New Pet Project at Procter & Gamble: Buying Specialty Food Maker Iams

Consumer products giant Procter & Gamble Co. on Wednesday announced it would buy specialty pet food maker Iams Co. for $2.3 billion, marking P&G;’s largest purchase and its first foray into pet products.

The move raises the stakes in the fast-growing premium pet food business and would pit P&G; on another front against one of its chief rivals, Colgate-Palmolive Co., whose Hill’s Pet Nutrition is the market leader.

Iams, a private Dayton, Ohio-based company, has $800 million in annual sales, giving it the second-highest market share in the category of premium pet food, which commands higher prices than the supermarket variety and is available only through veterinarians and pet product stores.

Analysts expect P&G; to use its marketing muscle to expand Iams in overseas markets and to eventually introduce it in supermarkets and discount stores, where most pet food is sold. Worldwide, pet food is a $25-billion business, and premium pet food accounts for 10% of that.

“They will get it integrated and will run it very well. This is a lot of firsts for P&G;,” said Lyle Schonberger, an analyst with Olde Discount Corp. in Detroit. “If you look at P&G; from several years ago, this is a company that never would have entertained an idea like this.”

The move by the maker of Tide detergent, Crest toothpaste and Pampers diapers is part of the Cincinnati company’s acquisition-focused growth strategy as outlined earlier this summer by new Chief Executive Durk Jager. In recent years, P&G; has watched its famous Crest toothpaste lose its decades-old first-place slot to Colgate’s Total brand--indicative of its stagnant growth.

Jager’s plans, which also included cutting 15,000 jobs, are to reach sales growth of 6% to 8% a year, up from last year’s 3% growth with flat unit volume. One part of achieving those numbers, Jager has said, is achieving 1% to 2% growth through acquisitions of premium brands that reflect the corporate heritage of top-line, top-price products.

On Wednesday, P&G; said it would leave Iams management, headquarters and operations as they are while P&G; studies the business. But the prospective parent company left open the possibility it would use its clout to distribute premium pet food in supermarkets, discount stores and other mass-merchandise stores.

“We want to make sure we first and foremost learn about the business and, as we do that, focus on building the Iams Co.’s leadership position in the pet specialty channel,” said P&G; spokesman Don Tassone. “We don’t have any specific plans beyond that, but we do expect longer-term to expand distribution beyond the specialty channel. We’re not sure where at this point.”

Iams’ hefty price is one analysts said was no bargain but probably fair for a high-market brand with 16%-per-year growth.

Some analysts suggested that just as Colgate decided to leave its premium pet food product to the specialty retailers, P&G; will come to the same conclusion.

Eventually, they said, P&G; might develop a separate, less pricey Iams product for mass retailers.

“The last thing they want to do is alienate the core retailers in the specialty retailing category,” said Jim Dormer, a household products analyst with Morgan Stanley Dean Witter in New York. “But P&G;’s core competency is in distributing to the mass retailers; it’s certainly not distributing to the specialty pet-care industry.”

James Myers, senior vice president and chief financial officer for San Diego-based Petco Inc., which sells Iams, nonetheless watched his stock fall $2.63 to close at $10.88 on Nasdaq. Shares in rival Petsmart fell 78 cents to close at $5.66, also on Nasdaq.

“Is pet food a reason why people come into the store and do they lose the reason for coming into the store?” asked Myers, who said pet food accounts for 30% of sales in Petco’s 480 outlets. “The answer is unclear, because there aren’t any specialty pet foods that have decided to widen the distribution beyond specialty pet channels.”

Pet food sales worldwide are growing at 3% to 5% a year, Procter & Gamble said. The premium sector is probably growing at twice that rate, said Olde’s Schonberger.

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Chow Down

Pet food is a $25-billion business, growing at 3% to 5% annually. Premium pet food accounts for $2.5 billion of the total, but that segment is growing at twice the industry rate. Here are the companies with the largest share of the premium pet food market:

Hills’ Pet Nutrition Inc. (Colgate): 33%*

Iams Co.: 27%*

Ralston-Purina Co.: 15%

Other: 25%

*Available only through pet stores. Some types available only through veterinarians.

Source: Procter & Gamble