Procter & Gamble is not known for taking stabs in the dark. However, analysts and market observers were taken aback when P&G announced last week it was spending &£1.4bn on specialist pet food manufacturer Iams, a sector which the company has no previous experience in.
Moreover, the privately-owned Iam, although a strong performer in pet stores, is hardly a household name to rank alongside established P&G brands like Persil and Fairy Liquid.
A closer look at the global pet food market, however, reveals just how shrewd a move the Iams takeover could be.
The worldwide market is sizeable, standing at about &£15.6bn. Iams is a premium pet food and this sector is worth 10 per cent of the market.
Iams has annual sales of &£500m and claims an average sales growth of 16 per cent over the past four years. The company’s two main brands are Iams and Eukanuba.
The bulk of its sales are in its home US market, with international sales accounting for just 30 per cent. However, two-thirds of the premium pet food market exists outside the US, so it is here where P&G’s global muscle is expected to come into play.
The takeover was led by P&G’s new corporate ventures group, which has the job of finding opportunities for growth in businesses and markets outside the company’s current strongholds. It is part of the company’s Organisation 2005 push for growth. This acquisition is the biggest in P&G’s history.
Euromonitor analyst Claire Briney says: “The pet food market has shown robust global growth in the past five years. Sales have been boosted by a distinct trend towards higher priced, premium value-added foods – a sector in which Iams commands a major presence – making it a highly profitable area in which to invest.”
She adds: “The global pet food market is becoming the domain of a small number of large multinationals.”
Iams has certainly tapped into America’s growing obsession with pampering its pets since the company was founded 50 years ago in Dayton, Ohio.
Most observers agree the next logical step for the brand would be to move out of speciality into supermarkets and grocery stores, which account for 90 per cent of global sales of petfood. P&G, with its massive market muscle, would be well equipped to perform this task.
P&G president and chief executive Durk Jager has already hinted that this might be on the agenda. Such a move would set alarm bells ringing in the UK.
For several years the UK pet food sector has been the preserve of two major players: Pedigree/Mars, which has 34 per cent of the dog food market and 37 per cent of cat food; and Spillers, which has 42 and 21 per cent of those markets respectively.
The third placed player, Butcher’s Pet Care, is some way behind with about four per cent of the dog food market.
Competition intensified when Nestlé bought Spillers Petfoods from Dalgety last February for &£715m. But the market effectively remains a duopoly. Spillers owns brands such as Felix, Winalot, Arthur’s and Fido.
Both Pedigree and Spillers spend significant sums on marketing, above and below the line. In 1998, Pedigree – which includes brands such as Pedigree Chum, Whiskas, Chappie, Kit-e-Kat and Pal – spent more than &£16m on advertising alone, according to AC Nielsen. MEAL.
Pedigree pioneered the growth of premium pet foods in the UK, discovering that people were prepared to pay extra for a quality product.
Some industry insiders are predicting P&G’s arrival on the scene could lead to a revolution of similar proportions. Iams already has a strong portfolio of dried pet foods, which is the real growth area in the market, and it has a reputation for quality.
At present Iams represents about two per cent of the UK market and is only available in specialist outlets. Last July Iams refused to supply Asda, and the supermarket responded by selling discounted Eukanuba products obtained on the grey market.
P&G says it is too early to say what it plans to do with Iams in the UK, but many sources close to the company are in no doubt about what will happen.
One source says: “Procter & Gamble is incapable of doing anything other than competing in the mass market. It will have no interest in having a specialist brand. It will want to win and be the largest. UK pet food has become a cosy market – this will not continue to be the case.”
He predicts a soap powder-style assault on the market, employing some of the tried and tested techniques the company has used in its core markets.
He adds: “I would expect P&G to use expert endorsements. It will probably try to find some performance claim that it can make about the product. It likes to use competitive claims which show the competition failing as its product succeeds.”
Pedigree remains unruffled by this significant entry into the market. A spokeswoman says: “We are seeing a lot of consolidation in the industry. However, Pedigree and Whiskas are the number one brands in the UK and we will continue to focus on strong marketing programmes to support them.”
But if the predicted shake-up means tougher competition for the big two, it could be very bad news for smaller players in the market.
Butcher’s Pet Care marketing manager Paul O’Reilly says: “We are competing now against two multinationals: Pedigree/Mars and Nestlé. We are happy with the competition. As far as competing against a third multinational goes, we will just have to wait and see.”
It seems only a question of time before P&G petfood brands are seen on supermarket shelves in the UK. The company seems certain of two things: that there is room for growth in the pet food market as a whole, and that the premium product company it has bought has the potential to be exploited in the mass market.