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Hypercompetitive Rivalries in the Pet Food Industry

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DOI: 10.1007/978-3-8349-6793-0_56,

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Hypercompetitive Rivalries in the Pet Food Industry 943

56 Hypercompetitive Rivalries in the

Pet Food Industry
ManfredFuchsandClaudiaObernhuber*


56.1 Introduction

56.2 HistoricalOverviewandDevelopmentofthePetFoodIndustry
 56.2.1 Overview
 56.2.2 ThePetFoodMarket
 56.2.3 DistributionChannelsinthePetFoodIndustry
 56.2.4 MarketingStrategiesoftheFiveBigManufacturersofBrandedGoods
 56.2.5 CompaniesinthePetFoodIndustry

56.3 TheLargeCompaniesoftheIndustry
 56.3.1 RalstonPurinaPetcare
 56.3.2 Masterfoods,MarsInc.–Waltham
 56.3.3 Procter&Gamble(PG)
 56.3.4 ColgatePalmolive
 56.3.5 DelMonte

Assignments

Hints

References



 ManfredFuchsisProfessorofInternationalManagementattheUniversityofGraz,Austria.Claudia
*

ObernhuberislecturerandPh.D.Studentatthisuniversity.

J. Zentes et al. (Hrsg.), Fallstudien zum Internationalen Management, DOI 10.1007/978-3-8349-6793-0_56,

© Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011
Hypercompetitive Rivalries in the Pet Food Industry 945

56.1 Introduction
Thiscasestudydemonstrateshowmultimarketcompetitionforcesmajorindustryplayers
in the pet food industry into a socalled hybrid competition. Companies such as the “Big
Five” in the pet food industry Mars Inc., Nestlé, Procter & Gamble (“PG”), Colgate
Palmolive,andDelMonteFoodsaredriversofthedynamicsinthis35billionUSDmarket.
Atthesametimethe“BigFive”arebeingdrivenveryfastfromonestagetothenext.The
pet food industry illustrates how fast global competition has intensified within the last
threedecades.Todaythepetfoodindustryischaracterisedbyanextremelyhighdegreeof
concentration. Further, market leaders in this industry have deliberately specialised and
expandedtheirproductportfoliothroughacquisitionsanddivestituresinexistingmarkets
as well as expanded aggressively into new foreign markets, in particular the BRIC coun
tries. In our case, most firms relied on pet and cat food and proceeded to diversify their
portfoliointootherpetfoodmarketsbyincludinghealthcareproducts,functionalfoodand
insurancepoliciesforpets.Forthemostpart,diversificationwasachievedthroughmergers
andacquisitions.Currently,thebattleformarketshareisshiftingfromestablishedmarkets
intheOECDcountriestoEasternEurope,theformerSovietUnion,China,andIndia

ThiscasestudyisbasedonD’Aveni’s(1994)modelofhypercompetitiverivalriesthatpro
vides us with a dynamic framework to analyse the global competition in the pet food in
dustry.D’Aveni’sapproachisintendedtoserveasabasetodiscussthequestionsraisedin
thiscasestudy.ItisnotsomuchanalternativetoPorter’sFiveForcesandhisdeveloped
idea of generic strategies in global competition (Porter 1980), but serves as extension to
these strategies. The hypercompetitive rivalry assumes that today’s markets are based on
fourdriversthatpushcompaniesfromonestagetothenextinglobalcompetitivemarkets.

Thesenewdriversare:

႑ escalationofconsumerrequirementstobetterqualityandlowerpricesservingincreas
inglysophisticatedconsumerdemands

႑ permanentandrapidlysuccessivecyclesofinnovation,called“TimingandKnowHow
Strategies”

႑ competitionwithregardstothecreationanddestructionofstrongholds
႑ formationofsecurecooperations,coalitions,strategicalliances,andespeciallyawaveof
mergersandacquisitionswithintheindustry.

