General Mills to Acquire Tyson’s Pet Treat Business for
USD 1.2bn – Deal Synergies & Outlook – 27 May 2021
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Specialist: Michael Gamage (MG)
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Former Director, Customer Sales & Trade Promotion at Blue Buffalo Co Ltd
Agenda:
1. Deal overview and synergies
2. General Mills (NYSE: GIS) and Tyson’s (NYSE: TSN) competitive positioning among leading players
3. Private label trends and market share implications
4. M&A outlook
Contents
Q: Could you begin with an overview of the US pet food and treat industry, pinpointing the major categories
and top competitors?
3
Q: How has the pandemic impacted the trends playing out across the industry, such as humanisation?
Q: How have adoption dynamics differed for cats vs dogs?
Q: Could you elaborate on the fragmentation across the various types of dog and cat food, whether wet, dry
or treats? Which categories or types of food would you highlight as leaders vs laggards?
4
5
5
Q: How is market share split across wet vs dry in the core food category? Does wet have more market share?
It costs more to give a dog more premium kibble, and there’s a chance they’ll just spit it out because they
don’t want kibble. How should we frame the retention of pets ultimately liking these products?
6
Q: How is deal activity trending in the pet food or treat industry? Has the pandemic catalysed consolidation?6
Q: What are your thoughts on Tyson’s sale of its treats business to General Mills? Is there less humanisation
associated with treats?
7
Q: What are your thoughts on Tyson’s USD 1.2bn valuation?
7
Q: How would you characterise the integration of some of these pet food acquisitions? How easy is it to roll
any of these various manufacturing pipelines into something such as a General Mills or Blue Buffalo?
Q: Could you break down the depth of General Mills and Blue Buffalo’s offerings? How has the pet business
evolved over the years?
Q: How should we evaluate Blue Buffalo’s marketing dominance in the categories it operates in?
Q: Can you outline the channel distribution dynamic among pet food brands, given the difficulties faced by
PetSmart and other retailers and more people focusing on big supermarkets such as Walmart? Where are
most sales coming from, and where is there opportunity for further growth?
7
8
9
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Q: What are your thoughts on the aggressive launch of private label by some big players such as Walmart? 10
Q: Are there any competitors who have caught on to Blue Buffalo’s marketing playbook? We discussed its
aggressive approach – I’m familiar with the brand, and I don’t even own a pet. What are your thoughts on
the smaller, potentially lower-quality upstarts establishing themselves, such as Central Garden & Pet?
Q: How should we frame the competitive barriers to entry in the pet treat segment? Do you think it has
become a lot harder to start up, build a brand and begin selling treats?
Q: The Tyson acquisition shores up Blue Buffalo’s treats offering, where it previously lacked a significant
presence. Could you break down the company’s offering for jumping into a much more premium aspect?
10
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Q: What’s your outlook for further consolidation? Are there any small, lean brands that you would highlight
as opportune targets to be rolled in by some of the larger players?
12
Q: How do you expect innovation to evolve across the various pet food and treat segments?
Q: What do investors commonly overlook when assessing the US pet food and treat industry?
12
12
General Mills to Acquire Tyson’s Pet Treat Business for
USD 1.2bn – Deal Synergies & Outlook
Transcription begins at 00:00:01 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled General Mills to Acquire Tyson’s Pet Treat Business
for USD 1.2bn – Deal Synergies & Outlook. I am Nyree Hinton and I will be facilitating today’s Interview with
Mr Michael Gamage, former Director of Customer Sales and Trade Promotion at Blue Buffalo.
Michael, before we get started with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material non-public information and agree not to disclose any
such information or any other information which is confidential during this Interview.
MG: I agree.
NH: Michael, could you start with an overview of your background and the various roles you’ve held in the
industry?
MG: Sure. I am a 30-year veteran in consumer packaged goods and working for Kraft, Kellogg’s, Starbucks in
roles from sales to sales planning, finance, strategic pricing, analytics and worked, last, with General Mills as a
Handling Customer and Consumer Analytics, as well as pricing and trade, and worked both with the
Acquisition with General Mills and worked through that. Then, after that, I worked as a private consultant,
doing consulting work in both the consumer packaged goods areas as well as some other areas for trade,
pricing, and customer analytics and reporting.
[00:01:31]
Q: Could you begin with an overview of the US pet food and treat industry, pinpointing the major categories
and top competitors?
