Saturday, September 09, 2000

Something to bark about

P&G's purchase of Iams no longer looks like a stupid pet-food trick

By Randy Tucker

The Cincinnati Enquirer

        Procter & Gamble's acquisition of Dayton-based pet-food maker Iams Co. a little more than a year ago drew muffled growls from some of Wall Street's big dogs because of the hefty price tag — $2.3 billion in cash.

        In hindsight, some analysts now say the Cincinnati packaged-goods giant's largest purchase ever amounted to little more than lunch money when compared to the potential return on investment.

[photo] Driver Pat Sheraton checks an Iams delivery at a Complete Petmart on Kenwood Road in Blue Ash.
(Michael Snyder photo)
| ZOOM |
        “P&G paid a fair price for Iams,” Burt Flickinger, a former P&Ger who is managing director of Reach Marketing in Westport, Conn., said. “But over time, it'll prove to be one of the greatest bargains since P&G bought the Charmin paper company and Folgers coffee company in 1963.”

        Both Charmin and Folgers had relatively modest sales until P&G took over and transformed the largely regional product names into worldwide megabrands.

        The $40 billion consumer-goods behemoth is taking the same tack with the Iams Co., whose sales since its acquisition already are up more than 25 percent to $1 billion.

        That compares with annual growth of about 16 percent in the four years preceding P&G's buyout of the company from former owner Clayton L. Mathile.

        P&G achieved those results by expanding the Iams brand dog and cat food — previously available only in specialty stores — to more than 25,000 mass-market outlets, including Wal-Mart and Kroger stores.

        At the same time, P&G also has maintained distribution of Iams in pet specialty stores, such as Dayton-based Complete Petmart.

        Kevin Manely, president of Complete Petmart, has said publicly that the 21-store chain initially saw sales of Iams fall as a result of competition from mass-market retailers.

        But Mr. Manely also said Iams sales have begun to rebound as a result of the heavy marketing of the brand by P&G.

        “There's been a very, very strong and comprehensive marketing program behind Iams, which has involved TV advertising and has scored very well with consumers,” said Jeff Ansell, a 20-year P&G veteran who became Iams' president Sept. 1, 1999, the day the acquisition closed. “Brand awareness is up, and that bodes well that the effort that's going on is making the brand more top-of-mind among consumers.”

        Mr. Ansell said P&G has more than doubled advertising spending to support the Iams brand.

        But increased spending is only part of the reason for Iams' heightened brand awareness among consumers, he said.

        “It's not only increased levels of spending,” he said. “What our strategy has been in making this successful is really capturing the synergy between P&G and Iams. We have tapped into proven, effective P&G and Iams techniques on how to launch a brand.”

        More marketing muscle has meant more sales for Iams across the board, in mass-market and specialty stores.

        But Mr. Ansell is quick to acknowledge that specialty pet retailers continue to feel the sting of competition.

        He said he recently spoke at a specialty pet store managers meeting in Anaheim, Calif., where he heard some grumbling about Iams' mass-market expansion.

        But the criticism wasn't as harsh as might have been expected a year ago, he said: “In talking to many of them (store managers), they said, "You know, it (Iams expansion) may have hurt us a couple of points, but the bottom didn't fall out the way we had feared.”

        Mr. Ansell said specialty stores will continue to play an important role in Iams' growth.

        As evidence, he pointed out that Iams Co.'s Iams and Eukanuba super-premium brand — which continues to be sold only in specialty stores — still dominate the pet specialty channel with a combined 28 percent dollar share, based on A.C. Nielsen audit and survey data for the three-month period that ended in June.

        Iams has been one of the few bright spots in a turbulent year for P&G, which has suffered through a sequence of missed earnings forecasts and the abrupt resignation of former president and CEO Durk I. Jager.

        Mr. Jager retired in June after P&G cut its profit forecast for the third time since March, pummeling the company's already struggling stock price, which has fallen more than 40 percent since reaching a high of $118.37 1/2 in January.

        A.G. Lafley, who has taken over as president and chief executive, proudly touts Iams as having the potential to be the company's next blockbuster brand.

        P&G began expanding Iams into the mass market in March with its biggest single-day product launch.

        The global powerhouse flexed its distribution muscle, deploying about 2,500 trucks to deliver Iams to the same stores where P&G sells its Crest toothpaste, Pringles chips and other big brands.

        “This is a story about growth,” Mr. Ansell said. “What's important now is the growth trajectory.”

        At the peak of that trajectory, Iams is projected to grow from about a 4 percent share of the $25 billion commercially prepared global pet-food market to as high as a 20 percent share, he said.

        Helping to drive that growth will be the continued rollout of new Iams and Eukanuba products with a variety of health and nutritional benefits.

        Those products include an Iams cat food introduced this year that is formulated to help cats digest hair more easily to prevent the formation of hairballs in their digestive tracts, and a new Eukanuba brand prescription-only food for cats with kidney disorders.

        Iams' “Hair Ball Care” cat food has been so successful that the company is planning to introduce a similar product under the Eukanuba label in the next several weeks.


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