Drivenbytheseconditionshypercompetitiontakesplaceinfourstages.Withinthepetfood
industry competition has grown increasingly aggressive and rapid. Hypercompetition is
considered faster than traditional competition. In addition, it is assumed that if one com
petitormovesahead,theothercompetitorsmustfollowquickly.Thefirststageisdefined
as cost and quality competition. Stage 2 is characterised as innovation competition with
timingofmarketreadinessbeingoneofthemajorproblemsinthisphase.Stage3ischarac
terised as the phase in which development of core markets or strongholds take place. In
Stage 4 mergers and acquisitions (“M&A”) and the formation of alliances dominate the
946 Manfred Fuchs and Claudia Obernhuber

activitiesintheindustry.Inthiscasestudythepetfoodindustryisusedasanexampleto
demonstrate hypercompetition. Furthermore, crossborder competition is illustrated by
referencetothedevelopmentsinthepetfoodmarkets.Thestudyfocusesinparticularon
thestrategicreasonsforintenseM&Aactivitiessincethe1980sofmarketleadersandmul
tinationalcompaniesnewtothemarketaswellasonmarketingstrategiesofthesecompa
nies.

Thiscasestudyisdividedintothreesectionsandfindsanswerstothefollowingquestions:

1. Whatdoesthestructureofthepetfoodindustrylooklike?

2. Whichstagesofthehybridcompetitionhasthepetfoodindustrygonethrough?

3. Atwhatstageofhypercompetitionisthepetfoodindustrycurrently?

56.2 Historical Overview and Development of the

Pet Food Industry

56.2.1 Overview
In the middle of the 19th century, pet food was produced commercially for the first time.
The pet food industry was part of the development of the multinational food industry in
thelastcentury.ThisperiodsawthebeginningsofcompaniessuchasNestlé,Mars,Inc.PG,
ColgatePalmoliveandDelMonteFoods.Inthepastthreedecadeseachofthesecompanies
hasexpandeditspositioninthepetfoodsectorandstrengtheneditsownbrandportfolio
withaggressiveandveryexpensiveacquisitions.Moreover,elaboratedandexpensivemar
keting strategies were used to defend international markets in industrial countries and to
promoteexpansionsintonewmarketssuchasEasternEurope,Russia,thePeoples’Repub
licofChina,andIndia.

The beginning of the industrial production of pet food is linked to veterinary issues of
healthynutritionforpets.Alreadyattheverybeginningthetypeofpackagingdidhavea
great impact on the industry’s advances. Since World War I for instance, cannedcat food
anddrydogfoodhavebeensoldonalargescaleintheUS.

However,theindustrialproductionofpetfoodwasrelativelymodestuntilthe1960.Back
then, the majority of households with cats and dogs either prepared their own pet food,
usedkitchenwasteaspetfoodorprocessedslaughterhousewasteaspetfood.

Intheyearstofollowthepetfoodindustryexperiencedadownrightboom.Inthe1970sthe
marketgrewwithdoubledigitgrowthratesannually.Backthen,companiessuchasCarna
tion,Heinz,KalKan,Alpo,andQuakersharedthisattractivemarket.Severalmanufacturers
ofcanneddogandcatfoodtriedtoentermarketsegmentsinwhichtheywerenotrepre
sented.
Hypercompetitive Rivalries in the Pet Food Industry 947

The rapid market growth was the result of a demographic change in most industrialised
countries.Thefamilystructureofmosthouseholdschanged,andinthelargeurbancentres
thenumberofsinglehouseholdsincreasedsignificantlyandrapidly.Nowadays,thegrow
ing portion of single households comprising elderly people is an equally important trend
influencingtheindustry’sgrowthrates.

In 1986 26% of American households had one or more cats while 34% had one or more
dogs. By 2007, some 20 years later, this percentage had almost doubled in the USA,
amountingto67%householdsowningbothcatsanddogs.Incomparison,60%ofhouse
holdsownadogorcatinEurope(EuromonitorInternational2006).In2006,forexample,
therewere23.2millionpetsinGermanhouseholds,75%ofwhichbeingcatsanddogs.By
the end of the 1990s, however, the annual average market growth declined slightly to an
averagerateof3.5%.Atthesametimethenumberofdogsinhouseholdsincreasedfaster
thanthenumberofcats.

56.2.2 The Pet Food Market

Apartfromtheownershipofbirdsandornamentalfish,whichincomparisontocatsand
dogsonlytakesupaverysmallmarketshare,catanddogfoodisbyfarthemostimportant
sector in the pet food market. Cat and dog food is divided into dry food, canned food,
moist food, and cat and dogbiscuits (including cat and dog treats for dental health).Dry
dogfoodtakesupthelion’sshareof30.4%,followedbymoistcatfoodwith18.9%anddry
catfoodwith18.7%ofthemarketshare;catanddogbiscuits(alsoreferredtoas“treats”)
meanwhile have a market share of 13.6%; moist dog food has a share of 12.3% (Petfood
Industry2006).

