How will Del Monte fare in pet food?
On 20 December 2002, Heinz sold various non-core businesses, including North American pet food, US seafood, infant nutrition and private label soup to canned food producer Del Monte Foods.
While Heinz became a more focused company, Del Monte diversified into new product areas and doubled in size in terms of turnover.
Under Heinz’s ownership, pet products sales declined by over 25% between 1998 and 2002. In fiscal 2002 (year end April), the company’s pet products sales fell by nearly 8%, which was mainly a result of the company exiting various international markets, which could not be offset by only modest growth achieved in its main North American market.
Pet products was not a focus area for Heinz, lacking in innovation and advertising investment. While competitors such as Mars reformulated their products by adding functional ingredients, in order to remain in line with consumer trends towards nutritionally advanced dog & cat food, Heinz refrained from doing so, apart from making some slight changes to its 9 Lives cat food in order to improve palatability.
The only product category which received strong attention was dog treats, which as a result performed strongly: Heinz’s share in dog treats & mixers rose from 18.3% in 2000 to 19.5% the following year, and actual rsp sales increased by 15%. Heinz’s shares declined in all other dog and cat food subsectors however, and total North American dog and cat food rsp sales increased by a modest 2% during 2001.
Del Monte’s growth strategy
In order to fuel growth of its newly acquired pet food business, Del Monte plans to focus on two core brands, Kibbles ‘N Bits dog food and 9 Lives cat food, as well as the already well performing treats brands. Smaller, non-core brands such as Gravy Train or Skippy will be divested, and the company furthermore plans to rationalise its private label operations.
Del Monte will however continue to manufacture Ol’Roy wet dog food and Special Kitty cat food for Wal-Mart, retail sales of which stood at over US$300 million in 2001 and thus constitute an important part of Del Monte’s pet food operations.
Prior to the spin-off, Heinz made changes to its pet food operations, including plant closure with a concomitant reduction in workforce. This has resulted in cost savings, which, coupled with expected merger synergies, will allow Del Monte to invest in product improvement, innovation and marketing. Del Monte aims to increase brand support to match expenditure of leading pet food players.
While higher marketing expenditure will undoubtedly be beneficial for Del Monte’s pet food business, in particular to boost sales in the short-term, the company must consider current market conditions to ensure long-term growth.
More premium image for Kibbles ‘N Bits
As a dry dog food, Kibbles ‘N Bits should benefit from the on-going consumer shift from wet to dry food. In the US, dry dog food currently accounts for nearly 80% of total dog food value sales. Moreover, dry dog food sales are expected to grow by about 10% between 2002 and 2007, compared to marginal growth of less than 2% forecast for wet dog food.
Kibbles ‘N Bits mid-priced positioning is not ideal however. It lacks added value at a time when US pet owners are increasingly demanding high-nutritional, premium food. While the general trend is clearly towards premium varieties, there continues to be a strong consumer base also for economy products. With consumers buying either on the basis of quality or on price, sales of mid-priced products are in decline.
As Del Monte markets its canned food brands on the basis of premium quality, it is unlikely that the company will resort to competing on price for its pet food business. Del Monte is likely to aim for a premium image, which could be achieved by adding functional ingredients or introducing lifestage lifestyle variants. While Kibbles ‘N Bits may not be able to take on specialist brands Iams and Hill’s Science Diet, it should be able to compete more successfully against similarly positioned brands such as Pedigree or Dog Chow.
Flavour and packaging innovation for 9 Lives
9 Lives is currently available in wet as well as dry varieties. The brand’s strength lies within wet food, where it claimed almost 14% of US sales in 2001, making it the second best-selling brand behind Nestlé’s Friskies Buffet.
However, wet cat food in the US accounts for only 40% of total cat food value sales, and wet cat food sales grew by just 9% between 1998 and 2002, compared to a 26% sales increase for dry cat food. As an economy brand, the outlook is poor, with economy wet cat food sales expected to decline by over 3% between 2002 and 2007.
Economy dry cat food is expected to fare better, giving Del Monte the option to develop 9 Lives within dry – it currently holds a 3% share. 9 Lives has scope for growth in wet cat food too, with the 9 Lives Gourmet Meals premium positioning, sold in single-serve cans. Emphasis on premium taste and flavour, coupled with heavier marketing support, should establish the brand’s presence in premium wet cat food, where growth is anticipated at 8% between 2002 and 2007.
Packaging innovation could aid in ensuring growth within wet cat food. As Del Monte already has expertise in pouch packaging from the tuna business also acquired from Heinz, combined with Del Monte’s introduction of more consumer-friendly plastic packaging, the company could leverage this expertise onto its wet cat food business. Competitors such as Mars have introduced single-serve pouch packaging for their wet pet food products, which have been well received by consumers, as they are more convenient to use, have a healthier image and make the refrigeration of leftovers unnecessary.
Stronger marketing support coupled with innovative NPD – the key to long-term success
While 9 Lives and Kibbles ‘N Bits suffered from neglect under the ownership of Heinz, their future looks certainly brighter now that they are in the hands of a company which is committed to its newly acquired pet food business – not least as it is one of the most profitable product categories within its portfolio. While increased marketing expenditure is likely to boost sales in the short-term, product reformulations as well as innovative new product and packaging development will be necessary to ensure long-term growth and to keep pace with highly innovative competitors.