Family-run VIP Petfoods has made a fortune down under. Having built up a large share in the Australian economy, the firm is about to expand worldwide. But how does it plan to change its USP in order to be accepted by western markets? Melanie Stern finds out.
Melanie Stern is the former section editor of Families in Business.
Tony Quinn doesn't recall the number of private equity suits that have called by his offices to wave dollars in his face. But he knows they always leave empty handed. "They're a pain, really. They don't understand me," the entrepreneur concedes. "I've only met one who knew anything about our business and our industry anyway. And I don't need their cash. The other day I worked out that I could live until I was 293 before I run out of money. So I think I'll be fine."
Quinn is certainly not backwards in coming forwards about money. But the figures do stack up for the pet food company he founded less than two decades ago, VIP Petfoods, one of Australia's best-recognised home-grown consumer brands, headquartered in Yatala, a prime industrial district on the Gold Coast. According to the global pet food magazine, PetFood Industry, VIP is the world's ninth-largest growth leader in its industry – outdoing its most potent blue-chip rivals, including Mars Inc, the family dynasty that owns petfood arm Masterfoods; Nestlé, which makes the well-known Purina brand; and Procter & Gamble, maker of Eukanuba and IAMS brands. VIP has almost doubled in size and output inside five years since 2000 and is valued by PetFood Industry at US$27 million. This hasn't gone unnoticed by VIP's major rivals, some of whom have already visited Quinn's offices in their search for smaller players to swallow.
In an economy as young as Australia's, VIP stands out as one of the country's fastest-growing success stories, remaining wholly family-owned despite the ongoing flirtations of the private equity world. Its key product, fresh chilled pet food for dogs and cats, produces turnover in excess of AUD$120 million each year. Its edge – the ingredients that go into VIP pet food make the meat deemed high quality enough to be stocked in the same supermarket aisle as meat for human consumption. Three of the firm's eight factories in Australia process some 17,000 kangaroo carcasses a week, kangaroo being lean game meat reared entirely in the wild. This is mixed with real vegetables, not vegetable reconstitutes or extracts, and tonnes of cooked eggs are added by hand on the production line. In a climate where consumers have cottoned on to the often unsavoury content of human food, millions of dedicated pet owners in Australia are happy to fork out more for pet food they feel is natural and wholesome. In turn, powerful retailers, such as Woolworth's, like the margins and have wholeheartedly endorsed the product. Its premium dog rolls – heavy tubes encased in gaudily-coloured shiny plastic with the VIP name emblazoned in super-large type on the front – are always stacked in a sort of pyramid of promise among the steaks and barbeque packs, glistening so invitingly that it seems a shame they're destined for the dog's stomach. None of VIP's rivals enjoy this luxurious point-of-sale. Placement in the same chilled compartment as meat for human consumption was one of the first major battles Quinn had with retailers that put his firm on the road to market dominance. It also turned out to be a marketing masterstroke, placing the brand directly in front of key consumers, inheriting an unspoken promise of quality being stocked next to prime Australian meat sold for family barbeques, and working its way into the Australian psyche.
In 2007, VIP enjoys a stunning 85% market share in a business segment worth around AUS$4 billion to the Australian economy. "To be honest, it's probably more, but we tend to stick to saying 85 because any more would be embarrassing," Quinn adds. Again, a brazen quip, but not unqualified by the facts. Australians are generally pet mad. According to the Pet Food Industry Association of Australia, the country's body of market operators, the petcare industry is one of the largest segments of the national economy, with around 64% of households having one or more dogs and cats. According to a report by Euromonitor, the Australian market is so big that growth has now begun to plateau, settling at 4% back in 2004. Australia is saturated with a handful of multinationals and a gamut of local players of a size that would not usually raise a blip on the radar of a firm like Mars, but whose customer loyalty and brand recognition make them serious players.
Additionally, aware of the presence of Asian commerce and the real threat it poses to businesses here, Aussie consumers consciously look for and loyally buy Australian. "Proudly Australian Made and Owned" labels adorn almost every supermarket item, giving local producers a stronger stance against otherwise all-powerful foreign rivals. However, for a company the size of VIP, there is little more growth to be achieved at home. "There is still a lot of testing and market research to do, which is a bit unlike me because I've always just decided on something I wanted to do and I've done it, and it's worked very well," says Quinn. "The international thing needs a totally different thought process to the domestic one, not least because products like kangaroo or crocodile meat outside of Australia probably wouldn't be wise. But having said that, I think pet owners in, say, California or Germany would love it because it's unusual. It's a big job." VIP already exports to some parts of Asia, including Thailand, Korea, China and Japan, but these are small contracts for a few thousand pallets a month to organisations such as greyhound racing clubs. "With fresh pet food, two things sell it: one is the desire for modern society to believe their food is fresh. There are always a lot of questions over how fresh the food we eat really is, so we're riding on the back of that phenomenon. Secondly, our generation, the over 50's, enjoy being part of the feeding process. When you give your dog some fresh pet food, and it's squishy, it's not from a tin, you can cut it up, you feel part of feeding the dog. But I don't think my grandchildren will feel like that," he says. "I think the future will be 86% of the market consuming dry food. So it is important for VIP to create more dry foods and more products that are different, and have some kind of way to be different from that market, including how we market them. There are a few outlets that you can easily deal with that sell pet food. In Australia, it's basically supermarkets and pet food stores but we might look at things like hardware stores or petrol stations. It is not only the places we sell but the point-of-sale too – we are thinking about things like making our own dispensing machines that can give out a 6kg bag of feed. We need to cater for women and for weekly purchases. They can put it on their loyalty card maybe." Ideas aren't in short supply for Quinn.