Compared to the 1980s the worldwide sales of cat and dog food have almost doubled. In
2008 cat and dog food worth USD53billion was sold worldwide. In the USA alone,
USD16billion in cat and dog food are sold annually. This is a total growth rate of 34%
from the 2004 amount of USD38.9billion (Petfood Industry 2010). While these numbers
reflectanamazinggrowthrate,anumberofresearchfirmspredictagrowthslowdownor
stopoverthenextyears.Noteworthyisthathouseholdsspendthesameamountofmoney
onpetcareproducts,petcare,visitstotheveterinarian,andonpettraining(PetfoodIndus
try 2007). In Germany the market volume is estimated to be USD3billion (Euromonitor
International 2007). Within the European Union pet food has an annual turnover of
USD15billion;70to75%ofwhichcatanddogfood.Withregardstocatanddogbiscuits,
dogchews,anddogtreatstheindustryrecordedaverageannualgrowthratesof8to10%
(Colgate2007;DelMonte2007a;PetfoodIndustry2007).

Thelistofthetopfiveglobalpetfoodplayershasnotchangedovertheyears.Fivemajor
multinationalcompaniessharethislucrativemarket.Withamarketshareof25.2%Mars,
Inc. is the industry’s market leader, recording revenues of USD13.6billion, followed by
NestléPurinaPetCarewithamarketshareof23.7%,andrevenuesofUSD12.8billion.In
third positions follows ColgatePalmolive with approximate global retail sales of
USD3.3billion. PG holds the fourth place with a market share of 6.8%, equalling
948 Manfred Fuchs and Claudia Obernhuber

USD3.27billion in revenue. With a market share of 3.5% and an annual turnover of
USD1.78billionDelMonteFoodsholdsastrongfifthposition(PetfoodIndustry2010).

Worldwide these five companies dominate approximately 66% of the total pet food mar
ket. By comparison the manufacturers known in the Germanspeaking countries retain a
relativelysmallmarketshare:KraftFoods0.4%,VitalkraftWerke0.3%,andSüdChemie
0.%). Currently, private labels hold a market share of 14% and include Walmart’s top
selling private label as well as the private labels of Aldi, Rewe, Spar, and Lidl and other
retailchains,whichdonotwanttomisstheopportunitiesofferedbythisprofitablemarket
segment.

IntheUSAthesefivemanufacturerscontrolalmost85%ofthetotalpetfoodmarket(Snap
shot International Ltd. 2005). With Nestlé Purina Petcare having a market share of 30%
(Euromonitor International 2006; Petfood Industry 2007); Nestlé and Masterfoods (Mars,
Inc.)share53%oftheglobalmarket.InEurope,however,Masterfoodsisthemarketleader,
especiallysincetheacquisitionofRoyalCanin,aFrenchproducerofhighqualitydogfood.
In Germany, France, Austria, the Netherlands, and the United Kingdom Masterfoods is
eventheuncontestedmarketleaderofthisfastgrowingpetfoodsegment,

Sincethelate1970stherehasbeenaveryintensepriceandqualitycompetitionformarket
sharebetweentheindividualcompanies.Inthe1970sthemanufacturersofpetfoodtriedto
expandandcomplementtheirproductportfoliothroughacquisitions.Backthen,Carnation,
nowpartofNestlé,hadaleadingmarketpositionincannedfood.Themarketshareforcat
foodwasat29%andfordogfoodat12%.Carnationwasthesecondstrongestcompanyin
thedrycatfoodarea.Inotherfoodsegments,however,ithadnooronlyverylittlemarket
shares.Thebiggestrivalanduncontestedmarketleaderincanneddogfoodatthetimewas
Alpo(todaypartofRalstonPurinaPetCare)with29%marketshare.Nowadays,powerful
brands once considered by the pet food industry as having sustainable advantage find
themselves under immense pressure by hypercompetition as quality demands have gone
upandpriceshavegonedown.

