Battling to Be Top Dog in a Finicky Business : Pet food: Glendale-based Nestle USA gains share in a stagnant market, hastening the cluttered industry’s trend toward consolidation.

For decades in the pet food industry, companies battled for market share in relatively polite fashion, as industry giants such as Ralston Purina, Nestle and Mars behaved like well-mannered dogs gathered around a heaping bowl of chow.

But the market has changed considerably in recent years. Competition from high-priced premium brands has intensified, grocery stores have lost pet food sales to alternative outlets, and growth in the pet population has slowed. Suddenly, there are too many dogs competing for too little chow.

With tensions rising, analysts say, expect skirmishes, and look for the big dogs to survive.

Nestle USA Inc., the Glendale-based maker of Friskies and Mighty Dog pet foods, started bulking up last week when it agreed to acquire Alpo Petfoods from London-based Grand Metropolitan for $510 million in cash.

Since 1988, Nestle’s share of the $8.4-billion pet food industry has fallen from 12.7% to 11.5%. The purchase of Alpo would make Nestle top dog, surpassing by 0.1% the 17% market share held by longtime industry leader Ralston Purina. And it will give Nestle a popular dog food brand to augment its already strong cat food sales.

Analysts applauded the deal as a much-needed closing of the ranks, but said there’s plenty of room for further consolidation. In the not-so-distant future, analysts said, many companies will have to decide whether to join Nestle in building up or Grand Met in getting out.

“It would seem logical to expect more deals in the future,” said Les Pugh, a pet-food industry analyst at Salomon Brothers in New York. “There are too many players, and too much money invested in too many factories with too much distribution.”

The winnowing-out process could take years, Pugh said, but eventually the pet food industry ought to look a bit more like the $8-billion breakfast cereal industry, in which three companies--Kellogg, General Mills and Post--hold a combined 80% market share in the United States. In contrast, the top three pet food companies--Nestle, Ralston and Mars, the maker of Kal Kan--together account for 46% of domestic sales.

Such fragmentation has persisted for decades because companies such as Nestle had little incentive to unload or expand pet food divisions that typically required little attention while producing steady revenue growth. But the pet food market has been upended over the past 10 years by a number of forces, including the emergence of long-dormant premium brands that have gobbled up huge chunks of market share.

Hill’s Pet Nutrition Inc., for example, was barely a blip on industry radar a decade ago. But by last year, the company had $660 million in sales and an almost 8% market share, much of it gained at the expense of Ralston Purina, Nestle and others.

What happened? Some say the fitness craze finally hit pets.

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Hill’s is one of several so-called premium pet food brands that claim to be more nutritious than traditional brands because they contain higher-quality grains and fewer fillers and animal byproducts. But nutrition comes at a hefty price. At Big Al’s, a large pet supply store in Granada Hills, a 40-pound bag of Hill’s Science Diet dog food typically sells for about $25, compared to just $12 for an equal amount of Purina Dog Chow.

Until recently, most consumers, and even many veterinarians, saw little reason to spend the extra money. But today, “you’ve got people more concerned about their own diet, and that transfers to their pet,” said Tim Phillips, a veterinarian who is editor of the Pet Food Industry magazine.

Hill’s, a unit of Colgate-Palmolive Co., has emerged as the leading premium brand partly by capitalizing on a relationship with veterinarians the company has cultivated since 1948, when it introduced its Prescription Diet foods for animals with heart or kidney disease. Until a few years ago, Hill’s sold virtually all of its food through veterinarians, who pocketed up to one-third of the sales price on each bag or can.

Today, even though Hill’s is now sold mostly through pet stores, its Science Diet brand is widely recommended by veterinarians, and health-conscious consumers are following doctors’ orders.

Iams, another premium brand, has similarly capitalized on its status as a favorite among breeders, from whom many Americans get their puppies or kittens. Tiny 10 years ago, Iams had 1993 sales of $350 million, and held a 4.1% market share.

Ralston Purina, Nestle and other major pet food makers have introduced their own premium brands in recent years. But sales of those products have foundered, partly because these companies lack credentials with veterinarians and breeders and also because they have been shut out by specialty retailers.

Over the past 10 years, grocery stores have watched their share of retail pet food sales in the United States slip from 95% to 55%, said John Maxwell, an analyst at Wheat First Securities in Richmond, Va. That’s bad news for Ralston, Nestle and other industry leaders who have traditionally relied almost exclusively on grocery store sales.

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Mass merchandisers, including Price Club, Wal-Mart and Costco, have picked up some of the business. In fact, Wal-Mart has acquired almost 6% of the retail pet food market through sales of its in-house brand, Ol’ Roy, named for the dog of the late Wal-Mart founder, Sam Walton. Also, as much as a quarter of all pet food is now purchased through burgeoning pet shop chains, some of which refuse to carry grocery store brands.

Petco, the second-largest U.S. pet store chain, has nearly doubled in size from 115 stores in 1988 to 205 stores today, and not one of them carries Nestle, Ralston Purina or other grocery store brands.

“We threw them out to differentiate ourselves,” said Brian Devine, chief executive of San Diego-based Petco. Instead, the company serves as an outlet for premium brands that aren’t available at grocery stores, including Hill’s, Iams, Nutro and others.

The outlook for Nestle, Ralston Purina and others has been further hampered by signs that the pet population is not growing as fast as it once did. Since 1990, the number of pet dogs in the United States has remained unchanged at about 54.2 million, said Geri Mitchell of the Pet Information Bureau in Washington. Meanwhile, the number of pet cats has actually fallen from 60.3 million to 59.4 million.

So analysts said that more consolidation is inevitable. Quaker Oats Co. is rumored to be looking for a buyer for its pet food division, which makes Cycle and Kibbles ‘N Bits dog food. Dozens of regional companies with tiny market shares are also considered acquisition targets.

Likely suitors include the large and well-known food producers that must find ways to regain lost ground. Like Nestle, other industry heavyweights have seen their shares of total pet food sales decline: Ralston Purina’s has slipped from 27.2% in 1998 to 17%; Mars has fallen from 10.7% to 8.8%. Even with Alpo, Nestle has already signaled it may still have some shopping to do.

“We are continually looking for opportunities to grow our business,” said Joe Weller, chief executive of Nestle USA, “whether through new products or acquisitions.”