Sunday, August 22, 1999
P&G ponders Iams: How best to sell pet food?
BY RANDY TUCKER
The Cincinnati Enquirer
Procter & Gamble's recent acquisition of premium pet-food maker Iams Co. raises a critical question for the Cincinnati consumer-products giant that is more familiar with diapers than dogs' diets:
What is the best way to sell the suburban Dayton, Ohio, company's Eukanuba and Iams' brands?
The answer has more than $800 million in Iams' annual sales riding on it.
If P&G decides to introduce Iams' products in supermarkets and discount stores, as many analysts have predicted, the company could risk alienating the specialty retailers that helped make Iams the world's No. 2 seller of high-end pet foods.
But P&G probably cannot achieve the kind of sales growth it wants if it does not mass-market Iams' brands. That's because the network of specialty pet-food stores — where most premium pet foods are sold — is not nearly as extensive as traditional retail outlets.
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TOP 5 P&G BUYS
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No. 1: Iams Co.
Year: 1999
Price: $2.3 billion No. 2: Tambrands Inc.
Year: 1997
Price: $2 billion No. 3: Noxall Corp.
Year: 1989
Price: $1.3 billion No. 4: Richardson-Vicks
Year: 1985
Price: $1.2 billion No. 5: Max Factor
Year: 1991
Price: $1.14 billion
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“It's somewhat of a dilemma,” said Lyle Schonberger, an analyst who follows P&G for Olde Discount Corp. in Detroit. “But eventually, I think P&G will use its marketing muscle to expand Iams overseas through mass-market outlets, because that's where most pet food is sold, and P&G wants to grow sales.”
Foreign markets account for about 30 percent of Iams sales and two-thirds of the estimated $25 billion worldwide pet-food business.
Durk Jager, P&G's president and chief executive, said P&G can double Iams' sales overseas, where the pet-food venture has the greatest potential for growth.
Although Mr. Jager declined to discuss specific distribution plans for Iams, he did not rule out a mass-market approach. “We do think that the brand's equity is based on what the consumers think about the brand and not on where it's specifically being distributed,” he said.
The $2.3 billion purchase of the family-owned Iams — P&G's largest acquisition ever — is seen by many analysts as a first step in the company's move to grow sales by 6 percent to 8 percent annually under its Organization 2005 restructuring plan.
Those projections include growth of 1 percent to 2 percent a year through acquisitions, such as Iams.
Iams' sales have grown 16 percent in each of the past four years. That should help P&G shift into high gear in accelerating growth.
But P&G could leave Iams' traditional retailers in the dust if it takes the mass-market route, said Terri Waits, who owns Newtown Feed & Supply in Newtown. One of the main reasons many of her customers shell out as much as $9 more for a 40-pound bag of Iams' brands rather than buy cheaper basic brands is that “you can't buy them at Wal-Mart,” Ms. Waits said.
“People are into saving money. But at the same time, when they do splurge, they want to get something that you can't get just anywhere,” she said. “That's what we do. We handle things that you can't get in a grocery.”
If P&G does sell Iams' brands in supermarkets, Ms. Wait said specialty pet-food retailers would suffer. “It would definitely hurt sales. We'd probably end up pushing other brands.”
In addition to losing its high-brow cache, Iams could also lose the endorsement of veterinarians, breeders, pet-store owners and other pet experts who often recommend premium pet-food brands to their customers.
“We've developed a real following in terms of our brands, and there's no question that when the recommenders recommend us, that's a powerful tool to use in marketing,” said Bryan Brown, an Iams spokesman.
Iams — which ranks just behind Colgate-Palmolive Co.'s Hill's Science Diet, with $1 billion in annual sales — has worked hard to sew up those recommendations. The company routinely sends teams of salespeople to visit veterinarians and pet-store owners to update them on new products and to try to get them to add the products to their inventories.
It's usually not a hard sale because veterinarians and other specialty distributors can pocket as much as 40 percent of the profits by selling direct to consumers.
In addition, Iams, like other premium pet-food makers, spends hundreds of thousands of dollars a year funding university research and nutrition courses at the 31 veterinary colleges in the United States and Canada.
Veterinary students can even get free pet food from Iams by participating in the company's “Food for Thought” program, which quizzes students on Iams' latest pet-food research. Once in practice, many pet doctors recommend Iams products partly because they've been so heavily exposed to them in school.
And a veterinarian's recommendation can mean a lifetime of sales because most pet owners ask their veterinarians what to start feeding a new pet, and pets tend to stick with a particular brand once they get used to it, said Jeff Grady, a veterinarian at Grady Veterinarian Hospital in Finneytown.
“In a certain way, there's a perception that the food at the grocery isn't as good,” he said. “So, in general, if they can get it at the grocery, it might be something that a lot of veterinarians and specialty retailers don't necessarily want to carry.”
No matter how P&G sells Iams brands, most analysts agree that Iams will become a much bigger company under P&G's direction. “They have such tremendous marketing skills and international reach, that the business can't help but expand,” Olde Discount's Mr. Schonberger said.
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