Feeding Fido is no longer part of Procter & Gamble’s (PG) grand plan for greatness in consumer goods.
The company is selling its three major pet food brands to Mars, the leader in the $74.5 billion global pet food market, for $2.9 billion. The deal unlocks cash the company can use to fuel research and development in markets closer to P&G’s core businesses or to return to shareholders. It does not include P&G’s pet food business in Europe, which it is working to sell separately.
While pet food is becoming a higher-margin business marked by exorbitant spending by affluent animal lovers in mature markets, the kind of innovations required to command $6 per pound prices in the domain of upscale dog and cat chow do not come cheap. “It’s not a low-cost business,” says Deborah Aitken, an analyst with Bloomberg Industries. “It’s seen as quite a staple category and it’s driven by innovation and research. A lot of the innovation for human foods is also pushed across the house to the pet care food.”
Pet food had been a tiny play for P&G, which commands less than 5 percent of the market, far behind Mars and Nestlé (NESN:VX), which together control nearly half the business worldwide. That left it a distant fourth-place player in the market, after Colgate-Palmolive (CL), according to data from Euromonitor. Among food brands, P&G’s best seller, Iams, held only a 3.3 percent market share in 2012. That’s why, no matter how much it revved up research to make the most attractive, high-margin meal a dog lover could serve, those sales would still mean very little to the company’s overall results. Edward Jones analyst Jack Russo calls the sale ”a smart move by PG to get more focused on its core categories: home, health care, beauty, and grooming.”
For Mars, meanwhile, the Iams, Eukanuba, and Natura brands it is acquiring will complement a stable of top sellers such as Whiskas, Greenies, and Royal Canin. “Exiting pet care is an important step in our strategy to focus P&G’s portfolio on the core businesses where we can create the most value for consumers and shareowners,” Procter & Gamble’s Chairman, President, and Chief Executive Officer A.G. Lafley said in a statement today announcing the sale. Translation: Dog food was rather a dog of a performer.