MG: The category has been continuing to grow. It’s an evolution category. What we have seen in the last 10-15
years in pet food is the consumer is moving, and everybody knows this, everybody is moving towards
premiumisation, but we used to call it humanisation. As everybody becomes more aware of what they’re eating
themselves, they would find themselves looking at the packages and what they’re feeding their pets and want
to feed them better foods. As this became a little bit more prevalent, and then as access to these types of foods
became more prevalent, we saw a major shift in consumers moving towards premium pet foods and continue
to do so. This whole segment continues to grow, whereas, previous, pet food was pretty much just an after-
thought, and it was mainly just big brands of, I would say, relatively low-quality food, unless you went to a
neighbourhood pet market and bought some really expensive high-end niche foods. This premiumisation and
humanisation of the category continues and has continued to evolve. Especially as millennials became more
involved in pets and getting pets, they are exceptionally aware of what’s going into their bodies from a human
food perspective. They brought that in with them, with their pets and became of aware of what they were
doing, whether it was organic, even vegan and everything else. They wanted to feed their pets what they were
eating and felt good about it. This has led to a lot of brands pushing high into that premium, which helps
everybody from a brand perspective, because you end up selling food at a higher cost to the consumer.
There are higher margins that can be involved with that, even though you have to put more in the input cost.
From major competitors, that perspective, it’s interesting that there are a lot of brands but few actual
competitors. You have Mars, you have Smuckers, you have Nestlé, and you have General Mills. They have
Private and confidential 3
several brands underneath their portfolio to be able to branch out across both the core brands as well as mid-
tier and premium and then super-premium brands across different categories within dog and cat. One of the
trends that you’ve seen in dogs, for instance, is the fact that small dogs, which is very typical because
millennials are leading this, small, medium dogs are growing exponentially, while large dogs, percentage of
ownership is going down. That’s because, now, it’s more common to see apartments that allow dogs, and
millennials are not necessarily buying houses as much. If they are, they’re buying pet-friendly houses, and they
may have two or three small dogs vs one large dog. Previously, somebody would maybe get one large dog and
have it in the backyard. That trend doesn’t exist anymore. Most of the time pets are sleeping on the bed and
there may be two or three smaller dogs. That continued trend of size of pet also means that the consumer is
moving towards more expensive food. The reason being is, it can cost more to feed an eight-pound chihuahua
premium wet food, than it does to feed an 80-pound bloodhound dry kibble. Because it’s, from a, “How much
am I going to spend on my pet for its pet food?” it doesn’t seem unreasonable if I’m going to spend USD 80 a
month on pet food for my eight-pound chihuahua.
You’re thinking, “That’s reasonable. I can spend this. It doesn’t cost a lot to actually feed that animal really
high-quality foods.” Consumers are, again, more savvy to the consequences of feeding bad food not only to
themselves but to their pets, from underlying conditions to tumours and everything else. Again, consumers
continue to get wise as to what’s in the food, and that humanisation trend continues and I don’t see it really
stopping. The outcome of this is that your core base-brand, premium dog chows of the world, which is, in my
personal opinion, basically sawdust mashed together, is pretty much being pushed away. You have the
medium and premium brands continuing to find very strong growth.
[00:06:14]
Q: How has the pandemic impacted the trends playing out across the industry, such as humanisation?
MG: COVID has had a massive impact across everything. People spent more time in their home. They were
spending more time with their family. They couldn’t do a lot of things, but one thing they could do in spending
time with the family, is adopt a pet. The mum and the dad that maybe both work outside of the home, they say,
we told the kids we don’t have time for a dog, we don’t have a dog, we can’t take care of them, now found out
that they had time, and they went out and they adopted pets. They may be first-time pet owners or they may
be last pet owners, meaning they had one as a child and now they’re getting one for their family. As everybody
hunkered down at home, they found it much more enjoyable, as well as stress-relieving, to have a pet with
them. This led to a boom in adoptions and, hopefully, that’ll continue. You see that same trend. Even if they’re
a new pet owner, they’re going to go seek out, “What do I feed this pet now?” They tend to get a lot of advice
from their veterinarian, but with this wonderful age of Google, they’ll got to Google and start looking at, “What
is going to be good for my pet?” right down to some people buying pretty specific pet foods. They’re going to
find out and do that research before they actually go out and do it. Consumers are doing research in the aisle,
for instance, by just scanning the UPC and finding out what’s actually in that food and what other consumers
are saying.
Ratings and reviews, which are great for electronics on Amazon, are the same exact thing that you find for pet
food. They’re going to look at what other consumers’ interactions with have been in food. This whole being
inside the house has led to life-long changes, meaning that an average small dog can last, in your life, 14-20
years. They’re bringing them in. It was great that there were a significant amount of adoptions, and it kind of
cleared out the kennels a little bit, not quite as much as everybody would like, but it’s definitely going to
continue to spur the growth in pet food, whereas, you would expect, if it hadn’t occurred, you would expect it
to plateau a little bit into mid-single digits, where low single-digit growth has actually gone into double-digit
growth because of the fact that now there are more pets and they will be around for the foreseeable future.
Private and confidential 4
[00:08:51]
Q: How have adoption dynamics differed for cats vs dogs?
