General Mills’ landmark deal to acquire Blue Buffalo in an $8 billion cash transaction has once again put the pet food industry in the spotlight. Both sides bring something to the table. The price tag represented more than a 17% premium to Blue Buffalo’s share price, reflecting the demand for pet food businesses among consumer brands. In typical M&A fashion involving two publicly traded companies, Blue Buffalo’s stock price advanced 16%-plus after the announcement, while General Mills’ price took a small hit.
For General Mills, the company is gaining long-term exposure to the coveted pet food industry, diversifying revenue streams in the interim and accessing a popular brand among millennials. Meanwhile, Wilton, Connecticut-based Blue Buffalo inherits the scale and brand recognition that comes with a company behind such brands as Cheerios and Betty Crocker.
Opening the Door
It’s not that Blue Buffalo wasn’t already a known brand, with its products winning shelf space in the likes of big-box retailer Target in the second half of 2017 and its pending expansion into a multi-million-dollar manufacturing and R&D facility in Indiana, a project that General Mills said it fully intends to support. But whether independent pet food retailers and pet parents will support the combination is a very different story.
When Chewy.com was acquired by PetSmart in early 2017, several brands, including Fromm Family Pet Food, Champion Petfoods and Tuffy’s Pet Foods, announced that Chewy would no longer be authorized to sell their products, citing an unwillingness to sell in large box retailers, or their online platforms. Blue Buffalo had already shown its willingness to accept that fate when it partnered with Target, putting its premium tag into question and alienating some independent retailers. The latest deal suggests it’s willing to again risk a complete falling out with specialty pet shops.
Pet parents have spoken up in the past when dominant CPG companies have acquired independent pet food manufacturers. In 2015, Nestle Purina announced the acquisition of Merrick Pet Care, prompting a backlash among pet owners who were worried about a loss in quality and a change in ingredients to cut costs.
Blue Buffalo’s possible loss among independent retailers could be the gain of other independent pet food makers, including brands that might not be on the radar of the Campbell’s of the world, for instance. From a strategic standpoint, independent pet retailers don’t want to go head-to-head with mainstream retail, so they could look to a single brand to replace what Blue Buffalo once dominated or share the shelf space among a number of new or existing natural and organic pet food makers.
Attractive Market Niche
With this deal, General Mills bolsters its portfolio at a time when the pet food industry is hot, evidenced by a market size of $20 billion, 50% of which is directed toward dog food, as per Nielsen data cited on CNBC.com. Meanwhile, human packaged food sales have been in a slump amid a generation where food-delivery services such as Blue Apron are on the rise. General Mills is not the maiden company to take this approach.
In 2014, for instance, Mars acquired the Iams and Natura brands, adding them to a portfolio that included Whiskas and Pedigree, when it bought most of the pet business from another household brand, P&G. In 2015, JM Smucker bought Big Heart Pet Brands in another multi-billion dollar deal.
It’s been a while since General Mills placed a bet on another established player such as Blue Buffalo, with the last time the company did a high-profile deal dating back to 2014 for Annie’s. Back then, critics complained that the organic food maker was selling out to its new owner. But last year, Annie’s was a top sales driver for General Mills, which explains why it would similarly target another natural food maker, this time for pets.
Given its growth and momentum, the pet food industry is certainly a bright spot in the consumer goods sector. As a result, greater consolidation among independent pet food companies could be on the horizon in 2018. But even while this deal may spur further M&A, its impact among both independent pet food makers and independent retailers is likely to be the more interesting story.
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