Following the disastrous recall of its dry pet foods during the dog days of summer last year due to possible salmonella contamination, Procter & Gamble (NYSE:PG) announced the other day that it's selling its Eukanuba, Iams, and Natura pet food brands to M&M's candy maker Mars for $2.9 billion. However, it will hold on to the leash of its remaining European pet foods business, at least for the time being.
According to the American Pet Products Association, U.S. household spending on pets came in at a record $55.7 billion in 2013, with pet food commanding the lion's share of it, representing more than 40% of the total. Indeed, the economics of the industry have looked so favorable that Del Monte gave up its more well-known fruit business to become solely a pet food company, while premium pet food makers Blue Buffalo and Freshpet are ready to go public with IPOs later this year. Pets need to eat, and pet owners are more likely to forgo their own comfort in favor of ensuring their pets' sustenance.
Two of the biggest outgrowths of the humanization of pets have been the development of healthier pet food products using organic or gluten-free ingredients and the creation of a billion-dollar pet supplements industry. P&G's own Natura line was purchased because the company saw the trend toward more wholesome pet foods growing bigger.
Yet despite those favorable conditions, Procter & Gamble has found it difficult to effectively compete against rivals large and small. Nestle (NASDAQOTH:NSRGY), through its Purina brand, and Mars, with both the Pedigree and Whiskas brands, control nearly half the global pet food business; P&G's Iams and Eukanuba brands, bought for $2.3 billion 15 years ago, struggle to command less than 5% of the market.
The North America and Latin America pet foods business being sold to Mars represents 80% of P&G's exposure to the industry, and while the remaining 20% is mainly in European markets, it will be held on to for the time being until a separate transaction to shed those operations can be initiated later on. The company will now focus on its consumer products businesses, like Tide laundry detergent and Pampers diapers. P&G says selling the pet food business will cause it to shift approximately $0.03 to $0.04 per share from its core earnings to discontinued operations, though it doesn't change the core earnings-per-share growth guidance for 2014 it previously provided.
The pet food industry is still pulling on the leash for growth, and premium foods in particular will continue to expand their presence, but after this deal is done, Procter & Gamble will no longer have a dog in that fight.