How Blue Buffalo's Growth Can Ramp Up as Part of General Mills' Global Footprint

In this coverage of General Mills' (GIS 1.93%) $8 billion acquisition of Blue Buffalo Pet Products (NASDAQ: BUFF), the Motley Fool's Industry Focus team considers the various strategies which General Mills can employ to boost the revenue of its new pet food brand. Learn about global expansion, opportunities in the Food Drug Mass (FDM) channel, and other levers General Mills can pull as part of the deal integration.

A full transcript follows the video.

This video was recorded on Feb. 27, 2018.

Vincent Shen: I think it's interesting, also, to speak to how, you mentioned the Food, Drug, and Mass channel, that's definitely a space that General Mills is very familiar with, very strong in. Blue Buffalo has already begun pushing into that FDM channel as of 2017. This includes the biggest grocery stores and retailers. That's away from where Blue Buffalo was previously focused, which was with specialty retailers. Because General Mills has a lot of that experience in the FDM channel, I think that's a really important part of the opportunity that the two companies, their management team, spoke to during the investor call.

Specialty channels accounted for about 40% of U.S. pet food sales, and the remainder of that was made up by the FDM channel. But growth has historically been much stronger in the Specialty channel. But because of that, in terms of FDM making up the majority of that space, the entry, I think, for Blue Buffalo is really important. And now that they've gotten started in 2017, it's only a matter of time until they're accelerated with the integration with General Mills.

On the other side of that, Blue Buffalo stated there's an international opportunity, whereas General Mills is saying it's a little bit farther off. But it's still worth looking at in that Blue Buffalo currently only sells in the U.S., Canada, Japan, and Mexico. Only 4% of its sales were outside of the United States. While the U.S. pet food market is about $30 billion, the global market is about $80 billion. Because of General Mills' global footprint, again, I think it's another important opportunity longer-term that they could consider in terms of how they market that and how they roll that out into their other geographic regions.

I want to leave a few minutes here for you, Asit. Any final thoughts on the deal before we close out the discussion?

Asit Sharma: Two things. One, just to add to your comment on the international expansion, especially in Asia where birth rates are declining, and populations are aging, the pet business is booming, I think China and Japan in particular. In Japan, there's a very worthy competitor in a company called Unicharm, which has seen a lot of success in selling pet food to families. They've enjoyed a lot of growth. I think there's some persuasive opportunity there.

The last point I want to make about this is, this deal is very similar to a deal that we saw last year, which is McCormick & Company, the spice company, buying Reckitt Benckiser's, a British company, portfolio of foods, which included French's mustard and Frank's Red Hot hot sauce. Again, another big deal versus the company's balance sheet. They took on a lot of debt, they also suspended share repurchases.

When companies do this, there's two things that we see. They are saying that it's really hard to develop innovation internally, and acquisition may help in this slow-growth consumer goods market. No. 2, we want to add a lot of debt to our balance sheets so that Kraft Heinz, who we talk about a lot, Vince, won't come and purchase us. And I think General Mills was thinking about that when they made this deal. "Hey, if we add a lot of debt to our balance sheet in this acquisition, we're not as attractive to that big behemoth that's over here that may be sniffing around trying to acquire us." So it's a defensive move as well.

All in all, I'll put these two taps together, I think the water runs a little warm for me. I have skepticism about that purchase price, but over time, it should work itself out.

Shen: Thanks, Asit! Last thing for me, I forgot to mention with the channels, which I thought was interesting, especially with the premium pet foods, an important channel for Blue Buffalo that they mentioned has been their e-commerce. That's something else that General Mills has been working on. Blue Buffalo sold $250 million via e-commerce in 2017. That was 75% growth year over year, about 20% of their total top line. It makes Blue Buffalo the No. 1 selling pet food brand online and also one of the most searched on Google overall.

If you compare that to General Mills' U.S. e-commerce business, they said it was up 82% in the first half of its current fiscal year, so very impressive, but that's from a very small base, only about 2% of their total sales, which they hope will be closer to 5% by 2020. But I think it's interesting how, with the younger demographic, in terms of consumers, how popular Blue Buffalo is among them. And their penetration in terms of that online market, again, something else that can help for both sides of the company in terms of these synergies there.