Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Pet Food Companies
Transcript
- Lucas: So, pet food. It's a category that has quietly become one of the hottest targets for private equity over the last few years, and the headline deal that really cemented it was the roughly one point two billion dollar acquisition of Freshpet by a consortium led by Clayton Dubilier & Rice in late 2025. Luna: Freshpet — the refrigerated stuff you see in that open-front cooler at the grocery store, right? Not the shelf-stable bagged kibble. Lucas: Exactly. It's fresh, refrigerated, sold in the meat aisle — they position it as 'human-grade' dog food. And that deal was a signal. For years, pet food was dominated by giants like Mars Petcare and Nestlé Purina. But independent brands focused on fresh, raw, or freeze-raw diets have been growing at roughly eight percent annually, which is more than double the rate of the overall packaged food category. Luna: If today's conversation gives you a better handle on where PE is looking next in consumer brands, that's kind of the point. These episodes stay ad-free because listeners who find them useful chip in at buy me a coffee dot com slash fexingo. It's a small way to keep the show independent. Lucas: Yeah, and we mean that. If this helps you think about the deal landscape a little more clearly, that's the whole idea. So back to Freshpet — what made it so attractive to a firm like CD&R. Luna: I imagine the growth trajectory was part of it. Freshpet was public, they had a good story, but they were also spending a ton on marketing and distribution to build that refrigerated supply chain. Lucas: Right. Freshpet's revenue was growing in the low double digits year-over-year, but they weren't consistently profitable on a net basis. The PE thesis was basically: you take this high-growth brand, you apply operational discipline — optimize the manufacturing footprint, consolidate the cold-chain logistics, trim the marketing spend that's not directly roi positive — and you can expand margins from the mid-single digits to something like twelve to fifteen percent over a four-to-five-year hold. Luna: But here's the thing I wonder about: pet owners are incredibly brand-loyal. You switch a dog's food and they get an upset stomach. People don't just grab whatever's on sale. So if you start cutting costs and maybe change the recipe or the sourcing, do you lose that loyalty? Lucas: That is the central tension in almost every pe backed consumer brand deal. And it's especially sharp in pet food because the end user — the dog or cat — can't tell you they don't like the new formula until they start refusing to eat it. So you get returns. And returns kill repeat purchases. The firms that have been successful — like JAB Holding Company, which has been rolling up premium pet food brands for a decade — they've been very careful about preserving the 'small-batch' or 'natural' positioning. Luna: JAB — they own things like Blue Buffalo, they bought the pet food division of Mars back in 2023, right? Lucas: Actually, JAB acquired the veterinary and pet food businesses of Mars in a deal that closed in early 2024, creating a combined entity called NVA. But on the food side, they've been assembling a portfolio that includes Blue Buffalo, Natural Balance, and several regional raw-frozen brands. Their strategy is less about one big brand and more about a platform — they buy regional raw-frozen manufacturers, consolidate production, and then distribute through their existing vet clinics and retail partnerships. Luna: So it's a roll-up, but vertically integrated — they own the vet clinics where the food gets recommended, and they own the manufacturing of the food itself. Lucas: Exactly. And that's a different model than what CD&R is doing with Freshpet. Freshpet is a single brand, publicly traded, with a national refrigerated footprint. The PE play there is more about operational leverage — getting more revenue through the same fixed-cost base. For example, Freshpet's manufacturing plants in Pennsylvania and Texas have capacity to produce more than the current volume. If you can grow same-store sales without building a new plant, that's where the margin expansion comes from. Luna: And the growth in the category — is that a secular thing? Like more people treating pets as family members and spending accordingly? Lucas: Absolutely. The humanization of pets is a massive trend. According to the American Pet Products Association, spending on pet food in the U.S. was about forty-two billion dollars in 2025. The fresh and frozen segment is still small — maybe four or five billion — but it's growing at fifteen to twenty percent annually. That's the kind of growth that PE firms love because it gives them a tailwind. You don't have to steal market share to grow; the whole pie is getting bigger. Luna: But with that growth comes competition. You've got traditional players like Purina launching their own fresh lines. You've got startups like The Farmer's Dog and Nom Nom that are direct to consumer, subscription-based. How does a pe backed brand compete with a well-funded startup that has no retail overhead? Lucas: That's a good question. The DTC fresh-food companies have really high customer acquisition costs — they spend heavily on Facebook and Instagram ads, and their logistics are expensive because they ship frozen food in insulated boxes with dry ice. Freshpet's advantage is that it's already in the retail cooler. The customer doesn't have to plan ahead; they just grab it when they're buying their own groceries. So the unit economics are actually better once you have the retail distribution in place. Luna: But retail distribution is expensive to build. That's part of why Freshpet was losing money — they were paying slotting fees to get that cooler space. Lucas: Right. And that's where the PE playbook kicks in. A firm like CD&R has experience negotiating with retailers across their portfolio. They can bundle — say, 'you want our coffee brand on your shelf? Then give Freshpet better cooler placement.' That