Private-equity firm Nexus Capital Management is looking to breathe some fresh life into Natural Balance, the US pet-food business it acquired from J.M. Smucker earlier this year. Pet-food industry veteran Brian Connolly has been hired as CEO and he talks to Dean Best about his plans to get the dog- and cat-food maker growing again.
Long-standing industry executive Brian Connolly believes he can put the recent dog days of Natural Balance, the US business he now heads under new ownership, behind the pet-food maker.
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After continued pressure on sales, Natural Balance was sold in December by US human- and pet-food major J.M. Smucker to private-equity firm Nexus Capital Management. The US$50m acquisition is Nexus’ first in the pet-food sector and the buy-out house has installed industry veteran Brian Connolly as Natural Balance’s chief executive.
With a career that includes The Iams Company, Castor & Pollux and Merrick, Connolly appears to have the credentials to try to revitalise Natural Balance, a business and brand he says he admired from afar but which he admits needs work to restore its fortunes.
“It was a tired brand,” Connolly tells just-food. “It had really not modernised its outward appearance or, inward, what was in the bag. It’s not that it’s perceived inferior or negative in any way. It kind of lost its way. Our task now is to reinstate a direction, a strategy, to get it back on a growth trajectory.”
Natural Balance is a US pet-food business that’s more than 30 years old, set up in 1989 by US actor Dick Van Patten. In 2013, the brand joined Del Monte Foods’ then stable of pet-food brands. A year later, after Del Monte Foods sold off its human-food business, the remaining pet-food assets were renamed Big Heart Pet Brands, a company subsequently sold in 2015 to J.M. Smucker for $5.8bn.
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By GlobalDataJ.M. Smucker, which remains a force in pet food, with brands including Rachael Ray, Nutrish and Milk-Bone, said its decision to offload Natural Balance would allow it to focus on “areas of the business that will generate the greatest growth and profitability”.
The now private-equity-owned Natural Balance generated net sales of around $220m in J.M. Smucker’s last full financial year (which ran to 30 April 2020), with the company reporting declining sales for the Natural Balance brand. That fiscal year also saw J.M. Smucker book an impairment charge of more than $52m that was related to the Natural Balance brand due, in part, to “a decline in current-year and long-term net sales expectations”.
Speaking to just-food, Connolly says he believes the Natural Balance brand still has potential and believes the new, stand-alone business, can grow sales at a “single-digit” rate this year. Nevertheless, he describes 2021 as “a retooling year” for Natural Balance.
“I view this year as kind of a retooling year to get our business up and running as a standalone and to get the rebranding and all of the new products up and running in the marketplace so that we come out of finishing up 2021 really-well positioned to have a very strong 2022,” he says.
To improve Natural Balance’s performance, Connolly and its new private-equity owners have assembled a team of around 40 staff, including the CEO says, “the core team” from Smucker that was “dedicated” to the brand within its former larger parent.
“We’re running this business in a very entrepreneurial fashion so that good ideas can come from anyone and, if we get behind them, we want to move really quickly, and not spend months and months having meetings, committees and taking a very siloed approach to whatever the innovation might be,” he insists.
What Connolly calls “innovation and renovation” is one of the ways in which he and his new team hope to grow Natural Balance. The company describes itself as a “pioneer” of Limited Ingredient Diets, dog and cat food made from “simplified” recipes. “There have been copycats but, despite the hardships and the headwinds that Natural Balance has faced as a brand, it still has an ownership position in the LID market,” he insists. “We intend to refresh the look of our packaging and we’re going to expand our LID offerings into many more unique proteins beyond what’s in place today, to really capture the ownership position in innovative LID again.”
Natural Balance is also eyeing the growing interest among dog and cat owners in plant-based pet food. Trends in the pet-food market can mirror those in human food and, with human interest in plant-based options on the rise, it’s little surprise to see shoppers looking for plant-centred products for their dog or cat. Manufacturers are reacting accordingly and Connolly says it is an area in which Natural Balance is looking to expand.
“I think for dogs there’s significant opportunity for plant-based pet food”
“It’s always had a niche here in the US,” Connolly says. “The vegetarian folks are more comfortable having all members of the family eat that way, with the exception of cats who scientifically are obligate carnivores and need meat in their diet. Dogs are more omnivores so they don’t. I think for dogs there’s significant opportunity and that’s been aggressively considered as part of our innovation and renovation.”