RalstonPurina(inthe70sstillanindependentcompany)wasthemarketleaderindrycat
food (with a market share of 52%) and dry dog food (with a market share of 39%). HJ
Heinzhadalargemarketshare(25%)inthewetcatfoodsegment;however,inthewetdog
foodsegmentitwasonlymarginallyrepresented.Witha15%marketshareinthecanned
pet food segment Heinz laid far behind the market leader Ralston Purina (with a market
shareof75%).In1980a1%marketshareinthecatanddogfoodsegmentmeantaturn
overofalmostUSD50millionandprofitsofUSD2million.Intheindividualpetfoodseg
mentstheprofitmarginsvariedwidely:13to15%fordrydogfood,15to17%fordrycat
foodandupto45%forsocalled“gourmetproducts”(Fleischmann1987).

Currently,a1%marketshareinthepetfoodindustryequalsarevenueofUSD400million.
Industryinsiderstalkaboutaprofitmarginof35%beforetax(cf.DelMonte2006).Inorder
to maintain and increase market shares, leading companies (e.g. Mars Inc. and Nestlé)
spendupto30%oftheirrevenueonadvertisingefforts.Fortheretailsectorcatanddog
food, including snacks, cat milk, treats, chews, various additional products, and dental
Hypercompetitive Rivalries in the Pet Food Industry 949

products are the second most important revenueearner in their entireproduct range. Su
permarketchainsreservealargepartoftheirshopandshelfspaceinthemostfrequented
areasforthislucrativeproductrange.

Inthe1970sthecompetitionfocusedonachievingastrongpositioninoneoftheindustry’s
coreareas:Eitheracompanyexpandedandfostereditsmarketshareinthecatfoodordog
food segment or it withdrew from the market segment, in which the company was least
successful. KalKan (today a part of Masterfoods) is an example for this behaviour. The
company focused on the canned pet food segment and created its own canned cat food
brand(Whiskas)inordertodifferentiateitselffromthecompetitorsanditsowndogfood.

Carnation(nowNestléRalstonPurina)increasedthecompetitioninthedrypetfoodseg
mentbyspendinghugeamountsofmoneyonadvertisinginitiatives,thusputtingpressure
onrivalandmarketleaderRalstonPurina.Carnationwasthefirstcompanytoexpandthe
pet food mass market’s brand portfolio to include a highpriced gourmet brand. Ralston
Purina thereby attacked competing companies in the market segments from which they
themselves draw the highest revenue. At that time individual manufacturers had very
different strengths and priorities, especially regarding the production of wet, dry, and
moist pet food. In the 1970s cat food in general was the most attractive market segment
withanaverageannualgrowthinsalesof10%,whiletheaverageannualgrowthinsalesof
dog food was only at 3%. In this market phase, companies with a strong position in the
marketfordogfoodtriedtobranchouttheiractivitiesintothecatfoodsegment.Thefive
leading competitors in the pet food industry diversified from a dominant position in pet
andcatfoodintofunctionalfoodandtreats,someevenofferinghealthcareproducts.How
ever,todevelopaneffectivestrategyforthisindustryitisimportanttotakeacloserlookat
theindustry’sfutureandtrytoforeseepossiblestrategicmovesofrivals.Inaddition,this
industryseemstobeanillustrativeexampleofinnovationandimitationwherecompetitors
successfullymanagedtomoveintonewmarketsegmentsbytakingsmallsteps.Theirca
pabilitytoinnovateandsellnewproductsandservicesfacesonemajorconstraint,acon
straint the whole industry has to face: the limited access to distribution channels, which
representsabottleneckformanycompetitorsandthusconstitutesamajorbarriertomarket
entry.

56.2.3 Distribution Channels in the Pet Food Industry

Apartfromtheminimumefficientscale(i.e.theleastamountofproductionacompanycan
achievewhilestillfullytakingadvantageofeconomiesofscale)inthepetfoodindustry(cf.
Kaufer1980),accesstodistributionchannelsisoneofthemajorparametersofmarketstruc
ture.Inthepetfoodindustrydistributionchannelsarelimitedbecauseshelfspaceinretail
isextremelyscarceandthereforefiercelycontested.Consequently,severalmanufacturersin
thepetfoodindustryengageindiscountandadvertisingwars.Sincethe70sthemajorityof
totalsalesofcatanddogfoodhasbeenrealisedinretailstoresandsupermarkets.Themar
ketshareforpetsupplieshasbeengrowingforalmosttenyearsbutisstillrelativelylow.
Worldwideonly1020%ofthesalesaregeneratedinpetshopsandpetsupplymarkets.If
950 Manfred Fuchs and Claudia Obernhuber

