ACQUIRE - CVS buys Aetna for US$69B

Aggregation by a pharmacy benefit manager (PBM) may deliver a shorter path, better care and lower costs.

According to Bruce Japsen in Forbes the CVS deal, values Aetna at $207 a share, and creates a company with combined annual revenues of $240 billion, which rivals United Health Group ($225 billion forecast in fiscal 2018). Japsen notes that Aetna aborted its effort to buy rival health insurer Humana last year in the face of antitrust scrutiny and didn’t have the resources to build doctor and outpatient care centres like United’s Optum unit has been doing.

“This combination brings together the expertise of two great companies to remake the consumer health care experience,” said CVS President and Chief Executive Officer Larry Merlo. “With the analytics of Aetna and CVS Health’s human touch, we will create a health care platform built around individuals.”

The Washington Post quoted Michael Rea, Chief Executive of Rx Savings Solutions, “This is kind of uncharted territory — a pharmacy benefit manager (PBM) buying a major national health plan. I think it’s a sign of the times, PBMs represented a little-known entity no one knew about not that long ago, and now they’re the controlling piece of the deal to take over a national insurer.”

No one should be surprised. The margin between pharmaceutical manufacturer and consumer is open to attack and consumer satisfaction is low. In once sense, it's no different than the aggregation that is happening in other markets such as grooming products. An InfoStream story earlier this week showed Gillette's ability to drive the price of a razor into the stratosphere opened the door for innovators to rethink the market and gather in quite a bit (11%) of Gillette's market share.

While the CVS Aetna transaction may be uncharted territory, the sector will likely see more activity. According to a story by Lauren Hirsch of CNBC on Monday, the CVS acquisition is aimed at driving Aetna healthcare subscribers to CVS stores. She suggests a 'market watch' on Walgreens, Rite Aid, Kroger and Walmart to look for similar mergers or acquisitions. Everyone sees the need for these players to shore up market share, acquire innovation and eliminate threats.

According to an article in Fortune, Wall Street is skeptical. The success of CVS Health Corporation's acquisition of health insurer Aetna Inc. is a bet on a complex and untested strategy. Some analysts are questioning whether the companies can pull it off.

CVS plans to build mini health centres in some of its 9,700 stores, turning them into key locations where Aetna members — and customers of rival insurers — get low-level care for ailments and chronic diseases. Already, CVS has 1,100 'MinuteClinics' in its pharmacies, and is testing out hearing and vision offerings in a handful of CVS locations.

Investors also seem to be showing skepticism. Aetna stock was trading at $180.11 as of 9:34 a.m. in New York on Tuesday. That’s 13 percent below CVS’s $207-a-share cash-and-stock offer. Investors may be pricing in the fact that CVS Health will no longer be a dividend growth company following this transaction.

CVS competitor UnitedHealth Group has a menu of health insurance products under its umbrella including Medicare, Medicaid and OptumRx as its' pharmacy benefit manager (PBM) as well as 30,000 healthcare professionals and hundreds of practices, outpatient surgery centres and urgent care facilities spreading across the country.


WHY THIS IS IMPORTANT:
Rethinking the market to create a broader ecosystem has just begun. Technology is driving the ability to bring new bedfellows together, but innovative thinking to find large pools of subscribers that can be cemented into an existing ecosystem is the game. This aggregation has already begun in the dental and cosmetic business and is also beginning in healthcare for companion animals. 

Watch the companion animal market for moves to cement a national animal health insurer together with retail locations, veterinary hospitals, diagnostics, technology and nutrition. Companies like Fairfax, Mars, National, Nestle, Petco and PetSmart will likely look at this deal very closely. 

While some call this kind of transaction a 'market consolidation', at Paradigm we look at it from the client perspective. It is really about aggregating the client demand while improving the client experience and convenience.

MARKET - PetSmart Opens 1600th Store

PetSmart continues expansion with the opening of 1,600th store in El Paso, Texas.

PetSmart now operates in all 50 U.S. States

In addition, the leading pet specialty retailer announced the opening of its Casper, Wyoming store last month marking PetSmart’s presence in all 50 U.S. states.