MG: Really, you’re talking about the difference between city living and living out in urban areas. In large
cities, you found cat adoptions went up significantly because (a) they are fine being indoors and so people that
were hesitant to have a pet, a lot of them went after cats if they lived in a small space, or they were worried
about going back to work and not being able to take care of the animal. You saw, in urban areas, where people
were in homes, single-family homes, that they were more apt to adopt dogs or even a second dog. A lot of of
actual current pet owners adopted a second animal because they were like, if I do have to go back to work, if
this does get over and I have to leave, I don’t want them to be alone, because they’re used to me being here all
the time. You saw a little bit of a divergence based on the location and, as well, obviously, preference. There
are a significant amount of people that obviously prefer one vs the other, sometimes due to allergies and
sometimes just due to space and what they prefer. Again, you also saw the trend of small dogs being adopted
very rapidly, and large dogs, which is typical, they tend to lag from an adoption-rate perspective anyways. We
found small dogs getting adopted really quickly. Cats, a lot of people added one or two to their household,
which is not uncommon because, again, they wanted to have more things familiar and more things around
them in a home when they were just sitting there all day long, even if they were on Zoom calls.
[00:10:43]
Q: Could you elaborate on the fragmentation across the various types of dog and cat food, whether wet, dry or
treats? Which categories or types of food would you highlight as leaders vs laggards?
MG: I spoke already, the laggards are your base, core, old, stayed brands, the Purina Dog Chow. That lagged
because, again, consumers spending more time at home, they had more time to look at what they were actually
feeding their pet. What exploded in growth, granted, it’s still a very small, niche part of the category, was
refrigerated foods and fresh-made foods, even fresh-made, delivered to your door foods. There are several
companies in large cities that are doing, “We make the food fresh, and we actually delivery it to you,” much
like Fresh Express or something like this. You saw explosive growth. However, a very small part of the
category in those refrigerated and delivered to your door categories. The premium category and super-
premium category picked up even more steam. They were big winners in this because, again, consumers not
only had time but they had the feeling that, “I’m going to feed my pet good food, because, now, I’m at home
and I’m making home-made food and I want my pet to eat as well as I do.” The losers of the category were the
low-end treats, saw explosive growth as well because when you’re home 24 hours a day, you have a larger
chance to give a treat to your pet, and quite frankly, they were keeping their humans company. They were
rewarded for that. In treats, you see not as much of the same trends that you see in core foods, I mean in wet
and dry kibble, because consumers don’t read the labels as much. There’s still a premiumisation of treats. It’s
not quite as steep a curve as you saw in dry and wet canned food, but you still see consumers starting to take a
little bit more notice of what’s in their treats that they’re giving.
There were several scares with treats that were harming dogs, and if you want to see something fall off a cliff is
have a dog get sick from something, somebody posts it on the internet and goes viral. Consumers started to
look more at their treats, but surprisingly enough, just like humans will eat salads and chicken breast to feel
better and lose weight and feel like you’re eating good foods and then go to Dairy Queen, that’s what treats are.
You don’t want to look at the calories and what’s in something at Dairy Queen. They feel the same way about
giving their pets treats. They want to give them something that they really,super enjoy. I did see, also, a change
in the categories, especially within dental. Dental is your Greenies, Whimzees and those types of treats.
Consumers started moving towards those a little bit more, as well, because they felt like they were better for
you, as well as they had the opportunity to quote, unquote treat a medical condition and save themselves some
money since dental treatment for dogs is exceptionally expensive. You saw a little bit of a convergence there of
premium going up, treats going up and premium treats going up but not quite as fast as actual premium food.
Private and confidential 5
[00:14:27]
Q: How is market share split across wet vs dry in the core food category? Does wet have more market share? It
costs more to give a dog more premium kibble, and there’s a chance they’ll just spit it out because they don’t
want kibble. How should we frame the retention of pets ultimately liking these products?
MG: First, it’s a couple of things. One is wet food, you have to look at it by serving. You can’t look at it by
dollars or pounds because, obviously, there’s a vast difference between a 40-pound bag of dog food and a 12-
ounce can of wet food. Wet food has two purposes. We found a large amount of consumers actually used wet
food with the dry food to make the dry food more palatable, and they also used wet canned food and pouch
food, like that type of stuff, as a treat for the animal as well. Just like you might let your kids have sugar cereals
on the weekend but not during the week, some pet owners would actually give wet food on the weekends or as
a special treat. Dogs find it palatable. The thing about dry kibble is, once your pet, once your dog, especially, is
on a certain food, it is a lot more difficult to move them off foods and change their foods. If my dog is on Blue
Buffalo Chicken and Brown Rice, to move them to, say, a Eukanuba, or an Iams or anything else out there, it
doesn’t matter what it is. You have to follow the directions in this so long as there is about a two-week
transition period, otherwise you’ll upset the animal’s digestion. That could be disastrous for you and your
carpet. Consumers don’t change the kibble so much. They may add wet food to the kibble if the dog seems less
interested in it, doesn’t like the flavour as much anymore, just again, loses interest. Not very common that they
do, but they’ll add wet food to it. Cats, you don’t have that situation.