theindustryreachesaplateauinthenextfewyearscompetitioninthisarenawillbecome
evenmoreintense.Theindustry’smajormanufacturersdistribute8090%oftheirpetfood
inretailstoresandsupermarkets(EuromonitorInternational2006;PetfoodIndustry2007).
Currentlyonlyasmallportionoftheindustry’stotalsalesisgeneratedbyspecialityoutlets
(forinstanceFressnapf)andveterinarypractices.ChainslikeAldiandLidlinGermanyand
HoferinAustriamanagedtohitmanufacturersofbrandedgoodshardwiththeirstoreown
labels. In Austria retail chains such as REWE, Spar, Bipa and DM as well as other self
servicewholesalechainsofferthefivemajorpetfoodmanufacturers’brands.Inmostcases,
the product line of a certain brand article manufacturer dominates unchallenged (either
Ralston Purina products or Waltham products are offered). In retail stores private labels
play only a minor role. In recent years specialist outlets like the German pet superstore
“Fressnapf” were able to increase their share of sales, however, in the convenience (pet)
foodsegmentretailandwholesalechainsdominate(cf.Fressnapf2010).

56.2.4 Marketing Strategies of the Five Big Manufacturers of

Branded Goods
Pet food manufacturers bring their marketing strategies in line with the relationship be
tweenpetownersandtheirpets.Accordingtothehypercompetitiveapproacheacharena
ofcompetitionshowstwotypesofescalation:Oneisincreasingrivalrywithineacharena,
i.e. raising the level of quality and lowering the price. Competition is also increased by
comingupwithnewproductsandbyimprovingknowhow.Inourindustryeachmoveis
characterisedbyeffortsofrapidimitation.However,focussingontheconstraintondistri
bution channels it is no wonder that all major competitors, especially the “Big Five,” put
mostoftheireffortsandmoneyintobrandsandbrandingstrategies.Todayimitationhap
penssofastinthisindustrythatallthecompaniesofferalmostthesameproducts.Inaddi
tion the organic food industry now also offers handrolled dog treats that look like sushi
andaremadefromallnatural,humangradeingredients(PetFoodIndustry2010).

Inthe1970sthecompaniescompetedformarketshareleadingtoanaggressivepricecom
petition.Backthenthebrandstrategiesfocusedonpromotingthehighmeatcontentofthe
petfood,whichtodaydoesnotconstituteacriteriaanylonger.Todayqualityandinnova
tion competition takes place between the major suppliers. Their brand strategies rely on
nutritionalingredients,qualifiedashealthyforpets,andonpetfoodrichinvitaminsand
fibre.Petfoodmanufacturerspresentthemselvesasspecialistsinnutritionallybalancedpet
food,whichisincreasinglyenrichedwith“functional”foodcomponents.Productstrategies
donotonlyconcentrateontheformationofprices,butalsoonfoodorientedpackagingand
thedifferingnutritionalneedsofapetindifferentstagesofitslife.AccordingtotheAmeri
canPetProductManufacturersAssociationthetwomostimportantwayspetownersfind
new products is by browsing store shelves and watching television advertisements. New
products and types of packaging are the key to attracting new customers. Consumers are
onthegoandpayforproductsthatareeasytostoreanduse(PetFoodIndustry2008).
Hypercompetitive Rivalries in the Pet Food Industry 951

Manufacturersconstantlyinventnewformsofpackagingtoimprovethedurabilityofonce
opened food portions and to offer pet food for pets of all age packaged in servingsizes
readytoserve.Intrade,tosomeextent,extremepricevariationsaretheresultofdifferent
forms of packaging. Apart from the products’ strong advertising presence in the media,
especially on television, also price and portionability determine the purchase decision of
many pet owners. Most large companies have put their marketing focus on presenting
themselvesnotonlyasmanufacturersofhighqualitypetfood,butalsoascompaniesoffer
ingexpertiseinpetkeeping,petnutrition,andveterinarymedicine.Thus,oneofthecom
paniesnotes:

„...Weuseourknowledgeandexpertisetogivepetownersthehealthypetfood,products,
tools and advice they need to make their pets lives healthy and rich.“ (Ralston Purina
2007).

