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What are the Implications of Mars’ Acquisition of Procter & Gamble’s Pet Food Brands?

4/14/2014
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Mars’ acquisition of the Iams, Eukanuba and Natura brands (outside Europe) from Procter & Gamble for US$2.9 billion in cash changes the dynamic of the dog and cat food market, particularly in North America. What will Mars get out of this deal, and what are the risks?

Mars will Account for a Quarter of the North American Market

As a result of this deal, Mars’ share of the North American dog and cat food market will jump from 16% to 25% (based on 2012 market share data), compared with Nestlé’s 36% share and the 11% share of both Del Monte and Colgate-Palmolive.

The real prize for Mars is undoubtedly the strong presence of Procter & Gamble’s brands in the North American premium segment, where they accounted for 19% of value sales in 2012. Combined with its existing 12% share, this almost puts Mars on a par with Nestlé (32%), ending its overdependence on economy and mid-priced brands and thus boosting its profitability.

What Mars Brings to the Table

While it remains the leader in the premium segment, the Iams brand has been haemorrhaging share in recent years, with Procter & Gamble extremely sluggish in its reaction to emerging threats (particularly the rise of so-called “alternative” dog and cat food) and fumbling a series of recalls.

Undoubtedly, Mars will be able to achieve significant synergies in manufacturing and marketing with its existing brand portfolio. Moreover, its astute management of a diverse portfolio of brands, ranging from Pedigree and Whiskas to Royal Canin, over the years shows that it has as good a chance as anyone of turning around the ailing fortunes of Iams and Eukanuba. Mars could also leverage its distribution network to raise their profile in emerging markets (it has been fairly successful with its own brands in this regard), something Procter & Gamble largely failed to do.

Procter & Gamble’s 2010 acquisition of natural pet food maker Natura was also a catalogue of errors, with the company failing to translate its niche appeal to a wider market, while alienating many of its existing customers. This is also an area in which Mars has significant expertise, having been quite successful at integrating another niche pet food maker, Nutro Products (which it acquired in 2007), into its brand portfolio and corporate structure.

Danger Below!

In some markets, two players accounting for well over half of value sales might raise concerns about competition (and perhaps even attract the attention of regulators), but this is clearly not the case here as the dog and cat food market has no significant barriers to entry and is in fact a seething bed of innovation. But, this is also the main risk of this deal for Mars.

Management missteps and botched M&A aside, such brands as Whiskas, Pedigree, Iams and Eukanuba (in addition to Purina, Hill’s etc) all face a similar competitive threat – the ongoing emergence of a plethora of niche, high-end brands (spearheaded by the likes of Blue Buffalo) that are competing for the dollars of the growing number of owners who are determined to give their pets the very best.

While Mars would appear to be a good bet to steady the Iams and Eukanuba ships, the acquisition of these brands represents a doubling down on a status quo that is looking increasingly precarious, at least in North America. However, this is counterbalanced by the potential for growth in emerging markets, and in the end Mars is probably unlikely to suffer from buyer’s remorse.

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