Natural Balance has one product, across a handful of packaging sizes, in the area but Connolly says sales have been good, surprising him and Nexus as they studied the business before the acquisition. “That was one of the learnings of doing the [due] diligence. We were amazed that the sales that these three bags generated were amongst the highest in the company,” he says. “It got us thinking, especially with over the years trends in the human side of the business that morph over to pet at some point in time. I think there are many different ways to go with additional formulas, different feeding systems, with canned products and treats for folks that want to have their dog eat as they do. So, definitely a growing segment.”
Specialist stores the target
The company’s product range, which also takes in more functional or “targeted nutrition” products for dogs and cats, as well as snacks and treats, will be aimed squarely at what Connolly calls the “pet specialty” retailers and not US mass retailers that sell pet food alongside human fare.
“It was always a brand that was targeted pet specialty, as defined by selling to independent pet distributors who would sell to independent pet stores at Petco and PetSmart, but not grocery stores, not Walmarts, Targets or that type of thing,” he says. “It was always a pet specialty-distributed brand, so we’ve hired pet-specialty experienced executives to now run Natural Balance and restore it back to its position in the marketplace through a variety of strategies.
“That’s who we’re targeting, not the Walmarts or the big grocery stores, that’s more of a domain where you’ll find the brands that are owned by Mars and Nestle and Colgate. You need deep pockets to compete in that channel, with really the marketing muscle that they have to put behind the products, given the competition. We want to work with smaller pet stores where they can understand our philosophy, the nutrition, the science that’s in the bag and they’re comfortable recommending it to their customers as they come in the door. We think we’re going to be a perfect match for the pet-specialty channel and give them products that they don’t currently have on the shelves now and create some excitement in and around the Natural Balance, that the brand is back again and reclaiming its roots. That’s the channel that we know, not grocery.”
Covid-19 has seen pet-food sales grow “across the board”, no matter the sales channel, Connolly says, with pet ownership having “increased substantially” in the last 12 months. “E-commerce would be up the most, but pet specialty is increasing and, because of pet ownership increasing, we’ve also seen single-digit increases in the mass, drug channel as well,” he explains. “It’s a sought-after category hence the reason you’ve got the big CPG guys that have quite a few brands in pet.”
In common with many executives in the CPG sector, Connolly believes e-commerce (in which he estimates Natural Balance generates around 25-30% of its sales) will continue on a structurally higher plane than it otherwise would have done without Covid-19 but believes the channel won’t see the same kind of sales “spike” it enjoyed during the depths of the pandemic. “As things go back to normal, people that like to get out and shop and see different products and talk to the experts at the pet-specialty stores, they’ll go back to doing that.”
As well as hiring executives with experience in selling to specialist pet stores, the Natural Balance team has a dedicated director looking at growing the California-based firm’s international business, which, including over the border in Canada, accounts for more than 10% of the company’s sales.
“We’re doing a pretty robust business in some of the Asian markets, specifically,” Connolly says. “We’re strong in South Korea, in Hong Kong, Taiwan and Japan and our sights are set on things that we have to do to expand more broadly.” Launching into “key markets” in South America is also part of Natural Balance’s strategy outside the US as the company looks to build its position overseas.
“It’s going to take a while, as I say, mostly from a regulatory standpoint to get formulas registered before you can import them. Many of the Asian countries have unique import standards, so that whole process can take a while and we likely will have to create some specialised diets for some of the international markets where quality determinations are made perhaps differently,” Connolly explains.
Another method of expansion that isn’t, at least in the short term, on Natural Balance’s to-do list is M&A. “I’ve been very clear with the Nexus guys that we’ve got a lot of plans; our challenge is prioritising,” he says. “What do we execute on first to get the business to the point that it should be operating at? It sold for the price it did because there were certain shortcomings to its performance.
“We need to right the ship before we can really seriously consider using Natural Balance as a platform to acquire other pet assets. Not to say never, but certainly not in the near term. We have so much opportunity within Natural Balance that to distract the team at this point in time to try to digest another company, another brand … we’re not ready for it in my opinion.”
After pressure on sales for a sustained period, there will be plenty of challenges for Connolly and his team to sail Natural Balance into calmer waters. Pet ownership is on the rise in the US and the market for pet food is growing but competition will be intense, even in the specialist channels the company is targeting.
“I’m excited,” Connolly insists. “We’ve got a great brand. It’s a fixer-upper, right? It needs some TLC but I’m really thrilled with the management team that we’ve been able to attract and it speaks to the opportunity here.”