The 1,600th PetSmart store in El Paso features nearly 18,000 square feet of space and includes a Pinnacle Pet Nutrition Shop, which is a feature in all new PetSmart stores. The shops are about 550 square feet and offer 400-plus items across several brands, and an expanded collection of pet food products featuring high-protein, natural, grain-free, minimally processed and raw pet food.

“We are thrilled to celebrate this milestone with our associates and the community of El Paso, Texas,” said Brian Amkraut, executive vice president, store operations, services, supply chain and real estate, for PetSmart. “At a time when the retail world is dramatically changing and many retailers are closing stores, we are proud of our store expansion efforts. We continue to focus on meeting the needs of pets and pet parents alike, and a key element of that strategy includes expanding our brick-and-mortar footprint to be the most convenient, best-in-class retailer.”

BUSINESS - PetSmart Chewy Deal Causes Commotion in the Industry

The pet industry is abuzz about the recent announcement of PetSmart’s acquisition of Chewy.

How is this going to impact independent pet retailers?

Chewy has been a formidable opponent in online retail - often selling products at prices the big box stores are unable to come close to competing with.

Another major component of Chewy’s success is outstanding customer service.

Anywhere one looks, happy customers are sharing stories of how well the company treats them and how well the company knows them.

People are speculating on the purchase outside of the animal industry as well.

The $3.35 billion acquisition is being touted as the biggest e-commerce purchase in history by publishers like Tech Crunch.

Recode is pointing out the deal is larger than Walmart’s acquisition of Jet.com, which was done for many of the same reasons - expanding Walmart’s e-commerce abilities and positively impacting their customer service.

Even e-commerce focused eMarketer is writing about the deal.

This deal is a big deal!

A Pet Business article touches on independent retailers concerns regarding how this acquisition can impact their bottom line.

While some fear the deal can make PetSmart an even stronger competitor, others believe it can actually take away some of Chewy’s clout.

Why?

Some pet food brands have chosen to sell their products through Chewy rather than big box stores like PetSmart through loyalty to independent retailers and they may pull their products.

In fact, Tuffy has already announced they will stop selling through Chewy because of the acquisition.

Also, Chewy has been operating with a very low profit margin and therefore very little profit.

There is a belief that PetSmart will want to raise that margin and generate more profit and that can’t be done without increasing the prices of online products.

The impact on the independent retailer remains to be seen, but what is clear is many people are watching to see just what happens.

BUSINESS - PetSmart to Acquire Chewy Inc.

PetSmart, Inc. announced it has entered into a definitive agreement to acquire the online pet retailer Chewy, Inc.

The acquisition accelerates the execution of PetSmart’s strategy and is a critical milestone in its journey to be the most convenient, best-in-class pet retailer.

Chewy is one of the leading online retailers of pet products and has seen major growth since it was founded by Ryan Cohen and Michael Day in 2011.

With the recent upgrade to the PetSmart website that boosts e-commerce, it’s clear the acquisition is part of a plan to grow the online portion of their business.

The combination of PetSmart and Chewy will enhance both companies’ capabilities and reach, offering a wide selection of pet products and services available both in-store and online in North America.

Michael Massey, president and chief executive officer of PetSmart said in a release, “We are focused on improving our customers’ experience in-store and online as we continue to execute against our long-term strategic initiatives. Chewy’s high-touch customer e-commerce service model and culture centered around a love of pets is the ideal complement to PetSmart’s store footprint and diverse offerings. Together, PetSmart and Chewy will provide the most convenient customer experience to a wider base of pet parents across every channel.”

Upon closing, Chewy will continue to be led by CEO Ryan Cohen and operate largely as an independent subsidiary of PetSmart, focusing on its current business strategy, while PetSmart will continue to execute its strategic initiatives across the combined company.

“Since we started Chewy, we have been dedicated to understanding and satisfying the evolving needs of our customers to deliver the highest quality pet products and customer service,” said Cohen.

“Combining our strong e-commerce expertise with PetSmart’s best-in-class infrastructure, footprint and breadth of offerings including services will help us ‘wow’ our customers even more.”

The acquisition, which is subject to customary regulatory approvals, is expected to close by the end of PetSmart’s second fiscal quarter of 2017.

PetSmart’s recent acquisition of Allpaws was more about social innovation than retail services, demonstrating the importance of both aspects to the pet supply retailer.

