Brazilians Bury Their Dogs Now, So Warburg's Backing Pet Stores
(Bloomberg) -- When Piero Minardi was growing up in Brazil and a family dog died, it was simply tossed out with the rest of the trash. That’s what everybody did then, but few would think of doing so today.
That shift to a pet-friendly culture led Minardi and Warburg Pincus, the private equity firm with $44 billion under management, to invest in Brazil’s Petz stores, one-stop meccas for owners looking to pamper their poodles and Persians. The blindingly bright yellow outposts are sprouting up across Sao Paulo and the rest of the country, siphoning business from countless mom-and-pops.
The market Petz aims to serve is either the second or third largest in the world for pet products, depending on who you believe. The 57-year-old Minardi, Warburg’s managing director in Brazil, says it’s worth an estimated 22 billion reais ($6.7 billion). The U.S. market, by comparison, is $30 billion.
“It’s been a global trend, taking better care of animals,” Minardi said in a phone interview. “It’s the humanization of them.”
Money has followed the demand -- pets are hot. The latest example: General Mills Inc. agreed to buy Blue Buffalo Pet Products Inc. on Feb. 23 for about $8 billion in cash.
There were only about seven Petz stores when Warburg made its first small investment in 2013 in what was then called Pet Center Marginal. Few noticed at the time, Minardi said, but Warburg was preparing for consolidation in the market. Now, there are almost 70 locations, with another 20 planned for 2018 and a possible IPO of the business in 2020.
“There’s plenty of space to keep growing,” Minardi said. “The market is very fragmented.”
Cobasi, Petz’s biggest competitor, has 62 stores and plans to open as many as 25 more over the next year or so. Ricardo Nassar, director of operations and a company partner in the private, family-owned business, said it hasn’t sought investment partners and instead relies on bank credit.
“We are trying to grow organically, in a sustainable way,” Nassar said in a phone interview. “We are more concerned with our bottom line, not just our valuation. We’re already growing solidly; we don’t need to bring in a partner just to increase our valuation to later sell off the company.”
Petz started out that way too. Sergio Zimerman, the chain’s founder, said it opened 27 stores with bank financing before reaching a "healthy" limit. On its own, the business couldn’t continue expanding, he said.
“We saw there was an important space to occupy in the market and maybe it wouldn’t wait for us,” Zimerman said. “We didn’t just want Warburg’s money, we also wanted to professionalize the company.”
With the store openings and other costs, Petz’s capital spending in 2018 is pegged at about 140 million reais, an annual level that’s likely to continue for the next five years and might increase, Zimerman said. Compound annual revenue growth has accelerated from about 35 percent over the past 10 years, to 45 percent in 2017 and an expected 40 percent this year.
Minardi, who says that today most Brazilians bury their beloved pets, is optimistic about the growth prospects.
“We’ve come a long way from tossing leftover rice and beans out for their dinner,” he said.
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