Q&A Interview with Shawn McGhee with Hollywood Feed

Page 1

IN CONVERSATION

Shawn McGhee, CEO, Hollywood Feed

What led to the decision to acquire PetPeople?

There are always four dynamics I look for in an acquisition. It starts with people and an alignment around the purchase of the customer and the customer experience with the people. Then we get into product. Within the pet industry, you have a pretty varied product assortment and product focus and strategy. In some of the larger categories you have people that are out selling fish, reptiles and small animals such as hamsters and all of that, which we don’t participate in, so for the most part, it’s much easier to do an acquisition with a group of stores that are aligned around canine and feline. Then it’s market. When you look at the market, it’s really the adjacencies within the states and the adjacencies within geography that start to make sense. Also, of course, product aligns around the customer and market and where the directive of the customer segmentation is you’re looking at going after. And last, as I see it, it just has to be an overall good fit. All the components have to come together, and you have to have the right capital markets for it to make sense economically. You also have to have a willing participant in a seller, along with a willing participant in a buyer, and I think that’s what aligned with this particular transaction.

Can you explain the geographical considerations, in particular?

There’s some really interesting things here. We gained more stores in Florida, Georgia, Indiana, Kentucky, North Carolina, Ohio and Tennessee. And then we added states—Illinois, Kansas, Michigan, Missouri and Pennsylvania with PG 1 / PE T I N S I G H T

Hollywood Feed storefront in Tulsa, OK

this transaction. And all of those fall within our given supply chain, so from a pure efficiency standpoint, falling within our supply chain makes transportation quite easy, and it is one of those things that drives an economic value of scale.

Why was now the appropriate time to make this acquisition?

It goes back to the first four things I talked about. Obviously, it’s the right amount of fit, but from a timing standpoint, you have a number of owners that are aging out or the owners are timing out. Also, if you’re a private owner and you’re reaching the twilight of your life, people are starting to make transactions happen because they’re in their 60s or 70s and it’s just the right time to do it. Further, on the private equity or investment side of the world, most of those funds are looking to be in a transaction for up to seven years, and they’re starting to time out. I believe right now is the right time for a lot of transactions to happen.

How does the acquisition benefit PetPeople and its customers?

From a pure customer experience standpoint, Hollywood Feed has this amazing tech stack that we bring to the table. From a pure technology standpoint, we think we’re leading edge in the industry and the consumer is going to see that in speed. The consumer is

going to see that in robustness of the offering. They’re going to see it in the overall service that we’re able to provide to them. The second component is our supply chain. When you look at it, Hollywood Feed owns its own distribution. Hollywood Feed owns all its own trucks. We own all our own cars for same day delivery, so we bring all that deep supply chain knowledge to the PetPeople stores.

And how does Hollywood Feed also benefit?

It’s two things: time is definitely one [benefit] because to go out and build 70-80 stores, it takes time. Therefore, it’s an opportunity to go into the new markets that we already discussed, but it’s also just a certain amount of scale, and we’re able to accelerate the timing just because it’s incredibly difficult to build stores in the middle of Covid right now, and this gives us an opportunity to enhance our total network.

What changes might staff see in the near future?

The first thing is what we’ve already done; we’ve already changed them over to our payroll stack and so the PetPeople employees are now being paid through the Hollywood Feed tech stack (includes back-end software, payroll, etc). That’s not only your first change r Cont'd on Pg. 2


Shawn McGhee, Hollywood Feed r From Pg. 1 that happened, but also a pretty critical one if you’re an employee: you want to make sure you get a paycheck. In the coming months, you’ll see the Hollywood Feed tech stack go into the stores. The Hollywood Feed tech stack facilitates an enhanced customer experience. It brings with it a commonization of the customer, so there’s a single point of reach for all customer information and all customer data. The stores are able to reach across each other to see inventories and customer consumption across the entire network.

What changes might a PetPeople customer see coming soon?

If you’re a Hollywood Feed customer and you walk into a PetPeople store, all your information from all your previous histories, your warranties, your coupons, all of that, is available to you, and vice versa. The other piece that happens is that Hollywood Feed is an e-commerce player where PetPeople wasn’t. So, if you’re a customer who moves out of a given area where there’s no longer a PetPeople store, we’re going to be able to still facilitate the health and well-being of your pet through e-commerce. The third thing is that same day delivery, instead of going through a third party, being delayed for anywhere from five hours to a day, we’re able to do that all within about an hour.

Will branding be changing?

We will be changing the names of all the stores to Hollywood Feed. It won’t happen overnight. This is Covid and being able to harmonize the brands is very difficult because of your ability to get materials in a supply chain environment like we’re in. “PetPeople” will be a brand in terms of the store. We still own the intellectual property to the brand. We don’t currently have a strategy as to exactly how we’re going to use it. Hollywood Feed will be consolidating all the PetPeople corporate office activities into the Hollywood Feed corporate office in Memphis, TN.

How do the values of PetPeople align with that of Hollywood Feed?

It starts with the customer experience. The individuals in the PetPeople stores are highly motivated towards serving the customer and delivering a PG 2 / PE T I N S I G H T

superior customer experience at the store level. I think that aligns very well with being similar, the saying goes, almost across the board within the Hollywood Feed sets of stores. Those things are just natural. If we would have gone out and looked at some of the other chains out there that are low service models or have a different philosophy, it’s just not as nice of a fit.

What’s your timeline look like to complete the acquisition logistics?

We expect to have all, what I call the mechanics of the business, solved by the end of July, when everything will be on the Hollywood Feed platform. Everything will be working on the Hollywood Feed supply chain, and we expect we’ll be done with that [this summer]. There will still be some branding elements that we don’t necessarily know how long they’re going to take. If these were normal times, I could probably give you a hard-and-fast timeline, but these aren’t normal.