In 2006, the firm started trading in the US, building a factory in Philadelphia and forming a subsidiary with a consortium of partners (Quinn obviously doesn't mind doing business with the private equity boys if he can keep them at arm's length) which is run by Tony's youngest son, Klark. The Quinns have hedged their bets with a 6% stake in the venture, the rest being venture-backed. A plant in Canada was also opened this spring.
But to make an international venture work, VIP has to change its USP from fresh chilled pet food to dry pet food, which is what its rivals have made money in and something VIP has, until now, only run as a sideline. Quinn concedes that dry pet food was one of the firm's smallest and slowest-growing sectors last year, but it will be essential to its success in the US. Changing to dry pet food is a big risk, particularly since the firm recently completed a very successful trial period selling into 700 national Wal-Marts, Giant Eagle and Kreuger's stores. "Industry guys are watching us, seeing what we're doing, and they're wondering if they should be doing the same thing. But they're mostly in dry foods," Quinn says. "Eventually, fresh pet food will just be a niche since it's too difficult to make and export."
Under Quinn's patronage, VIP has become the leader by way of innovation, from developing new types of pet food, being the first to make commercial success out of products made from natural ingredients, and adapting to consumer needs or financial trends by developing mid-range and premium lines. The latter is where VIP is strongest. But Quinn believes the two will begin to merge soon, leaving him without that edge. Additionally, fresh chilled pet food is impossible to replicate across global markets and goes off before containers reach ports anyway.
"In five to 10 years time, the gap between super-premium and mid-level dog food – the private label stuff – will disappear and it will be difficult for consumers to distinguish between them," he says. "That's when we need to be doing products that are so unique no one else is doing it. That's the project we are most heavily involved in at the moment."
Organic growth and true innovation are especially important now as shortcuts, such as acquisitions, are costlier since the multinationals have been buying them up. Green's, a local Queensland family business, was bought by Nestlé last September for US$90 million. VIP had been conducting due diligence on the firm as a potential buyer for its dry foods expansion, but the price tag proved unpalatable. The Nestlé purchase of Australia's number-three petfood firm was, Quinn says, defensive. "For them it was an insurance policy because their brands are losing out, losing space on the supermarket shelves," he explains. "They had to do something since they're in the top one or two globally in pet food, and to be de-listed from that spot and from their position in the Australian market ... so to pay $90 million to avoid that ..." Mars also turned its back on its own company policy to defend its dominance in the pet food market when it bought Doane Pet Care, two moves heralding the changes in the market as a whole. "Up until that point Mars wouldn't make private label brands because it was against their company policy," Quinn adds. "But the whole world is changing and we as manufacturers need to embrace this private label phenomenon. And our market today is driven to a big degree by the greed of the retailers and their need for more margin and control. After all, it is their real estate, and they can do as they like with it, so the best road for them is private label. That will have a terrible effect on our business globally because it will stifle innovation and opportunity."
For now, untroubled by the ever-growing power of multinationals, the family is pulling together with its management to fashion its new USP for global growth. The second generation is already well ensconced in the business; Tony's wife Christine works closely with him in the executive office; eldest daughter Kelda runs the Perth plant with Tony's brother, Sinclair; his eldest son Kent is in the US; son-in-law Kynan runs the meat production side of the firm, while Tony's youngest son Klark "is the make-it-happen man" – only in a family do such titles exist. "I think his future may be in marketing our firm, using his profile," says Tony. And there is validity in their arrangement. "I think for the size that we are now, we've remained very innovative as a family. My eldest son, Kent, I rely on as my right-hand man. If I come up with an idea, it's easier for me to tell him about it because he understands the language I use, rather than having to go to engineers. You get fed up with that and you move on. But I come up with a lot of ideas, and that's where the guys use me and they make them happen."
Even Tony's parents put their two cents in now and again. His father, Jim, is a Queensland legend, a Scottish émigré who founded a dog school that went on to train and supply dogs to the State for the police force. A team of non-family managers oversee the firm alongside the Quinns, though as he admits, like so many other growing family businesses, that partnership can be "a mission, psychologically – but we have some great people who take care of everything for us." That said, the Quinn name is at the heart of the brand. Quinn's principal advertising channel is its involvement in V8 racing. The firm runs its own racing team and participates in a string of high-profile races year-round, both at home and abroad. As we speak, his team are competing in the Dubai Carerra Cup. Klark, 28, heads up the team as the driver. The cars are plastered with the VIP logo and Tony says this garners several million dollars in TV advertising time, which he is confident (though there has been no audit, so there are no figures) that this converts itself into sales. As the firm expands overseas, this will continue to be an important promotional tool. "People ask us, 'Motor racing, how did you work that one out?' We have audited it and it cost us AUS$380,000 to run the team for a year but we receive $1.7 million in television time for it," explains Tony. "From a brand point of view, motor racing has been exceptional but, if you're down the back, you're wasting your money. It has worked well for us in Australia and New Zealand, and it will be the same in the US."
Meanwhile, VIP has already seen its investment in the US venture triple in value, so the signs are good. Yes, private equity is in there, but Tony is confident Kent has influence in what he sees as a VIP business under control. "The Americans want to move in on our Canadian business already, tying it into the US business so they can benchmark it for future sale," he says. "I said to them: 'Next you'll be wanting to benchmark the Australian business' and he said to me: 'Funny you should say that'. I was offered an awful lot of money by a private equity firm for the business last year. But so long as the kids want to do it and I have a good team here, let's keep on doing it."