Sale of pet-supply company sign of changing times

Petco purchase of Drs. Foster and Smith one of several industry shifts

Published: December 17, 2014
By Rianna Hidalgo

Photo courtesy of Drs. Foster and Smith
Dr. Race Foster cofounded and ran a successful catalog and online pet-supply house for 31 years. Following a sale of the business to Petco, Foster hopes to stay on for at least five more years.

For Dr. Race Foster, selling the company he cofounded in 1983 to the second-largest pet retailer in the nation is about keeping up with change — in the veterinary profession, in the retail world and in life.

“We are just practitioners who got old and needed to change with the times,” said Foster, a 57-year-old veterinarian. “You have to face the realities. How do you take what you created and make it part of something bigger?”

In November, Petco announced a plan to buy Drs. Foster and Smith, a mail-order and online pet-supply company owned by Foster and fellow veterinarian Dr. Marty Smith, 68. The company carries prescription and over-the-counter pharmaceuticals, private-label products and other supplies for dogs, cats, fish, birds, rodents, horses and reptiles.

“The acquisition will complement Petco’s existing capabilities in pet health to include prescription services,” said Petco CEO Jim Myers in a statement, "including prescription diets, preventative care and a broad base of products created by licensed veterinarians.”

For Petco, which carries parasiticides in addition to a variety of pet goods and live animals including birds, fish, rodents and reptiles, the acquisition means full-range pharmaceutical capabilities along with an expanded product base. For Drs. Foster and Smith, which employs 500 people out of Rhinelander, Wisconsin, it means becoming part of a $3.2 billion entity with more than 1,300 locations. Its founders expect the company to remain in Rhinelander as a stand-alone operation for the foreseeable future.

Petco's purchase of Drs. Foster and Smith comes as retailers push to keep pace with the growing pet industry and amid ongoing discussion within the veterinary profession about the landscape of pet-medication distribution.

In September, Petco’s chief rival PetSmart acquired a full-service Internet veterinary pharmacy in the e-commerce site Pet360. On Sunday, PetSmart announced it is being bought for $8.7 billion by a consortium of investors led by the private-equity firm BC Partners.

A New York Times report rated the deal the biggest leveraged buyout of an American company this year and explained the allure of the purchase with this quotation from Raymond Svider, a managing partner of BC Partners: “The category of pet products has been growing in the U.S. and abroad consistently for a number of years.”

In addition to selling live animals and an array of food and goods for pets, most PetSmart stores house veterinary clinics run by Banfield Pet Hospital, which is owned by Mars Inc., a privately held company. Banfield said that under the terms of the agreement governing its relationship with PetSmart, it will be unaffected by the ownership change. “Banfield will continue to operate its hospitals as usual,” the company stated.

At Drs. Foster and Smith, the pending sale to Petco has generated pushback from customers concerned that the smaller, people-oriented business might be “selling out” to a retail giant. With the deal in early stages, it remains to be seen what will change after the acquisition. A spokesperson for Petco declined an interview request.

Co-founder Foster is adamant that the deal is a positive choice that not only secures a future for his company as he and Smith near retirement, but is perfectly suited to a rapidly transforming profession and retail environment. By becoming part of Petco, he said, Drs. Foster and Smith is doing what it has done since it first started 31 years ago: catering to the consumer.

Why sell?

The decision to sell Drs. Foster and Smith was not due to financial woe.

The company has progressed from the days when it was just four veterinary clinics operated by Foster, his brother Dr. Rory Foster, who died of Lou Gehrig’s disease in 1987, and Smith.

The founders sent out their first 16-page catalog in 1983, opened a warehouse in 1992, launched private-label products a year later, began selling online in 1998 and opened a licensed pharmacy in 2003. Today, the company also operates, an information resource for pet owners, and, a supplier for aquariums and ponds.

Drs. Foster and Smith reported record sales this year of an estimated $240 million, and it has garnered a stellar reputation for customer service and awards for its website and catalog.

Even so, plans to sell the company have been in the works, Foster said, for one reason in particular: They are getting older, and it was time to strategize for the future of their company.

Foster said they listed the company for sale through an acquisitions advisory firm, Falls River Group, and looked at several possible buyers both inside and outside the pet industry before landing with Petco.

