing ingredients such as chicken and soybean.

“In manufacturing design and product ingredient sourcing, the founder and his family have a lot of experience,” said Sasidharan. “But he has also assembled a strong sales team outside of the family and given them full independence to do whatever was needed to crack the market. A lot of creativity and hustle has gone into building the brand presence, market by market and city by city.”

The key channels for pet food distribution in India are speciality pet stores, general trade stores – not so much modern retail because of sensitivities concerning non-vegetarian products – and online. While others focused on developing the retail market, Drools turned its attention to vets and breeders who have significant influence on dietary choices when a pet is young or newly adopted.

This word-of-mouth affirmation helped boost e-commerce, where the company works with the likes of Flipkart and Amazon and is expanding into quick commerce channels like Swiggy. It also laid the foundations for the rollout of a retail network with 34,000 touchpoints skewed towards lower-tier cities.

“Drools is not as strong as Mars in big cities, but we found it is stronger in tier-two and tier-three cities, where there is a lot of growth and a lot of pet adoption,” said Sasidharan. “You cannot just ignore the metros, so Drools has been working its way up through the channels. It does not want to be number two in every category.”

Growth agenda

White space abounds in India’s pet food market, which is relatively small at USD 500m, but growing 20% per year. L Catterton is encouraged by the expansion potential implied in data points such as pet ownership penetration of less than 10% compared to over 50% in the US. Moreover, up to 80% of pet owners still prepare carbohydrate-centric home-cooked meals for their pets; in the US, it is sub-30%.

Megatrends such as rising income levels, urbanisation, and the rise of millennial consumers – who tend to prefer value-for-money products – are compelling, but this doesn’t necessarily translate into easily-won investment opportunities. Drools is profitable and on course to be of significant enough scale to list domestically next year; these industry tailwinds mean that it doesn’t need external capital.

“Our conversations went back and forth, and it was about the value we can bring to the table, not just the capital,” said Sasidharan, who spent 18 months nurturing the opportunity. “We understand the space, we have a lot of experience in it, the founder can spend time with folks we’ve backed in other markets and get product insights.”

L Catterton’s to-do list includes transitioning Drools from family-run to professionally-run in terms of personnel and governance; helping strengthen the growth strategy and build greater brand resonance; and contributing to working capital investment that will go towards the expansion of manufacturing and distribution operations and extensions into newer sub-categories like wet cat food.

There is an incongruity between the private equity firm’s India and China investments in that the former trails the latter in market development: China exhibits a stratification of premium, mass premium, and imported products; India does not. However, it is possible to look for trendlines in that one might be replicated in the other – the emergence of cat food, across various product types, is a case in point.

Sasidharan believes these attractive market dynamics will encourage new entrants, typically crossover players looking to take advantage of existing experience in either consumer brands or manufacturing. But becoming competitive in both areas, like Drools, is a long process.

“Companies that know what to do with brands may try to figure out manufacturing and sourcing, but there isn’t a lavish supply of manufacturers in India,” she said. “And those with experience in categories like poultry, who understand the manufacturing and processing of meat, want to leverage that, but they must also build brands and create distribution, which is challenging.”

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• Topics
• South Asia
• Expansion
• Consumer
• India
• Growth capital
• L Catterton