Cat owners, for instance, are less into humanisation than dog owners. That doesn’t mean that cat owners don’t
like their cats any more than dog owners. It means that cats do tend to be more finicky and a pet owner will
maybe go in and go in and buy a can of 9Lives, and then a can of Blue Buffalo and a can of another one
because the cats do like varieties and they will get tired of it. You have to constantly be changing it out. They
don’t tend to have the digestion issues that dogs do from changing food to food. Dogs, changing the food, even
sometimes just a little bit, can cause real issues. With cats, it doesn’t tend to be so much. If they don’t like the
food, they just simply won’t eat it and you move on to the next can. It’s a little easier to move a cat around
from one to the other, whereas dogs, not so easy. Again, that leads you to, “I guess the dog doesn’t like the
kibble anymore, for some reason. I’m going to supplement by putting half a scoop of wet food on top of it to
make it more palatable.”
[00:17:44]
Q: How is deal activity trending in the pet food or treat industry? Has the pandemic catalysed consolidation?
MG: Yes. It has made the bigger players bigger. A lot of the up-and-coming smaller regional brands that were
out there in pet speciality stores and by pet speciality, I mean like neighbourhood pet stores, mom-and-pop,
five-, maybe 10-store chains, a lot of those, with COVID and the shut down and not being able to get produced
is most of them didn’t produce their own foods. They’re getting it made by a third party, struggled. What you
saw is, a lot of those getting acquired or getting significant investment from the larger companies saying,
“You’re a great target.” I think it definitely accelerated some deals and some mergers and what you don’t see
publicly in a lot of the documents is investment levels. Nestlé is big in doing this. They will invest 49% and
own 49% of an organisation of a brand. That way, they don’t have to call it a Nestlé brand and they let it run.
They’ve done that with Merrick. Merrick runs, as its own company with its own everything, own infrastructure
and everything else, even though it’s primarily owned by Nestlé. You saw a lot more of that type of activity
going on because it was a ripe time to do it. For the smaller retail brands, it kept them afloat. They could not
necessarily compete, and some of them couldn’t even produce their own foods. I saw a lot of them running to
large private label manufacturers or subcontractors like Champion and Simmons Pet Food, to try to get them
to produce their foods, which Simmons is continuing to explode with growth and building more plants
because of that. Simmons has taken equity positions in several of the brands because they see the potential for
growth as everybody climbs out of this.
Private and confidential 6
[00:19:56]
Q: What are your thoughts on Tyson’s sale of its treats business to General Mills? Is there less humanisation
associated with treats?
MG: It was never a core focus of theirs. It was something they did. It’s great for Tyson because, again, it was
nothing that they were really going to spend a lot of time, money or effort on. They had created some really
good brands, and some of it maybe even by accident, but they did have a great following and great products.
Quite frankly, Tyson has relationships with every one of these large pet food manufacturers, very strong
relationships with them. It’s not like they were unknown to everybody or unknown to each other. It just made
sense from them to get out of that. It makes a lot of sense for Blue Buffalo to acquire it through General Mills,
because that segment was a pain point for Blue, meaning really having a tough time in the chews category.
Couldn’t really seem to come up with a formula that they could put out there and get traction with under
chews, tried several times and couldn’t get it there. Even soft treats for dogs, really struggling on those. They
did okay on training treats but not real soft treats and manufacturing. Blue has one manufacturing facility for
treats and that’s it. It makes it a little difficult to expand than it was even three years ago, running at 100%
capacity. Acquiring Tyson’s business, you get three really brands, you fill in a segment that you struggled in a
great deal and couldn’t seem to get any traction, as well as picking up a manufacturing facility that you can
exploit for further new product development and capacity.
From what I understand from my knowledge in the industry is that facility was not running even close to 100%
capacity. There’s opportunity for them to ramp up capacity as well as take those products to locations that they
weren’t currently being sold in. General Mills will get to the General Mills ubiquity of distribution. I wouldn’t
be surprised to see those products at Walgreens, at CVS and every other location that you normally see
General Mills products, and integrating it into the supply chain is pretty seamless, exceptionally seamless, so…
Huge synergies from a supply chain perspective. Quite frankly, they can drop it right into their supply chain.
There’s no cost for General Mills at all. It actually further fills up their trucks and makes the ordering
efficiency better and again gives them the capacity they need as well as entrance into segments that they
haven’t had. One of the issues that Blue Buffalo has always had is coming out with products that didn’t
necessarily fit the Blue Buffalo stamp of how they would do things. This acquisition, using those brand names,
a lot of their products that they couldn’t make and have it be natural allows them to push that under a
different brand name but still get the sales and be able to expand the market. That was always a struggle for
Blue to try to come up with things that fit their quality standards for Blue Buffalo, and now they have an
opportunity to produce something that may not quite be on brand trend for Blue, but under a different label,
and be able to push into other segments, both up and down the pyramid of premium.
