Can Old Dog P&G Learn a New Trick? (News) August 11, 1999

Can Old Dog P&G Learn a New Trick?

By Brian Graney (TMF Panic)
August 11, 1999

Two months after reorganizing its business under an ambitious plan called Organization 2005, consumer products maker and marketing giant Procter & Gamble (NYSE: PG) unveiled its first growth-propelling effort today in the form of an acquisition in an entirely new product category. In one fell swoop, P&G has vaulted itself into the thick of the fast-growing business of providing pricey, specialized eats for Fido and Puff-Puff by agreeing to buy privately held premium pet food maker Iams Co. for $2.3 billion in cash and assumed debt.

According to president and CEO Durk Jager, P&G moved fast to snatch up Iams, which has been growing its annual sales at a speedy average clip of 16% over the past four years. Talks between the two companies began 60 days ago, according to Jager, and the deal is expected to close next month. That's a significant departure for a company that is a famously slow-mover, where subtle changes to the packaging of such well-known brands as Tide and Crest are regarded as agonizing decisions and are rumored to take months.

Based on figures included in the acquisition press release, Iams is selling into a $2.5 billion premium pet food segment, which represents a 10% chunk of the entire $25 billion global pet food market. With annual sales of $800 million, Iams appears to be top dog in premium pet chow, even though Petfood Industry magazine ranks it as only the seventh largest pet food company in the U.S. Iams and Eukanuba brand name dog and cat foods are sold in 77 countries through mostly specialty pet stores and veterinarians, although they are becoming increasingly available at pet specialty chains such as Petland and Petco (Nasdaq: PETC).

The goal under P&G's Organization 2005 effort is to find ways to grow revenues 6% to 8% annually and earnings 13% to 15% annually over the next five years. Making a big purchase is one way to boost revenues, while selling premium products rather than staples is a sure way to raise margins. Moreover, Iams growth opportunities look robust. P&G can use its marketing and distribution might to spur international sales of Iams food and exploit other selling channels, such as high-end food stores and maybe even selected supermarkets in affluent areas.

Instead of risking a possible "faux paw" and spending billions to develop a premium product in a segment where it has no experience, P&G has opted to buy a leading product line outright. It's a dog-eat-dog world, after all. This is a new strategy for P&G, but it has worked as a growth driver for giant, mature businesses before, most notably healthcare company Johnson & Johnson (NYSE: JNJ). P&G still has a ways to go in selling its new "aggressive growth" image to investors, but the acquisition of a premium product leader such as Iams in a new market category seems like a smart first move and a step in the right direction.

Related link:

Breakfast With the Fool, "P&G Organizes," 06/04/99

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