kind of cross-portfolio leverage is something an independent company doesn't have. Luna: So the acquisition isn't just about the brand itself. It's about the platform and the relationships. Lucas: Exactly. And you're seeing that in other pet categories too. Take pet supplements — that's another hot area. Firms are buying companies that make joint health chews or calming treats for dogs. There, the margins are even higher — sometimes sixty percent gross margin — because it's a nutraceutical, not a food. The challenge is that it's a fragmented market with hundreds of small brands. So the PE strategy is to buy three or four regional players, combine their manufacturing, and then use a national sales force to get into Petco and PetSmart. Luna: I've seen some of those supplements at the checkout counter. They're priced like premium items — fifteen dollars for a small bag of chews. Lucas: Right. And the cost of goods is maybe three dollars. So there's a lot of room to play with pricing. But again, the brand has to feel authentic. If a consumer finds out the 'small family business' they trusted was bought by a private equity firm and the recipe changed, they might switch. Luna: So how do PE firms manage that? Do they keep the founder on as a figurehead? Or do they just keep the branding the same and hope nobody notices? Lucas: Usually both. In the Freshpet case, the CEO stayed on after the acquisition. For smaller brands, the founder is often given a minority stake and a multi-year employment contract to ensure continuity. And the branding — the packaging, the story — stays the same. The changes happen behind the scenes: shared manufacturing, consolidated distribution, centralized purchasing of ingredients. The dog doesn't know the chicken came from a different supplier as long as the taste and texture are the same. Luna: But there's always the risk of a misstep. Remember when Blue Buffalo had that contamination issue a few years ago? That was a huge blow to their brand trust. Lucas: Right, and that's a reminder that these are food products with real safety implications. PE firms that come in and try to cut costs too aggressively on ingredients or quality control can create a disaster. The smart firms invest in quality systems — they actually improve safety because they have the capital to upgrade testing labs and supplier audits. Luna: So the winning strategy might be to use PE capital to professionalize the supply chain, not just strip costs. Lucas: Exactly. And that's the story behind the deals that work. The ones that fail are the ones where the math doesn't add up — where the multiple paid was too high, or the growth assumptions were too aggressive. In pet food, the multiples have been climbing. Freshpet was acquired at roughly three and a half times revenue, which is high for a food company. The buyers are betting on continued double-digit growth for at least five years. Luna: Is that sustainable? I mean, at some point, how many more dogs can you convince to eat fresh food? Lucas: That's the billion-dollar question. The penetration of fresh and raw food is still only about ten percent of the pet food market. If it goes to twenty or thirty percent, there's huge room. But that assumes that the premium price gap doesn't scare people off. Freshpet can be four times the cost of kibble per serving. In a recession, that kind of discretionary spending could take a hit. Luna: So PE is betting that the humanization trend is sticky — that even if people tighten their belts, they won't cut back on Fido's dinner. Lucas: Exactly. And historically, pet spending has been remarkably resilient during downturns. During the 2008 recession, pet food sales actually grew slightly. People treat their pets as family, and family gets fed. So it's a defensible category. The risk is more about execution — can you really integrate all these small brands without losing the magic that made them successful? Luna: I know of a regional raw-frozen brand in the Pacific Northwest that was acquired by a pe backed platform two years ago. The founder stayed on, but he told me the pressure to use cheaper protein sources was constant. He ended up leaving after eighteen months. Lucas: That's the kind of story you hear a lot. The founder's passion for quality clashes with the financial sponsor's need to hit margin targets. The best PE firms understand that they need to protect the brand equity, not squeeze it. But the incentives can pull in the other direction when you have a fund with a finite life and a target IRR of twenty percent. Luna: So what's the exit strategy for these deals? For Freshpet, CD&R probably plans to take it public again or sell to a strategic buyer like Nestlé or Mars after they've grown it. Lucas: That's the typical path. The hold period is usually four to seven years. If they can double the EBITDA from, say, one hundred million to two hundred million, and the market multiple stays the same, that's a double on their investment. And if the market gets even more excited about pet food, the multiple could expand, and they could triple or quadruple their money. Luna: So it's a bet on both operational improvement and multiple expansion. But if interest rates stay higher for longer, those multiples might compress. Lucas: That's the macro risk. PE deals in 2025 and 2026 have been done at higher leverage costs, which means more of the returns have to come from actual earnings growth, not just financial engineering. That actually favors the kind of operational play that CD&R is known for. They're not a financial engineering shop; they're an operations-focused firm. Luna: So maybe the pet food story is a good test case for whether PE can add real value in consumer brands, not just strip costs. Lucas: I think that's exactly right. If Freshpet comes out of the CD&R ownership period with stronger margins, better supply chain, and the same brand loyalty, it'll be a proof point. If it stumbles — if they cut too deep and lose the trust of pet owners — it'll be a cautionary tale. Either way, we'll be watching.