BUSINESS - Prescription Pet Foods Face Class Action Lawsuit

A California class action lawsuit alleges that pet food manufacturers Nestle Purina, Mars Petcare, and Hill’s Pet Nutrition, pet supply chain PetSmart, and veterinary chains Banfield Pet Hospital and BluePearl Vet conspired to falsely promote prescription pet food.

The veterinarian writes a prescription for the specialty food which is then filled at a supplier such as PetSmart.

The complaint argues here is no reason for each brand of pet food to require a prescription, as they “contain no drug or other ingredient not also common in non-prescription pet food.”

The prescription pet food sold by Mars, Purina, and Hill’s are not evaluated by the Food and Drug Administration and contain no drugs or other legally controlled substances, the plaintiffs state.

Therefore, according to the class action, selling the expensive pet food as requiring a prescription is unfair and deceptive under California consumer protection laws.

The suit includes veterinary clinics because they write the prescription, the manufacturers who make the food and PetSmart because they sell it.

According to the complaint, Mars owns 79 percent of Banfield Pet Hospital, and PetSmart owns the other 21 percent. Many Banfield clinics are inside PetSmart locations. In addition, Mars owns 100 percent of Blue Pearl Vet Hospital.

In the case filing, plaintiffs stated that they and others had overpaid for the prescription formulations and made purchases that they wouldn’t have if not for the prescription requirement.

“We are aware of the recent lawsuit in Northern California against Mars Petcare US, Banfield, Blue Pearl, PetSmart, Hills Pet Nutrition and Nestle Purina Petcare,” Courtney Suthoff, representing Mars Petcare’s Royal Canin for public relation agency FeishmanHillard, told Petfood Industry. “While we do not otherwise comment on pending litigation, we believe the allegations to be without merit and will defend ourselves accordingly.”

BUSINESS - PetSmart Acquisition Sheds New Light on Corporate Valuation

AllPaws.com purchased by PetSmart

Richard Kestenbaum, Partner at Triangle Capital, recently wrote about the value of emerging subscriber based companies in Forbes magazine.

His startling conclusion is that many companies that once held great value are no longer given the same regard, while some of those formerly considered worthless are now regarded as having great value.

He draws this conclusion from Triangle’s participation as sell-side advisor on the AllPaws.com acquisition by PetSmart which is a recent real world event.

Furthermore, he admits that he and his colleagues were surprised by how things worked out as the transaction progressed.

PetSmart makes no money when a pet is adopted and yet the company looks upon the AllPaws transaction as core to their business:

“Pet adoption is core to our purpose-driven business, and the acquisition of AllPaws offers a smart technology platform to accelerate our in-store adoption program even further,” said Michael Massey, president and chief executive officer for PetSmart.

“Our leadership role in pet adoption has led to a record-setting seven million pets adopted from our stores since we started the in-store adoption program in 1994. More than 3,000 current animal welfare partners -- plus thousands of additional rescues and shelters -- will be able to use AllPaws as a digital hub to promote adoptable pets, which we believe will result in even greater success in finding forever homes for pets across North America.”

As Kestenbaum notes:

“Convincing consumers that a business has a purpose beyond making money and is consistent with consumers’ values is key to developing a sustainable and trusting relationship with consumers and maintaining sales and profits.Never before have values been so closely associated with earnings and success. This is new. 

"About half the population has a dog and 35% has a cat. But among Americans in their 30s, 75% have dogs and 51% have cats. Even though the pet industry is exploding, having grown threefold in the last ten years, PetSmart knows that they can’t rely on a growing industry, they have to share their customers’ values to continue succeeding.”

What does this mean for emerging companies like Urban Animal Corporation? Just three things:

1. Investing capital to develop online services that can accumulate large pools of subscribers at a low cost of acquisition IS THE THING OF VALUE.
2. Subscribers and successful services will be valued higher than revenue, income or free cash flow.
3. In the next three to four years the scramble to acquire subscribers and services that add to the core values (purpose) of large brands will intensify.

The Paradigm Corporation has followed this trend in valuation since it emerged in late 2012. The ‘Paradigm Market Watch’ document is constantly updated to maintain a watching brief on comparable transactions and resources as well as market trends and analysis.