He cited its adoption program and its hiring of veterinarians as examples of its dedication to the health and wellness of animals. (Petco employs one full-time veterinarian to oversee animal-welfare issues and contracts with veterinarians in communities where it's located to provide medical care for animals in its stores.)

“If you look at their track record, they are very close to the veterinary profession,” Foster said. “I think they have an overall vision that goes way beyond selling toys and treats in a retail environment.”

Foster said the acquisition was the logical choice to boost sales and reach more customers.

Terms of the deal, which is expected to close in early 2015, have not been disclosed. Foster said he is confident Petco will not make many changes in the short run but stressed that he has no way of knowing what will happen down the road.

“I don’t know what they plan on doing when they fully incorporate us into their system,” he said. “What I do know is that they have a dedication to animal health and wellness, and I have to believe that one of the reasons they looked at us is to help them carry that out.”

Foster does have several hopes and expectations: that Drs. Foster and Smith continue as a stand-alone operation, that he and Smith stay with the company for several years — at least five in his case — and that operations continue out of Rhinelander.

He also said he would like to see Petco expand its pharmaceutical capabilities and add in-store pharmacies to give pet owners greater options.

“There have been a lot of changes in veterinary medicine,” Foster said. “And those same changes have happened at the retail level. The consumer wants to have access to services in a lot of different ways.”

Mirroring human medicine?

The pet industry is generating an estimated $58 billion in 2014, according to the American Pet Products Association. With the industry growing each year, Petco and PetSmart are not the only ones vying to keep pace.

Target launched a pet pharmacy in 2010 and Walmart followed suit in 2012. Both now feature pet pharmacy pages with mug shots of puppies and kittens. And with more pet owners turning to sources outside veterinary clinics for their pet medications, the discussion of how the pet pharmaceutical marketplace should function is turbulent.

Some veterinarians accuse retailers of undercutting practitioners’ prices, damaging the veterinarian-client-pet relationship and selling substandard or even dangerous drugs. Even more controversial has been the practice of gray-market diversion, whereby drugs meant to be sold only by veterinarians end up on retail shelves through shadowy third-party distributors.

The Federal Trade Commission has been discussing the distribution of pet medications for several years, prompted by the introduction of a bill that would require veterinarians to give prescriptions to clients to enable them to obtain their pets’ drugs outside the clinic.

Currently, most drug manufacturers have policies of selling only to licensed veterinarians. Drs. Foster and Smith has been outspoken in its support of an open marketplace where drug manufacturers supply all qualified pharmacies, retailers and clinics.

Foster said he believes it simply is part of an evolving profession and a consumer-driven industry. To his mind, it is inevitable that a place such as Petco will become part of the picture for animal health and wellness, and that medications will make their way out of clinics and into stores.

“I believe they will expand and augment what goes on in the veterinary world,” he said. “I just don’t think they are totally separable.”

Foster sees the change as paralleling human medicine — a world where people get prescriptions from doctors and fill them at Walgreens or another retail pharmacy, where patients ask doctors about medications they see on TV, and vaccinations are given in schools and drug stores in order to reach the masses.

“I’m for the veterinary profession,” he said, “but we also have to realize we have a changing profession that is driven by consumers. And I don’t think veterinarians like to hear that. It’s no different than human medicine. It’s just years later.”

Foster admitted that these transformations make things tough on the average veterinary general practitioner; he experienced it himself, he said, when more veterinarians moved into specialized fields and general practice became undervalued, another transformation he called consumer-driven.

While some veterinarians find it hard to accept, giving the consumer more choice and lower prices is for the greater good, as far as Foster is concerned.

“We need to be part of the greater picture or we will become a relic,” he said, “just as I did as a general practitioner.”

Customers react

News articles about the acquisition have garnered dozens of negative comments from readers who have ethical objections to Petco for its sale of live animals, or who fear shipping speeds will slow, prices will rise and customer service will decline.

Foster has seen the comments and stressed that he expects quality and service to stay up to par. One phrase in particular bothers him: “selling out.”

Foster sees securing a future for the company he has been invested in since he was 26 years old as nothing but a triumph. “We have opportunities now that we never would have if we didn’t make changes,” he said. “That is positive — for our employees, for pet owners and for our families. There is nothing but victory in that. There is no selling out.”

In the end, Foster isn’t fazed by the criticisms. “Clearly,” he said, “more people like Petco than like Fosters and Smith. Otherwise, I would be buying them.”

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