56.2.5 Companies in the Pet Food Industry

Asalreadymentioned,thepetfoodindustryischaracterisedbyahighdegreeofconcentra
tion,whichresultsfromaveryintenseacquisitionstrategyofthecompaniesinthisindus
try. Table 56.1 summarises the most important acquisitions and divestitures of pet food
manufacturersinthelastthreedecadesandisintendedtorenderthemarketproductstrat
egyofthefivemajormanufacturersofthisindustrymoretransparent.1

 



1  The remarkable thing about the M&A history in this industry is that in most cases the products’
brandnameswerenotchangedaftertheacquisition.Insomecasesthemaingoalwastheacquisi
tionofthebrandandtheassociatedrevenueshare.Inothercasestheacquiredbrandswerecom
pletely renamed. This can be explained by the fact that in the present stage of competition shelf
spaceandsalesareaareextremelyscarce.ThisalsoexplainstheintensiveuseofTVspotsinthis
industry.Thisrelativelyexpensivecompetitionandtheadvertisingbattlesofthefivemajorcom
petitorsalsomeanthatthelargecompanies(especiallyNestlé;Mars,Inc.;ColgatePalmolive;Proc
ter and Gamble; Del Monte Foods) focus their marketing policy on building few, but globally
strong and present brands. After acquisitions companies then try to rapidly sell lessrecognised
brandsintheirportfolioandfocusonsomestrongsellingandwellknownbrandfamiliesintheir
productline.Inthecourseofinternationalisation,whichhasbeenadaptedbythebigcompanies
foryears,thisfocusonstrongbrandsisfurtheremphasised.In1995,Masterfoodsenteredtheat
tractiveRussian marketwithits twotopsellingand mostrecognisedbrands PedigreeandWhis
kas.Onlytenmonthslater,MasterfoodsexpandedintoChinawithitsownmanufacturingfacilities
forthePedigreeandWhiskasproducts.

952 Manfred Fuchs and Claudia Obernhuber

Table 56.1 The Most Important Acquisitions and Divestitures of Pet Food Manufac-
turers in the Last Three Decades

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Hypercompetitive Rivalries in the Pet Food Industry 953

56.3 The Large Companies of the Industry

56.3.1 Ralston Purina Petcare

NestléPurinaPetCare,asubsidiarycompanyofNestlé,isalongsideMarstheundisputed
marketleaderinthepetfoodsector.WithaturnoverofCHF12.9billion(USD11.9)anda
salesgrowthof7.9%(comparedto2008)thepetfooddivisionisoneofNestlé’smostprof
itablebusinessunits.RalstonPurinaPetCareistheresultofseveralacquisitionsandtake
oversin recent decades.In the US Ralston Purina is no. 1;there it produces inelevenpet
foodfactories.Thecompanysellsitspetfoodin75countries.RalstonPurinaoperatesasa
separatebusinessunitwithintheNestléGroup.Globally,RalstonPurina’ssalesaredistrib
uted in three main regions: In Europe the company has a turnover of CHF3.6 billion, in
AmericarealisesaturnoverofCHF7.2billionandinAsiaofCHF578million;intheUSA
aloneRalstonPurinaholdsamarketshareof30%,whichisafewpercentagepointsahead
ofitsarchrivalMarsInc.(Nestlé2010).

ThebestknownbrandsofRalstonPurinaareAlpo,Beneful,DogChow,MightyDog,Pro
plan,PurinaONE,PuppyChow,Begin’Strips,FitandTrim,BusyBonewithdogfoodand
CatChow,DeliCatandFriskieswithcatfood.

In1893WilliamDanforthfoundedNestléPurinaPetCareasRalstonPurina.InitiallyDan
forth produced animal feed for farm animals. It was only in 1950 that Ralston Purina
moved into the dog food market. In years to follow, Ralston Purina bought several food
suppliersandmanufacturers.

