Capitalizing on Pet-Food Panic

Scott Morris decided it was time to gamble. He'd had a good run as head of marketing at Meow Mix, one of the country's leading cat-food manufacturers—boosting sales by $150 million. But when Delmonte Foods bought the Secaucus, N.J.-based company, Morris saw that this might be his last best chance to start the new business he'd been plotting. His idea: to become the country's first maker of all-natural, locally grown, refrigerated dog food. He and two business partners had scraped together $875,000 in seed money, liquidating 401(k) plans, taking out second mortgages, and borrowing from friends and family. They convinced a few retailers in the Southwest to carry their product, got an additional boost from an Australian-based pet-food manufacturer, and set off into a tough and competitive market. "I was scared as hell," Morris remembers. "Striking out on your own, leaving a day job, it's never easy."

Then, the great pet-food scare of 2007 hit. In a matter of days, 60 million units of wet dog and cat food were recalled, tainted due to rat poison. Pet owners panicked, flooding veterinarians' offices with calls about their sick cats and dogs. The FDA offered assurances that the food on the shelves was safe, but skeptical buyers weren't so sure. Suddenly, consumers began noticing the curious four-foot refrigerators in pet-food stores, bedecked with decals about locally sourced ingredients and all-natural alternatives to the usual fare—and stocked with loaves of wrapped plastic that looked more like Jimmy Dean pork sausage rolls than the usual kibble or cans.

The pet-food crisis has claimed many victims. Just 16 animals have had their deaths directly attributed to the tainted food. But the FDA says it's received about 17,000 complaints of sick pets since the recall, half of which have resulted in the loss of life. And it's been a rough several weeks for Menu Foods, the Canadian-based pet-food manufacturer that sold the tainted food to the makers of nearly 100 brands. Two weeks ago, Menu Foods president Paul Henderson testified before a Congressional hearing, answering questions as to whether a Chinese manufacturer intentionally added melamine—the source of the poison—to its tainted supply of wheat gluten in order to boost its protein content. Henderson said that a "case of deliberate contamination" appears likely. Menu Foods is suing its supplier ChemNutra, and now both companies are under investigation for violating federal food-contamination laws.

But as in any crisis, there are winners, too—and in this case, the spoils of the recall seem to be going to the handful of companies that offer alternative pet foods. From raw to all-natural and organic, the market for nontraditional pet foods is still only about 5 to 7 percent of the overall pet-food industry, says Bob Vetere, president of the American Pet Products Manufacturers Association. But they're growing fast—if the last month or two is any indication. And few have emerged from the rubble as well-positioned as the business Morris and his partners started, FreshPet. Timing, it seems, is everything—even where Fluffy and Fido are concerned.

"The week after the recall, we had record sales in every account," says Morris, who calculates that FreshPet's overall sales are now up 40 percent in the last six weeks. "Just the last 30 days have been borderline overwhelming." Retailers from Florida to Boston are calling every day, asking for product samples. Individual consumers want to know where they can find the stuff. "The lady we hired to answer the phone part time is now full time. She can handle about 100 calls a day," says Morris. "You put an idea on a piece of paper and hope for the best, but this has exceeded even our most optimistic projections."

The idea was to change the whole pet-food paradigm—to capitalize on Americans' increasing appetite for all-natural foods on their own dinner tables, and mix that with their habit of spending more and more money on their pets. Among the competitors: Karma, the maker of high-end organic dog kibble, and Nature's Variety, which manufactures medallion-sized frozen patties of USDA-certified, human-grade raw meat for both dogs and cats. What gives FreshPet a leg up, as it were, in the marketplace: its price. On average, it costs only about 12 percent more than traditional dog food (Karma can cost about twice as much as traditional food). "Compared to the others, Freshpet is relatively affordable," says Susan Parker, executive vice president of Cutters Mill, a specialty pet-store chain in New Jersey and Pennsylvania whose sales of all-natural and organic pet foods has increased 40 percent since the recall.

"Our behavior toward our pets has changed drastically, but the food we feed them has stayed the same," Morris says. "Pets are now seen as part of the family, but we're still feeding them brown mystery meat in a can." The core premise of Freshpet, whose tagline is "Food for dogs, not dog food," is to feed our pets the way we feed ourselves. "We're not making dog food," says Morris. "We're making human food for our dogs."

FreshPet's food is sold in loaves of various sizes, and costs about 60 cents a pound. The loaves are made from fresh meats and vegetables: chicken and turkey from Pennsylvania, rice and carrots from Texas, beef from Ohio. No artificial preservatives are used, the company maintains. The food is processed at a factory in Quakerstown, Penn., that made meatballs and hamburger patties for humans before Freshpet bought it for about $10 million. The company invested another $10 million into the 30,000-square-foot factory, updating refrigeration and improving sanitation. FreshPet keeps the food at between 36 and 38 degrees, which helps preserve it for an estimated 12-week shelf life. Traditional pet food often uses as its protein base rendered poultry and beef product cooked at high temperatures to create a dry, mealy powder. Freshpet flash-pasteurizes it, quickly bringing it to a temperature about a third as hot as traditional pet food—hot enough to kill bacteria and parasites, Morris says—before packaging it and then immediately chilling it down. "Dogs need fats and protein from meat. When it's overcooked, the amino acids start to break down," Morris says.

Is it any healthier? Morris claims it is, citing shinier coats, smaller stools and better breath. But even he admits that there is no clinical evidence that his product is better for your pet than traditional off-the-shelf pet food. Even after the recall, most pet-food experts say traditional wet and dry pet food remains a nutritious source of animal nourishment. "There's a lot of vitamins and minerals in most of your traditional pet foods, both the high- and low-end brands," says the APPMA's Vetere.

A year ago, Freshpet was in fewer than 150 stores. By next month, Morris expects to be in more than 1,000 stores nationwide—including large, general retailers like Kroger, Giant Eagle and Wal-Mart, as well as pet-specialty big boxes PETCO and PetSmart. This summer, Freshpet will launch a new line of treats called Fresh Bites—essentially meatballs for dogs that come in large, Tupperware containers. "We plan to enter into cat food at some point," says Morris , a market that could prove more lucrative, considering the 88.3 million cats in the U.S. compared to 78 million dogs.

The growth curve could continue; the whole thing could also turn out to be a panic-driven fad. The upstart may soon face more competition, too; Vetere says that while the big pet-food makers have not yet delved into the alternative foods market, that could be coming soon. "They don't want to completely change their business model," he says—noting that the companies don't want to create new divisions that eat away at their core product sales. "But they are looking to at least be a player in that market." For now, Morris says, "We're just happy to have been in the right place at the right time."