We believe the opportunity for clients like Urban Animal Corporation is to apply capital to add services and subscribers at a lower acquisition cost than these elements are valued by the market.

Large brands will then seek out meaningful relationships that add the substance and trust of Urban Animal Corporation to the brand’s purpose and core value.

About Executive Producer, Larry R. Evans:
Larry Evans is a futurist, a brand developer and a collaboration advocate. He is Principal of The Paradigm Corporation, which is headquartered at Thunder Ridge just outside Crossfield, Alberta, Canada. He is known for bringing a unique and predictive lens to paradigm shifts in a career that spans 45 years. Now from his wheelchair, he brings a grounded, tenacious view of brand value, client rights, online services and trusted relationships in the digital age. His perspective and values influence his life, business and ministry.

BUSINESS - PetSmart's New Website Boosts E-Commerce

PetSmart Inc. has launched an improved, mobile friendly website with new features including same-day delivery and subscription services.

Many see these improvements in e-commerce as a direct step to compete with companies like Amazon, which has been dominating the US online pet food market.

Forrester Research has predicted the fastest online category growth will continue to come from the pet category, which prompts brick and mortar stores to step up their online retail game.

The new site includes features such as one-page checkout and new tailored delivery options like recurring subscription-based shipping, scheduled delivery and same-day delivery.

All the improvements are aimed at letting pet parents shop how, when and where they wish, which demonstrates a customer-centric approach that should benefit the company.

“Our omnichannel strategy is aimed at giving pet parents options tailored to their needs and desires. We look forward to seeing their response to the new site with its new user experience and commerce-meets-content approach,” Eran Cohen, chief customer experience officer, PetSmart said in a release.

The new shipping options are provided by last-mile logistics provider, Deliv, a company that powers same-day delivery for over 4,000 businesses.

By mid November, PetSmart customers located in 17 of Deliv's markets can shop on PetSmart.com and select scheduled delivery on the product page for anything from 50 pound bags of dog food to bulky containers of cat litter or a fun pet fashion accessory like a hoodie, collar or leash, as well as seasonal holiday items.

HEALTH - Rescue Cat Saves Owner from Seizures

The human-animal bond is a mutually beneficial and dynamic relationship between people and animals that is influenced by behaviors that are essential to the health and well-being of both.

This includes, but is not limited to, emotional, psychological, and physical interactions of people, animals, and the environment.

(Brandon Wade/AP Images for PetSmart)

A great example of this bond made the news this week.

Blake, a one-year-old black cat adopted from a PetSmart in Fort Worth, Texas has had no training, but he is Glen Schallman’s seizure predicting feline friend.

Schallman has a very rare combination of three different brain diseases which, together, cause daily seizures.

Having a seizure while sleeping is particularly dangerous, and Blake alerts Schallmann to the nighttime events by biting at his toes.

During daylight hours if Blake senses an oncoming seizure, he lets Schallman know in a much gentler way - by jumping up, stroking, purring and staring.

According to CBS News, Schallman is believed to be the oldest living person with his rare combination of brain conditions, thanks in part to his buddy Blake.

The bond between the two is strong as they have rescued each other and Blake has joined a long list of hero animals that have saved humans.

HEALTH - Music Influences Mood and Behaviour

For humans, music is as intimate and integral as a heartbeat. Music can heal, and the beat of a drum can help the heart and mind.

Researchers are still asking why music is so effective in so many therapies.

Music therapy, the intentional use of specific music to assist with medical conditions, is used in treatments as diverse as enhancing the communication of non-verbal children with autism to reducing anxiety and recovery time for patients undergoing surgery.

Music therapy has also been used to treat trauma, dementia, and as a coping and educational tool for individuals with disabilities.

PetSmart’s move to bring intentional, carefully selected music into their stores and PetsHotel boarding facilities no doubt draws on the ability of music to calm stressed animals – whether those animals are humans, dogs, cats, or other pets.

But music is more than simply therapeutic. It also entertainment, communication, and background noise, and people encounter music most often outside of clinical settings.

Wherever it is heard (or played), music has an effect.

Favourite songs can cause the same physical responses as intense emotional arousal, with dilated pupils, rising pulse and blood pressure, and even blood being redirected to the legs and feet.

