10/21/2023 0 Comments Fresh petThe firm looks to fully pass these costs on to customers, which makes customer retention and acquisition more difficult. The firm expects ingredients, labor, and freight inflation of ~17% in 2022 when compared to 4Q20. pet market is historically nowhere near the revenue growth levels embedded in Freshpet’s valuation, as we’ll show below.Īccelerating inflation will be a drag on the premium pet food seller. pet expenditures have risen 6% compounded annually over the same time. households that own a pet has grown from 50.1 million (55% of total) in 1988 to 90.5 million (70% of total), or 2% compounded annually. According to the American Pet Products Association, the number of U.S. Underpinning Freshpet’s growth story is the long-term growth of pet ownership in the U.S., which accelerated during the COVID-19 pandemic. Competition: TTMįRPT Cumulative Free Cash Flow New Constructs, LLC Per Figure 3, Freshpet’s operating expenses as a percent of revenue, at 44% over the TTM, are much higher than its large competitors.įigure 3: Freshpet’s Operating Expense as % of Revenue Vs. To maintain its growth, Freshpet must spend much more heavily on advertising and building its distribution network than the established competition, whose scale drive much more efficient operations. Scale Matters, and the Incumbents Have It Should Freshpet’s environmentally-focused consumers grow more concerned about its high-energy use product, a strong dependance on refrigerators could put its ESG image at risk. Freshpet tries to offset this environmentally unfriendly distribution method through purchasing renewable energy credits, which makes for good marketing, but in reality, renewable energy credits don’t help much to decarbonize the grid. Few would argue that Freshpet’s 40,000+ refrigerators across 23,000+ locations are good for the environment. Freshpet’s competition could just as easily sell fresh pet food in refrigerators.įurthermore, refrigerators could be a liability for the company that bills itself as doing good for pets, people, and the planet. Readers can likely see the parallel with Beyond Meat (BYND), which I covered in a prior report.įreshpet may stand out in the pet aisle with its refrigerator, but the novelty of refrigerated pet food will wear off as more companies replicate the concept. The growing presence of private label products has been a large headwind for consumer product firms for decades, and I expect Freshpet will face similar pressure over the long term. These retailers control the amount of physical and digital shelf space they give to manufacturers who compete against them. Large retailers with existing distribution such as Costco (COST), Amazon (AMZN), Kroger (KR) and Chewy (CHWY) all have their own private label pet food brands. Perhaps, an even greater threat to Freshpet is the expansion of private label offerings in the pet food market. Technavio expects this niche to grow 24% compounded annually from 2021 – 2025, which as even more brands to enter the fresh pet food market. Nom Nom, Ollie, The Farmer’s Dog, and A Pup Above are examples of the growing number of brands competing in the fresh pet food niche. New Entrants Will Also Eat Away at Hopes of Profitabilityįreshpet not only faces well-entrenched competition, but it also faces an onslaught of new competition, particularly from other niche brands and private labels. Sources: Statista, and Allied Market Research
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