[00:25:02]
Q: What are your thoughts on Tyson’s USD 1.2bn valuation?
MG: It wasn’t USD 1.2bn. When you actually look at the net, it was a little under USD 900m once you exclude
that and other acquisition costs and stuff that was absorbed by Tyson. Still, not a bad purchase at all. It will be
slightly accretive to General Mills, according to what they’re saying, and again, the opportunity the expand
that business and then to cut supply chain costs and get the manufacturing capacity, they probably underpaid
for it.
[00:25:41]
Q: How would you characterise the integration of some of these pet food acquisitions? How easy is it to roll
any of these various manufacturing pipelines into something such as a General Mills or Blue Buffalo?
Private and confidential 7
MG: Exceptionally, especially with General Mills. For Blue Buffalo, it might be a little bit more difficult, but
General Mills’ portfolio expands from everything from frozen, to refrigerated, to natural, organic and
everything else. Their supply chain and logistics team are some of the best in the entire industry. Acquiring
someone like this, as small as it is, and pushing it into their systems and supply chain, really not much of an
effort at all. It’s going to take a small team maybe a couple of weeks to figure out how to do it and to do it
seamlessly, and that will be it. It’ll really be a little bit more work on the sales team to say, “Hey, by the way,
we’re now selling this,” and getting it changed over in the retailers’ systems to be under General Mills-Blue
Buffalo vs under Tyson. Even that’s not that difficult.
[00:26:52]
Q: Could you break down the depth of General Mills and Blue Buffalo’s offerings? How has the pet business
evolved over the years?
MG: Blue Buffalo has evolved from a single brand. Bill Bishop started with LPF, Life Protection Formula,
expanded Blue Buffalo into four different brands with Wilderness, Basics being some of the bigger ones, trying
to expand the premium category. Bill Bishop always would tell a story whenever you went out to dinner of how
he completely intended to sell Blue Buffalo after it hit USD 250m in sales. As it exploded past that, he’s like, “I
guess I’ve got hold onto it for longer.” It just continued to take off. He didn’t realise how good of a thing that he
was building when he started to build it, and then as he did, you’re talking about a guy that really, actually was
invested in the product and invested in how it was going to show up and care to the animals. Rigorous testing,
and it came through in the quality of the product. He flipped the script. What Bill Bishop did differently than
every other manufacturer of premium pet foods was, instead of trying to cultivate the brand with consumers in
neighbourhood pet stores, he launched directly at PetSmart and Petco, which pissed every neighbourhood pet
store and owner off, because they were used to this. Somebody introduces a brand to neighbourhood pet
stores, cultivates it over five or 10 years and slowly maybe brings it to PetSmart and Petco. No matter what,
you never leave PetSmart and Petco and go to grocery stores. Bill Bishop actually says, “No, I actually want my
food in as many locations as possible, and I’m actually going to market my product and I’m going to market it
nationally, put it on TV,” which most of these brands did not do, because it was limited distribution, meaning
at neighbourhood pet stores and PetSmart and Petco, Tractor Supply, even.
He said, “No. I’m going to build my brand,” because that’s what he is, is a marketer at heart. He did that and
then he thumbed his nose even at PetSmart and Petco, says, we’re going to go the grocery stores, because we
can’t get… everybody recognises our brand, they know our brand, but they simply can’t get it because isn’t a
PetSmart, Petco or a neighbourhood pet store close by. Neighbourhood pet stores jack the price up
significantly because they’re a niche kind of shop. PetSmart, Petco were, at the time, actively looking to reduce
their reliance on Blue Buffalo. He reduced Blue Buffalo’s reliance on PetSmart and Petco by going to grocery
stores and really accelerating the volume. Blue Buffalo was one of the first premium brands to jump into e-
commerce and build very strong businesses at Chewy and very strong businesses at Amazon and actually focus
and build sales teams around those. He was trying to always stay one step ahead. General Mills recognised
that, recognised where they were, and it’s a great opportunity for General Mills. If you understand how the
manufacturing process works, Purina Dog Chow, when it was invented, they used excess cereal production
lines to make kibble.
The processes are relatively similar from the manufacturing side of it. It made sense for General Mills because
they actually could add expertise into the manufacturing of it, and at the time, probably not so much due to
COVID, but at the time, they had excess capacity in those areas. They could even change a whole plant over
from making cereal to making kibble and make production. From an integration perspective, it make a lot of
sense, and for General Mills to get into a category and a brand that has seen strong double-digit growth for 10-
15 years, where most of their brands are, if they’re lucky, a single-digit growth, at the time, made all the sense
in the world. With COVID, it accelerated General Mills’ core brands and then continues to accelerate Blue
Buffalo. It was a strong win across the board.
