Please ensure Javascript is enabled for purposes of website accessibility

Is Amazon About to Make General Mills Regret This $8 Billion Deal?

By Rich Duprey - May 22, 2018 at 9:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The e-commerce giants launches a dry dog food. Will customers eat it up?

General Mills' (GIS 0.05%) $8 billion acquisition of premium pet food manufacturer Blue Buffalo hasn't been well-received by investors, with shares of the cereal maker losing about a quarter of their value since the deal was announced in late February. Sales for cereal and yogurt may have been weighing on the company, but diversifying into pet food apparently wasn't what the market had in mind.

The owner of brands including Cheerios, Chex, Betty Crocker, and Pillsbury hasn't sold dog food in about 50 years, and though treating pets like humans is a big driver in the premiumization trend -- and what launched Blue Buffalo to the forefront of the category -- $8 billion was a hefty price to pay. Standard & Poor's lowered General Mills' credit rating to BBB "because of the substantial increase in leverage" it took on to do the deal.

And now General Mills has to deal with Amazon.com (AMZN 2.07%) entering the market with a private-label premium dog food.

Dog sitting in front of a water bowl and a food bowl

Amazon.com represents a big threat to the premium dog food industry. Image source: Getty Images.

Amazon starts small

Some may be quick to discount the Amazon threat to General Mills. A few years ago it bought Quidsi, which owned sites like Wag.com, Diapers.com, and Soap.com, but was never able to make them profitable. It ended up shutting them down last year. The thinking may be that if Amazon failed once in the dog food biz, perhaps it will do so again.

But that would fail to account for Amazon being the largest dog food seller in the online space, with a 55% share of the market, according to Packaged Facts, more than twice the share of PetSmart's Chewy.com, which has a 26% share, and PetSmart's own 19% slice, according to the division of MarketResearch.com. PetCo and Walmart round out the top five online retailers with 17% and 14%, respectively.

According to Packaged Facts, pet product sales on Amazon totaled $2 billion last year, a 40% increase from 2016 and a figure it expects to grow, particularly with Amazon's entrance into the premium food space.

Amazon recently launched Wag, the retailer's first major expansion of its pet products business, which will start with dry pet food, but extend to other pet products. This makes sense for Amazon.

The American Pet Products Association says U.S. households own nearly 90 million dogs, and Americans spent $69.5 billion on pet products in 2017, $29.1 billion of which was on food. That's almost 42% of the total, and 70% more than the second biggest category, vet care. The APPA expects almost $30 billion to be spent this year on food.

But it's big

That, of course, was part of the rationale for why General Mills bought Blue Buffalo. It touted that Blue Buffalo was the top premium brand, generating $1.28 billion in revenue last year and $319 million in adjusted earnings before interest, taxes, depreciation, and amortization.

It also highlighted that Blue Buffalo sold some $250 million worth of food online, a 75% increase year over year, making it the No. 1 brand in e-commerce, with more than twice the share of the second-place manufacturer.

Amazon's entrance has to give General Mills some pause, however. Immediately, Prime members gain the advantage of free two-day shipping on Wag, and it wouldn't be surprising to see the brand show up at Whole Foods Markets. Pet food is already a commonplace item in grocery store aisles, and after buying the organic grocer last year, Amazon immediately began selling its Whole Paws brand online. Wag's premium pricing would also mesh well with Whole Foods' image.

There may have been some justification for General Mills to re-enter the dog food business, but it likely overpaid for the privilege of buying Blue Buffalo's premium positioning, and now that Amazon.com looks to be a serious competitor, it may find the e-commerce leader has plenty of bite to go with its bark.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$143.55 (2.07%) $2.91
General Mills, Inc. Stock Quote
General Mills, Inc.
GIS
$77.00 (0.05%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.