Music also has an effect on the behaviour of shoppers, and that’s another reason PetSmart is wise to team up with Mood Media for background music in their retail locations. Multiple studies have shown that the volume, tempo, and genre of background music can affect consumers’ behaviour in various ways.

Slower tempos tend to keep customers in stores longer, and in one 1982 study showed a 38% increase in gross product sales in a grocery store.

A 1999 study showed similar results in a restaurant, and also offered insight into how to move consumers through the environment quicker during peak periods, by increasing the tempo of the music.

Newer research has added nuance to the understanding of how music affects consumer behaviour. Mode may be just as important as tempo, and music in the major mode (which is often perceived as “happy”) has the same effect regardless of tempo, but music in the minor mode (“sad”) is significantly more effective when paired with slower tempos.

Music is used for everything from entertainment, to marketing, to therapy for a wide range of issues. Humans have been making music since prehistory, and may even have learned to make music from observing animals.

Research continues into how music can influence mood, health, and behaviour, but regardless of whether the hows and whys are understood, humans will continue making and listening to music.

It’s been part of the human experience for almost as long as there have been humans, and may have been one behaviour that differentiated Homo Sapiens from Neanderthals. It’s clear that this tradition will continue.

By Tiffany Sostar

Tiffany is a writer, editor, academic, and animal lover who came late to her appreciation of pets. At 18, a rescue pup named Tasha saved her from a depression and she hasn't looked back. She has worked as the canine behaviour program coordinator for the Calgary Humane Society, and was a dog trainer specializing in working with fearful and reactive dogs for many years. She doesn't have any pets right now, but makes up for it by giving her petsitting clients (and any dogs she comes across on her frequent coffee shop adventures) extra snuggles.

BUSINESS - PetSmart Adds Mood Music for Pets and Sales

People are used to the being serenaded by “muzak,” that ubiquitous music first found in elevators and now found everywhere from grocery stores to call centres.

Now PetSmart will be bringing their own mood music to each of their 1450+ stores and PetsHotel boarding facilities.

PetSmart has hired Mood Media to develop playlists that will appeal to customers and employees in their stores.

The PetsHotel locations will have “modern mellow tunes” to help keep their animal guests calm, and these playlists will also be used when rescue groups host adoption events at PetSmart locations.

Although music for human shoppers is pretty standard, introducing music for companion animals is fairly new.

But there is science to support PetSmart’s move to use music in their PetsHotel facilities and during adoption events.

Pets do appreciate music, and they are particularly interested in species-specific music. The right sounds can have a positive effect on animals, helping keep them calm even in stressful situations.

Some animals, including dogs, appreciate sounds in the same range that humans do.

Charles Snowdon, a psychologist at the University of Wisconsin-Madison and an expert in animal responses to music, told National Geographic that music made for humans has “positive effects on dogs, elephants, and chimpanzees, and negative or no effects on gibbons, baboons, horses, and lambs.”

The reason is that animals prefer music with rhythms and tempos similar to what they find within their own species.

So cats prefer music that includes the pitch changes and sliding vocalizations that they’re used to, and tamarins prefer music that has a quicker tempo to match the tempo of their calls, which is much faster than human speech.

The right music can even increase egg production in chickens and milk production in dairy cows, and despite the fact that animals often prefer species-specific music, there is evidence of empathetic responses when listening to cross-species songs.

One can assume the decision to play specific types of music is as much for PetSmart's retail business as it is for the animals.

Numerous studies have shown that different types of background music can impact sales, with low tempo music increasing purchases in retail stores and restaurants, and classical music inspiring shoppers to buy more expensive merchandise.

Mood Media global senior vice president, Danny Turner, told CBS that they were searching for “a solution that combined both organic textures and atmospheric styles.”

Mood Media is a global company that supplies music for high end spas and hotels throughout the world, and PetSmart is counting on them bringing the same attention to detail and quality to this project.

“Muzak” has become a term associated with any background music found in public spaces, but the word comes from Muzak, the company that first popularized music in elevators and shopping spaces in the 1930s and 1940s. Mood Media purchased Muzak Holdings in 2011.