Private and confidential 8
[00:31:15]
Q: How should we evaluate Blue Buffalo’s marketing dominance in the categories it operates in?
MG: One thing Blue Buffalo did, was again, they kind of skipped the step of neighbourhood pet and went
directly to PetSmart and Petco, and at the time, PetSmart and Petco had a few premium brands but their idea
of premium at that time was Iams and Eukanuba. Nobody was really coming out with premium brands,
putting them in PetSmart and Petco and then marketing them to consumers. Blue Buffalo came in, gave them
brands, gave multitudes of brands and a sub-brands underneath the one, and supported PetSmart and Petco
tremendously and literally drove PetSmart’s and Petco’s growth and became very dominant within PetSmart
and Petco, at times exceeding 25 and 30 share of the total dog food category within PetSmart and Petco. It
became a very symbiotic relationship, a very strong relationship and both companies grew on the backs of
each other because Blue Buffalo, through their marketing, drove more consumers into PetSmart and Petco
that normally wouldn’t go in there, that would pick up their food at grocery stores. That, of course, flipped
around a little when Blue went into grocery, but because of consumer awareness of the brand, it made sense.
We changed our product package size, so we through went through through a price pack architecture and
changed the size, so it’s different sizes for dry foods, especially in grocery, than it is in PetSmart, Petco, and
tried to give them some differentiation and then launched new brands within PetSmart and Petco to offset any
losses they had.
Quite frankly, what we found is very little cannibalisation between consumers going, say, leaving PetSmart to
buy it at a grocery store. What we found is just new consumers that knew about the brand, but just didn’t ever
want to make that extra trip to PetSmart and Petco discovering Blue Buffalo in their grocery store and starting
to transition their pets to it. It made a huge different for Blue Buffalo and then made a huge difference,
obviously. I think the successful transition into grocery is what probably spurred General Mills to say, “This
makes sense as an acquisition now, because that’s a supply chain and logistics chain I understand, and that’s
an area that I could add more growth and more capacity to. I’m going to grab it now and try to keep this train
running.”
[00:34:00]
Q: Can you outline the channel distribution dynamic among pet food brands, given the difficulties faced by
PetSmart and other retailers and more people focusing on big supermarkets such as Walmart? Where are most
sales coming from, and where is there opportunity for further growth?
MG: Grocery has always been dominant because of the number of locations, obviously. That helped
tremendously. Then, e-commerce is huge and it continues to explode in growth. That had obviously picked up
rapidly during COVID, and I don’t see it going away. It is the perfect subscribe-and-save product because it’s a
product that I don’t want to have to go pick up and I don’t want to make a special trip for. If you’re going to
deliver to my door every month, that’s fabulous, because it’s also, unlike humans, we don’t know how much
we’re going to eat every day. Dogs eat about the same amount every day and same thing with cats. I can set it,
forget it and never have to worry about having to make that, put that on my grocery list. It’s hard for some
people outside the industry to understand that Amazon is a distant number-two player from market share and
e-commerce and Chewy is the dominant one. Chewy, being owned by PetSmart, or by the same venture capital
team, it really helps. It helps the PetSmart team and it helps manufacturers being able to exploit the e-
commerce side of it. Chewy just continues to be on a roll fulfilling the whole needs of the pet, from where
they’re now pet meds and that type of thing and getting into therapeutics and being able to do that and leaving
that retail side to the PetSmart side. PetSmart is much more focused on extra services, meaning veterinary
services and grooming, to bring consumers in, where Chewy is looking for that stable everyday purchase and
being to do the subscribe-and-save type of thing.
A long story short, I think you’re going to see continued growth, obviously, in e-commerce. You’re going to see
mild to moderate growth, if any, in PetSmart and Petco because they are growing, but they’re growing slower
than the rate of adoptions and the rate of pets in households. That means they’re actually losing. You’re going
to see some of this continued growth of brands in e-commerce and in grocery. Grocery is somewhat limited
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because the size of the box is too small. They can’t bring in all the brands that they would like to to attract
consumers. Many years ago, most grocery stores gave up on this category, so to speak. They moved it from the
centre of the store to way off in the corner on the edge because Walmart and Target had kind of taken over
those types… as well as Costco, taken over that category. You see Walmart is going to continue to be dominant,
but they’re more dominant on the 80-pound bags of dog chow. They’re still on the lower end, from a consumer
perspective. Lots of opportunity for premium but still not necessarily their target, for instance, is a bigger
share of for-premium, because they have, at least from perception and perspective, the demographics to buy
those types of products.
[00:37:35]
Q: What are your thoughts on the aggressive launch of private label by some big players such as Walmart?
