Can a shaggy golden retriever share a kennel with a smart French poodle? That is the question some observers are asking after European regulators gave the go-ahead this week for Mars, the producer of mass-market petfood brands including Whiskas and Pedigree Chum, to buy Royal Canin, an upmarket French petfood company.
The European Commission demanded the sale of five petfood brands and two production plants as its conditions for approving the deal, which will cost Mars E1.5bn (£915m).
Mars must find a buyer for its own Brekkies cat food and Advance dog food brands, and for Royal Canin’s Royal Chien, Premium and Playdog dog foods. These brands, which sell in several European markets, would have given Mars too much of the French and German markets, the Commission says.
The brands to be sold off were proposed by Mars, and will help the merged company pursue its European strategy, says Royal Canin spokesman Xavier Knoepffler.
That strategy is for Royal Canin to focus solely on developing its business through specialist outlets such as pet shops and garden centres, and to vets and pet breeders. Mars will continue doing what it knows best: volume-selling through the grocery trade, Knoepffler says.
One of Royal Canin’s plants in France – which must now be sold – produces own-label petfood for retailers including the Aldi and Auchan supermarket chains. The up-for-sale Royal Chien dog food is Royal Canin’s main mass-market brand.
Knoepffler says: “The aim is to keep the businesses separate as much as possible. That includes purchasing and research and development.
“A high-level committee comprising people from both companies will meet every month or so to discuss new materials and innovation. But on a day-to-day level there will be no link between the companies,” he says.
The two companies could not be more different in their marketing strategies. Mars promotes its brands heavily on TV, on posters and in the press. Royal Canin, on the other hand, is rather reticent. European agencies hoping that some big-spending new Mars brands will emerge from this deal are likely to be disappointed.
So if Mars’ brands will not benefit from the upmarket approach of Royal Canin and if Royal Canin will not benefit from Mars’ sales magic, what is the logic of the deal? “This isn’t a cost-saving deal, but a value-adding deal,” says Knoepffler.
“The market for petfood sold through grocery outlets is pretty flat,” says a petfood buyer with a large Belgian supermarket chain. “Mars appears to be buying its way into the more lucrative premium sector, selling through the specialist shops.”
European petfood sales through pet shops and other specialist outlets are worth about E1.4bn (£850m) a year and are growing in value by between eight per cent and 15 per cent annually, according to Royal Canin.
European petfood sales through grocery chains are worth about E5.8bn (£3.5bn) a year, but are almost flat. “The trend in grocery sales of petfood is for annual value growth of two to five per cent,” says Knoepffler.
Consolidation and increasing competition in the industry are seen as the main causes of diminishing returns from the grocery trade. There have been three large takeovers in the petfood business in as many years.
Last summer, Swiss food giant NestlÃ© bought Ralston Purina of the US, having purchased the Spiller’s petfood business from Dalgety in 1998. In 1999, Procter & Gamble bought Iams Company of the US for $2.3bn (£1.6bn).
Competition is also increasing in the specialist retail sector. Royal Canin claims to hold a third of this market in Europe, mainly with two brands – Size Nutrition for dogs and Feline Nutrition for cats. But others are jockeying for position. Colgate-Palmolive’s Hills petfood, for example, is popular among vets and breeders.
By delisting Royal Canin from the Paris Bourse, privately owned Mars will be able to channel the French company’s dividend payments back into the company, which will help it defend its strong position in the specialist retail trade in Europe.
Mars and Royal Canin should benefit from the deal in different ways. Mars acquires a well-established foothold in a growth sector within the petfood market, while Royal Canin receives more money and will be able to focus on its core activity of selling to the specialist trade.