How do you think the pandemic impacted the apparent acceleration in mergers and acquisitions in recent years?

What the pandemic did was accelerate the growth in the industry. It probably pulled us forward a good two to three years. If you go in and look at the macroeconomics of the pet industry in general, over the next decade it’s supposed to more than double. And I think when you talk about an industry going from say, a round number of $100 billion to $200 billion, the sheer size, stability and overall growth of the industry is going to attract larger and larger players with deeper and deeper investment [dollars]. And I think that by its nature, it’s going to drive consolidation. The second thing is, as I touched on earlier, is the demographics. The pet industry has been built by entrepreneurs. Many of those entrepreneurs are reaching ages in which they’re starting to think about estate planning and enjoying life on the golf course or the tennis court or whatever it is that makes them happy, and I think that’s creating that opportunity. The other side of it is when you look at the investment dollars that are coming in through private equity, private equity all has a given timeline—almost all of

them have a given timeline—and with those timelines come businesses that are bought and sold at a fairly regular cadence.

This is a cyclical occurrence, then?

It’s the demographics cycle. The Boomers are going to be completely gone by the mid to late 30s, and you have the Millennial generation and Gen Z coming in en masse behind them. That transaction is creating a lot of this change in not just our industry, but I think in all industries.

So many mergers and acquisitions creates an impression that opportunities are dwindling for a smallscale entrepreneur. Would you agree with that assessment?

I think there is more opportunity today than there’s ever been. A typical mode of consolidation is a manufacturer gets bought, and the first thing they want to do is go to the larger market which means you’re going to move into food, drug and mass. That moves them out of the independent pet space or moves them out of the pet spaces as an exclusive, which creates an opportunity for that new, young brand and that new, young idea to come into the space and create that niche opportunity. The second thing is capital has never cost less, so the No.1 thing that every new brand needs is more money. And if that money comes to you at a lower cost, it’s going to improve your chances for success. Thirdly what happened in my opinion was if you look at the pandemic and go in and look at the math, the number of businesses in the US came close to doubling during the pandemic. This means you’ve had this huge entrepreneurial flashpoint that was fueled by a lot of people who either took buy outs or a lot of people who were able to get stimulus or were able to acquire capital at a really attractive rate. What that does is they’ve gone out and created new businesses across many fronts—at a level we’ve never see in the US. And while it’s too early to say exactly how it plays out, if I was an entrepreneur today, I would be more emboldened to be more aggressive and go after areas in the pet space. It’s much easier to create a really r Cont'd on Pg. 3


Shawn McGhee, Hollywood Feed

Hollywood Feed storefront in Atlanta, GA

r From Pg. 2 nice business in a $200 billion industry than a $100 billion industry.

What about on the retail front —will mom-and-pop stores just continue to be edged out in favor of consolidation?

I’d counter the narrative of the ‘momand-pops are going away’ with a review of the franchise space, whether it be Pet Supplies Plus, which is obviously the largest franchisor in the space. However, you also have 3-4 others behind them that are all seeing robust growth, and that growth is not coming from corporate America. It is single store owners to owners with a few stores. The way you win, as a single store owner, is to individualize those stores. Individualization means uniqueness and uniqueness is always about a point of view around product and people.

How would you sum up the last two years?

Our goal was to maintain as normalized a customer experience as humanly possible, in an incredibly difficult environment. I’m very proud of the team for being able to achieve that goal. It continues to be a difficult environment in my opinion. Even though the masks have come down the supply chain has gotten worse. And again what we’re doing is trying to maintain a normalized customer experience at a very high level for the Hollywood Feed customers and now for the PetPeople customers. It really is PG 3 / PE T I N S I G H T

a testament to our team that we’ve been as successful as we have been throughout this cycle.

Could you elaborate on the supply chain assessment—that it’s gotten worse?

I suppose when you look at the consumption of many products that continue to scale, the short supply of product continues to be a battle in the marketplace. You’re seeing those products continue to inflate now. We didn’t have the inflation that we’re having today, and I sense the inflation is going to be the next major challenge that we’re all going to fight. Every vendor out there is feeling the pinch of energy right now and every vendor is feeling the pinch of the incremental cost to move items. Whether you’re moving those items in the US or you’re trying to pull containers out of China or Europe or any other country, there’s been an inflation that the world has never seen. It’s nothing for container pricing to have increased eight to 10 times and that kind of inflation we’ve never had to deal with, and there’s really no way to get around it at the moment. I think there are some long-term things that could come on the horizon, but in the short term we’re going to feel an awful lot of pressure.

So how do you prepare for it?

It’s already here. I’ve always been a believer that a low-cost producer is always going to survive and win, and Hollywood Feed has always been about

making sure that we have a low cost overhead, and we have a very efficient supply chain so that we’re here for the long haul.

What are your goals for the rest of the year?

We’ll have the technical side of this one [the acquisition] solved by the end of July. It doesn’t mean we’ll have everything moved in, but the mechanics of it in terms of what the customer sees, in terms of what the employees see, in terms of our ability to just digest and see it as one unified platform, I expect we’ll have complete. So at that point what you’re really looking at is the development of new stores. With the acquisition we acquired several pieces of real estate that need to be developed and opened. Hollywood Feed had a pipeline of real estate that they were already working on, so it’s those two coming together and figuring out that piece. But I think the other piece of it is on the supply side of the world. You now obviously have to source significantly more goods and in a market that’s very difficult. So I think the back end of 2022, you’re going into the fourth quarter, which historically has been the peak time of the year, there’s a lot of unknowns and it’s going to be difficult and very challenging. The last piece is we think there are other opportunities out there that may present themselves to us, and we would be open to those acquisitions should they come at the right time and the right place.