Alpo Purchase May Make Nestle Top Dog in Pet Food Industry : Acquisitions: A pending $510-million cash deal would give it a bigger bite of overall U.S. market, edging out No. 1 Ralston Purina.
Nestle USA Inc., best known as the maker of chocolate candy bars, Taster’s Choice coffees and Stouffer’s frozen foods, moved Monday to capture market share among customers who walk on all fours and eat from plastic bowls.
In a deal that analysts said should vault the company to the top of the cluttered pet food industry, Nestle agreed to acquire Alpo Petfoods from London-based Grand Metropolitan for $510 million in cash.
The transaction, subject to legal and regulatory approval, would give Nestle 17.1% of the market in the $8.4-billion U.S. pet food industry, narrowly edging out Ralston Purina, which has 17.0% market share.
Nestle’s Friskies PetCare Division is already a market leader in canned cat food, with its Friskies, Fancy Feast and other brands. But the purchase of Alpo would enable Nestle USA, the Glendale-based unit of Swiss food giant Nestle, to enhance its somewhat weaker presence in the dog food market, where it offers Mighty Dog and Come’N Get It brands.
“Alpo is one of the most recognized consumer brands of dog food,” said Joe Weller, chief executive of Nestle USA. “The Alpo brand conveys quality to consumers and will enable us to compete more effectively against the market leaders in the dog food segment of the pet food industry.”
The acquisition should boost Nestle to the No. 2 position in the canned dog food market, with market share jumping from 9% to 25%, said Nomi Ghez, a food industry analyst with Goldman, Sachs & Co. The current leader is Mars Inc., maker of Kal Kan.
Alpo’s smaller cat food business should boost Nestle’s share of canned cat food sales from 33% to 41%, Ghez said.
For Grand Metropolitan, the sale of Alpo means leaving the pet food market altogether to focus on the leading consumer foods brands--including Pillsbury baked foods, Green Giant canned goods and Haagen-Dazs ice cream--that make up its Pillsbury Co. subsidiary.
Paul Walsh, chief executive of Minneapolis-based Pillsbury, said in a written statement that Alpo’s middle-of-the-pack position in the pet food industry made it a strategic misfit with the company’s higher-profile food brands.
“Our objective is to maintain No. 1 or 2 positions in our major businesses,” Walsh said. “Alpo has been the exception.”
Allentown, Pa.-based Alpo, acquired by Grand Metropolitan in 1980, will post operating profit of $47 million on sales of $430 million for its fiscal year ending Sept. 30. A company spokesman said revenue has been flat in recent years.
The transaction was seen as a closing of the ranks in an industry that analysts say is ripe for consolidations. While most food categories are dominated by two or three companies, half a dozen large companies and a number of smaller labels compete in the pet food industry, analysts said.
“In breakfast cereals, to be No. 1 you have to have about 35% market share,” said Les Pugh, an analyst with Salomon Bros. “Here we’re talking about No. 1 with 17% share.”
The industry is facing increased cost pressures, Pugh said, because growth in sales volume has slowed in recent years and the number of pet food retailers has expanded and become more specialized. “You’re dealing with a much wider array of operators who clearly demand exceedingly competitive terms,” Pugh said.
By combining Alpo with its Friskies division, Nestle advances its market share, but it should also achieve significant cost savings, analysts said.
“The businesses are very similar, and you probably have a lot of duplication,” Ghez said. “You probably don’t need all the salesmen and employees that Grand Metropolitan currently employs.”
Laurie MacDonald, a spokeswoman for Nestle, said the company will spend the next few months considering how best to integrate the businesses. She said it is “too early to talk about any changes.”
Nestle had sales of $39.1 billion last year, including $7.2 billion in sales at its Nestle USA subsidiary, MacDonald said.
Pet Food Market Share
With its acquisition of Alpo, Nestle will edge past Ralston Purina with 17.1% of the $8.4 billion U.S. pet food market. 1993 market share based on revenue: Ralston Purina: 17% Nestle: 11.5 Kal Kan (Mars): 8.8 Heinz: 7.9 Hill’s: 7.8 Quaker Oats: 5.8 Ol’ Roy: 5.7 Alpo: 5.6 IAMS: 4.1 Nutro: 2.1 Others: 23.7 Source: The Maxwell Report