By Tiffany Sostar

Tiffany is a writer, editor, academic, and animal lover who came late to her appreciation of pets. At 18, a rescue pup named Tasha saved her from a depression and she hasn't looked back. She has worked as the canine behaviour program coordinator for the Calgary Humane Society, and was a dog trainer specializing in working with fearful and reactive dogs for many years. She doesn't have any pets right now, but makes up for it by giving her petsitting clients (and any dogs she comes across on her frequent coffee shop adventures) extra snuggles.

BUSINESS - Stores Expand as Pet Industry Grows

Petco is expanding their retail presence having opened five new stores in July and done extensive renovation to 13 Seattle locations.

The Seattle market makeover and new store openings are part of the company's overall goal to significantly expand its national footprint by the end of the year.

At the same time, Pet Supplies Plus has signed 20 deals across the country resulting in 55 new stores this year.

Pet Supplies Plus is the leading pet franchise chain in the U.S. with a total of 360 stores.

Why the expansion and renovation in such a short time?

It’s simple - pet industry spending continues to rise.

The American Pet Products Association (APPA) reported total spending of $60.28 billion in 2015 and is projecting an increase to $62.75 billion this year.

“The steady growth of the pet industry is credited to cognizant pet owners looking for natural products for their pets and an increase in the amount of households with pets, which is now roughly 75 percent of the country. Pet Supplies Plus’ growth is exceeding that of the industry and on track to open 55 locations this year, a record year for the company,” David Leonardo, senior vice president for franchising at Pet Supplies Plus, said in a release.

The pet industry appears to be one of the most recession-resistant. As people cut back household expenses they still want to provide the best to their animal companions.

Since 1994, the industry has grown every year by at least $1 billion, according to the APPA. From 2006 to 2011, the industry grew by 32 percent.

As reported in InfoStream in July, PetSmart, the largest specialty pet retailer in North America, is also growing by 80 stores this fiscal year.

It’s interesting that more stores are being built when there is such a shift to online purchasing in general.

However, Petco is including services such as a grooming salon, dog training area and in-store Vetco clinics in the new Wellness Centers and mobile clinics that cannot be provided online.

And Pet Supplies Plus will be launching its own e-commerce capabilities in 2017.

BUSINESS - PetSmart Expanding

With 50 new stores in the 2015 fiscal year, PetSmart plans to continue its growth by opening another 80 stores in the U.S. and Canada in 2016.

The new stores average over 12,000 square feet with service offerings such as grooming and pet training.

“We are ramping up efforts to expand our footprint in North America and are actively identifying and evaluating opportunities in both current and new markets,” said Brian Amkraut, senior vice president of real estate, strategy and initiatives.

“Our customers prioritize convenience, and we are listening and responding. Our aim is to focus on consumers’ localized needs and we’re pleased to have more opportunities to engage with and serve customers, and to be active in supporting pets and pet parents in these communities.”

PetSmart’s continued expansion is part of its long-term growth strategy and will further strengthen its position as the largest specialty pet retailer in North America.

PetSmart operates 1,466 stores in the U.S., Canada, Puerto Rico and 203 in-store PetSmart® PetsHotel® dog and cat boarding facilities.

BUSINESS - Ellen DeGeneres Launches Pet Product Line

(Business Wire)

With pet industry spending coming in at a record $60.28 billion in the United States last year, it’s not surprising that Ellen DeGeneres - a pet lover and design icon - is entering the market.

Partnering exclusively with PetSmart, the ED pet lifestyle line will include pet apparel, beds, bowls, collars, leashes, harnesses, toys and pet carriers, as well as shampoo and other at-home grooming supplies.

“We are thrilled about this collaboration with the ED brand and Ellen, who shares our view that pets make us better people. She is passionate about pets, a tremendously creative design talent and people relate to her and love Ellen’s view on life. She is extremely relevant, especially among millennials, an important demographic that is moving into pet parenthood at a significant rate,” said Ted Passig, EVP of Buying and Sourcing for PetSmart.

The collection is expected in all 1,450 stores early next year with seasonal updates.

When announcing the record pet industry spending numbers, Bob Vetere, president and CEO of the American Pet Products Association (APPA), stated, “The pet humanization trend is alive and well and continues to drive growth at the premium end of the market. As millennials prepare to take the reins from the baby boomer generation as the primary demographic of pet owners, they stand to further develop this trend.”

Ellen’s foray into the pet industry seems to support Vetere’s prediction of continued growth and development.