Can Nestlé sustain its leadership in the pet food market?

Mars and Nestlé have both undertaken major takeovers in the face of stagnating pet food sales in recent years, triggered by a shift in consumer demand towards premium and dry varieties, while the companies’ offerings were skewed towards wet and mid-priced products. The purchase by Nestlé of US dry pet food specialist Ralston Purina in 2001 was followed one year later by Mars with the takeover of French dry and super-premium pet food firm Royal Canin.

The takeovers bring significant benefits to both companies, and the outlook for each has been considerably improved. But while both companies will remain very close in terms of pet food turnover for some time, it can be argued that Mars is set for stronger long-term growth.

Nestlé lead in North America, Mars to build on dominant position in Western Europe

In terms of geographic penetration, Nestlé’s takeover of Ralston Purina had the greater benefits. Nestlé became the dominant pet food company in North America, the world’s largest pet food market, its share in the region leaping from 13% in 2000 to over 30%.

Being the dominant player in the US also means that Nestlé has considerably improved its negotiating power with grocery retailers. Mars, whose position in North America is relatively weak – ranking third with a share of just over 10% – now faces even tougher competition in US grocery stores.

In contrast its takeover of Royal Canin did not significantly change its pet food operations with regards to geographic reach. Royal Canin’s main market is Western Europe, a region in which Mars is already the dominant player. The takeover did however improve Mars’ presence in the region within the specialist retail channel, Royal Canin’s main point of distribution.

Improved product portfolios

The main benefit was the fact that it greatly enhanced Mars’ dry and super-premium product portfolio. By moving into the fastest-growing sectors in dog and cat food, Mars may have gained an important edge over its rival.

While Nestlé also improved its dry portfolio, it failed to move into the super-premium end of the market, as Ralston Purina’s products are positioned primarily within the economy and mid-priced platforms. Ralston’s main brands, Dog and Cat Chow, lost share in their domestic US market in 2001 for this reason. Ralston Purina does have some premium brands, in particular Pro Plan and Purina ONE, but as both were launched relatively recently they are not yet competing fully against longer-established rival premium brands.

Globally, premium dry dog food is forecast to grow by 24% between 2002 and 2007, while mid-priced dry dog food is expected to record only modest growth of just over 5%. A similar trend can be identified for cat food. With an increasing number of premium and super-premium brands expected to appear in supermarkets, Nestlé is likely to face tougher competition in the long-term.

Royal Caninmay mountsupermarket challenge in Europe

Marsmight considerintroducing Royal Canin into supermarkets in Europe, and by doing so the company could capitalise on the growing popularity of super-premium products across distribution channels. Mars would furthermore be able to compete directly against Iams, whose distribution was expanded following its takeover by Procter & Gamble in 1999.

It is also likely to push sales for the brand in North America, as Royal Canin is well positioned to take on super-premium Hill’s and Iams in the region. While Royal Canin had been present in North America for years, it was unable to successfully establish itself in the highly competitive market, mainly because it lacked the necessary financial resources and marketing support. This will undoubtedly change now that Royal Canin has the backing of a major firm with significant financial clout.

Mars – superior in innovation and long-term vision?

Long-term growth will be determined to some extent by innovation, something which Mars has already brought to pet food. Even prior to the takeover, the company proved to be able to turn around its pet food business through product reformulations and innovative packaging such as pouches for its ailing wet cat food business. Mars also supported its major brands through innovative advertising campaigns, while in comparison Nestlé’s advertising activity was less effective.

Moreover, Mars appears to have greater vision for its pet food business. Fully aware of the ‘pet humanisation phenomenon’, Mars is keen to capitalise on the increasing trend for pet owners to spend money on ensuring their pets’ wellbeing. As a result, Mars ventured into added-value pet services, such as pet insurance, as well as animal hospitality through the takeover of UK pet hotel ‘Triple A’.

Duopoly within pet food to continue

Currently Mars’ and Nestlé’s presence in the pet food market remains balanced, and as a result of their consolidation activity, the world pet food market is characterised by an even more pronounced duopoly. In terms of global pet food revenues, the two companies are now very close, and barring further acquisition activity this is likely to remain the case for the foreseeable future. However, unless Nestlé is able to improve its super-premium presence, the outlook appears more positive for Mars.

A possible takeover target, which would benefit Nestlé in particular, is Nutro Products, a US-based privately-held manufacturer of super-premium pet food. While the company, which ranks seventh globally in combined dog and cat food, is intent on retaining its independence, it could find itself a target of larger players as competition within the super-premium segment intensifies.