MG: Walmart has had private label for a long time. That’s nothing new. They’ve done okay with it. Majority of
the source of their volume is from the premium dog chows into their private label. I really don’t see source of
volume with consumers going down from a Blue Buffalo to a private label. It doesn’t necessarily happen.
Again, even Amazon and Chewy have launched their own private with moderate success, if any. Again, once I
get my pet on a dry dog food, I am not going to change unless I absolutely have to, and by absolutely have to,
meaning, if there’s a medical condition that requires me to change them. That process is fraught with all kinds
of hurdles, and I don’t want to do it. If the pet is happy with it, I don’t care. You can come up with as many
private labels as you want, make it USD 20 cheaper a bag, I don’t care because I’m not going to change my pet
if I don’t have to. You can come out with American Journey. It was met with poor reviews. It was made by
Champion and it was, I wouldn’t say a complete flop, but not necessarily a success. You’re going to continue to
see people try to do private label just like you do in grocery store for every category, because there’s more
margin in it for the retailer that way. You’re still going to find categories like dry food and especially wet food
where they’re going to probably shy away from it.
Again, I don’t want to change my pet and I know what I know and I trust what I trust to feed my pet and just
swapping out is not going to be something I’m going to do. Treats, on the other hand, they probably have more
success in treats because, again, consumers will feed USD 7-a-pound wet food to their dog and then hand them
a Milk-Bone, which literally is sawdust, and don’t think anything twice about it. They’re not as concerned
about quality when it comes to a treat, as it does their food. Private label probably do better in treats and a
substantial margin in treats, so why not.
[00:39:49]
Q: Are there any competitors who have caught on to Blue Buffalo’s marketing playbook? We discussed its
aggressive approach – I’m familiar with the brand, and I don’t even own a pet. What are your thoughts on the
smaller, potentially lower-quality upstarts establishing themselves, such as Central Garden & Pet?
MG: The one that caught on the most is Nestlé. (a) They’re one of the sharpest manufacturers out there and
they’re great at marketing. They continue to do what Nestlé does well, which is invest in small brands by either
taking equity ownership in that brand, such as Merrick, and letting it run, and they’re good at cutting clear
channels out so that the brands may compete on the shelf but they don’t compete in the corporate office. They
get marketing exceptionally well and they have the capacity to take these brands and go across the globe,
which a lot of brands don’t have that capacity or understanding to do. I say, Nestlé has done exceptionally well.
Smuckers struggled. They actually have not done well with Rachael Ray. They’ve actually declined that
business. They’re struggling a little bit to turn a Blue Buffalo playbook and actually do the marketing. They’ve
actually cut most of their marketing for Rachael Ray. It’s probably not necessarily the right trend. Mars is
exceptionally good at it. Pet food is a huge chunk of their business, but they still are focusing more on cranking
products out vs marketing and getting consumers aware of the brand, whereas Nestlé gets it. That’s for sure.
The smaller players, I think you’re going to continue to see more niche players, especially in refrigerated,
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frozen, ready-to-serve and delivered direct to your door. However, again, as you go up the pyramid, the are
less and less consumers willing to spend USD 200 a month to feed their pet. There are some, and they will
absolutely do that, but it’s just a smaller population. Will they catch on and be successful? It depends on what
you determine as successful. Will they be a USD 1bn brand? Probably not. Will they make somebody a decent
amount of money? Probably. They’re not going to be for mainstream. You’re not going to get a mainstream
amount of consumers to go from paying a USD 1 a serving to USD 6 a serving. You see a lot of the
comparisons. I can go out and buy a porterhouse steak cheaper than what I can buy some of this food for my
pet. I’m not going to cross that bridge. I’m not going there. There are some consumers. I’m sure Paris Hilton
would do it, but then again, money is not an object for her, and there are just not as many of her as there are of
me.
[00:43:08]
Q: How should we frame the competitive barriers to entry in the pet treat segment? Do you think it has
become a lot harder to start up, build a brand and begin selling treats?
MG: It has gotten a lot harder, especially in treats. It’s a very crowded field. To find capacity to make treats,
from a third-party perspective, not hard. There are a lot, because again, the manufacturing process is very
similar to other food products, so, it’s not hard to find somebody to make those products. Now, to make them,
and make them well and make them consistent is a little bit more difficult. Like Simmons, that’s what their
whole business is, is making that. They’re actually exploding in growth. Their CEO is an old friend of mine and
they’re doing great work. They’re adding manufacturing capacity as fast as they can. I think you’ll still see a lot
more players come in there. It’s just questionable whether consumers are going to give up their Milk-Bone for
a higher-cost treat on a regular basis. One thing that we find about pet owners is it’s a lot like cereal. They may
have six different cereals in their pantry. They’ll do the same with treats. They’ll have six different treats in
their pantry, but they’ll only have one dog food, one brand, because it’s a treat. I think it’s still going to be a
messy world within treats, but it’s definitely a good place to play because margins are really strong.
[00:44:44]
Q: The Tyson acquisition shores up Blue Buffalo’s treats offering, where it previously lacked a significant
presence. Could you break down the company’s offering for jumping into a much more premium aspect?
MG: It’s interesting. Prior to the General Mills acquisition, the publicly stated goal for Blue Buffalo was to
continue to move up the premiumisation trend and up the pyramid. I will tell you that all the work that
General Mills said, (a) you’ve seen that whole conversation die off, and all of the press releases and quarterly
calls. General Mills understands the fact that below premium is a huge market, and a huge market to go
exploit, and the higher end is a very small market with very difficult points of entry and very difficult
opportunity to grab traction. There’s a point when you go up that pyramid of premium products that margins
start to go down. It actually does an inverse curve and starts to come down, because the cost to produce and
distribute. Then, the amount of product that’s old, because it can’t stay on the shelf for two years like dry
kibble, goes up dramatically and you lose profit margin. Whereas, to take something and go down, Blue
Buffalo, at one point in time, actually had a different brand that addressed the lower end of premium, the
entry-level premium, the higher end of core brands or base brands. It’s much more likely that General Mills
will go that direction, than try to go up the pyramid any more. They kind of own the premium, and super
premium, you’re going to spend a lot of money to go after a little bit of return.
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[00:46:45]
Q: What’s your outlook for further consolidation? Are there any small, lean brands that you would highlight as
opportune targets to be rolled in by some of the larger players?
MG: Yes. You’re going to continue to see, if they can establish themselves well in neighbourhood pet, because
most of these acquisitions are, you’re talking a couple hundred and maybe up to USD 1bn, but most of them
far less than that. For a Smuckers, a Mars, a Nestlé, a General Mills, these are just little bolt-ons. For them, to
acquire them, to expand and to get into more locations, meaning if I can be primarily a pet food that’s in
grocery stores and expand into PetSmart and Petco and Tractor Supply and all the way into neighbourhood
pets, that’s an attractive opportunity and then they’ll still look for those that have created at least a semi-
national presence, to acquire and to bolt those on. From a supply chain perspective, it’s easy to do, so why not.
I wouldn’t be surprised that if, much like Champion did, is, as they start making more and more of those
foods, to actually come out with their own brands and try to be a little bit more of a branded player. They’re
definitely going to be attractive. Quite frankly, a lot of those have got the cutting edge, so you always look at
neighbourhood pet for the cutting edge of what people are doing for pets, whether it be CBD-infused foods or
those types of things. They’re going to be looking at that and seeing how it grows and if it can get enough
consumers to be interested in it to go after it and then make it mainstream.
[00:48:35]
Q: How do you expect innovation to evolve across the various pet food and treat segments?
MG: You’re going to continue to see an explosion and you’re going to see the GMO... there’s actually a big
undercurrent looking for no-chicken. We don’t have chicken in our food, because chicken is something that is
primarily used to up the protein levels. There is all kinds of internet chatter that chicken can be bad for dogs,
which is absolutely ridiculously. You’re going to continue to see diversification in flavour profiles, as well as in
more, I would say, unique profiles, such as boar, and that type of thing. You see those things out there, now.
You’re going to see, especially when you’re talking about going in the grocery store, and quite frankly, the
regulatory environment around pet food is exceptionally light. I could add 2% bison to my current food and
call it a bison-infused food. You’re going to continue to see exotic profiles, things to try to attract consumers to
either stay with a food or move up that pyramid and go down, come up from a Purina Dog Chow, up to a
Rachael Ray or a Blue Buffalo. They’re going to attract them by having continued health benefits, whether it be
glucosamine or something for a dog’s health. You’re going to continue to see that. You’ve seen quite a bit of
explosion in breed-specific foods, foods that are supposedly designed to fit a breed specifically. That kind of
trend has kind of run its course, it seems, but some of these things come right back around, so you never know.
[00:50:24]
Q: What do investors commonly overlook when assessing the US pet food and treat industry?
MG: What is commonly overlooked is regulation. There’s almost none. You can say anything you want. The
only fear is whether you can be sued by another manufacturer. That’s also a threat. The other one is, who is
making your food? Are you making it? Do you have the quality standards? Brands have come and gone
because, quite frankly, they didn’t have the quality standards for their food, and they made six or eight dogs
sick. It hit USA Today, and the brand can disappear overnight. Do they have good control over third-party
manufacturing is a huge risk for an investor, ensuring that they do, that if they’re making it themselves, do
they have the quality standards for the incoming product, to ensure that the worst things that could happen to
a pet food don’t happen to them, which is make a dog sick.
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[00:51:35]
NH: Thank you, Michael, for your input, and thank you, clients, for joining today’s Interview. If you would
like to speak to Michael in a private call or meeting, please let your relationship manager know. Goodbye.
Transcription ends at 00:51:44 of the recorded material
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