Since1985RalstonPurinahasheldthepositionofthemarketleaderinthefastgrowingdry
dog food sector; numerous acquisitions have contributed to systematically extend and
fosterthisposition.ByacquisitionRalstonPurinaalsomanagedtostrengthenitspositionin
dry cat food. The company also expanded into the production of wet and semimoist pet
food,inwhichhighermarginsaregenerated.WiththeacquisitionofAlpoRalstonPurina
improveditsmarketpresenceincannedcatanddogfood.OvertheyearsRalstonbuiltupa
fullrangeproductportfolio,whilethecompetitionfocusedonspecificmarketniches;H.J.
Heinz,directcompetitorinthemarketforcatfood,investedalotofmoneyinthedevelop
ment and strengthening of premium quality cat food, the most important branded good
being9Lives.Inthemid1990sRalstonPurinaenteredthespecialtydogfoodmarket,focus
ingonspecialtyfoodforpuppiesandseniordogs.In2004RalstonPurinafolloweditsarch
rivaltoIndia.2



2  „TheIndianpetfoodmarketisestimatedat5,000tonnes,andgrowing1015percent,accordingto
industryestimates.While30percentofthismarketcomprisesimportedproducts,theremaining
products are locally manufactured. Imported pet food products in Indian currently include Mars
brandRoyalCanine,PropackandEukanuba,besidesotherbrandssuchasEagle.Locallymanufac
tured brands include Nutripet, which is being manufactured in Bangalore since 1983, Pedigree
from Mars, and regional brands Champ and Robust, among others. Another global major, Mars,
954 Manfred Fuchs and Claudia Obernhuber

Ralson Purina’s strengths are generated by its dominant market position in the USA (the
world’slargestandcurrentlystillthestrongestgrowthmarket).Alsointheareaofproduct
innovation the company is one of the market leaders. Stepbystep individual brands are
systematically promoted and positioned as “healthy” and “functional” pet food. Ralston
Purinareinvests5%oftheannualturnoverinresearchanddevelopment.Fornewproduct
developments,especiallyintheareaoffunctionalfood,thecompanyfallsbackonthecor
porate group’s knowhow in the food sector. Expert knowledge, for instance in pre and
probiotic, is directly used in the production of catand dog food. Also functional food in
gredients, like omega3 fatty acids, are used in pet food to prevent or anticipate possible
health hazards (Nestlé 2008). Market entrance and access to distribution channels in new
marketsareadditionalbenefitsofhighsynergyeffects,sincebothlocalmarketknowledge
anddistributionchannelscanbeused.

In the pet food segment Nestlé follows a very focused brand strategy. All pet foods are
promoted under the umbrella brand Purina. More differentiated segments are managed
withintheumbrellabrand(cf.NestléPurina2010).AcentralweaknessofRalstonPurinais
itslackofmarketpresenceinthepetcareproductsector,whichalreadygeneratesasales
volumeofUSD9.8billionintheUSA(PetFoodIndustry2006).

56.3.2 Masterfoods, Mars Inc. – Waltham

With an annual turnover of USD21billionMars Incorporated, a familybusiness based in
McLean,Virginiaisthemarketleaderinthisindustry.JohnFranklynMars,almost75years
ofage,monitorstheactivitiesofthecompany,whichisactiveinover65countries.In1911
thecompanywasfoundedFrankC.Mars.Today,Marsisstillaprivatecompany;forthat
reason there is no annual report available. Data on this company is based on newspaper
reportsandestimatesmadebyEuromonitorInternational.

Mars produces a less comprehensive, but in many aspects similar product portfolio as
Nestlé.MarsPetCare,Mars’businessunitforpetfoodisRalstonPurina’smaincompetitor.
In the USA Mars has been very successful since the early 1950s with wellknown brands
such as Whiskas, Chappy, and Pedigree. In2006 Mars Pet Care achieved a global market
shareof25%(PetfoodIndustry2007).Inthepetfoodsectorthecompanytodayispresent
on the European, Russian, Indian, and Chinese market. 30% of the company’s total turn
over originates from pet food. In the year 2006 Mars pet food division realised
USD10.26billion.In2008MarsPetcareDivisioncontinuedtodefenditsnumberoneposi
tion, closely followed by Nestlé Purina. Mars Petcare had estimated global retail sales of



hasalreadysetupapetfoodmanufacturingfacilityinHyderabad.Accordingtoindustryanalysts,
the reason why the pet food market is now registering healthy growth rates is because home
cookedfoodisbeingsubstitutedwithbrandedpetfood.Indianpetownershavetraditionallyfed
petswithhomecookedfood.Butthetrendisrapidlychanginginfavourofbrandedpetfoods,be
causetheseprovidebalanceddietandpetsdohavespecialisednutritionalneeds,saidananalyst“
(Ratna2003;cf.alsoEuromonitorInternational2007).
Hypercompetitive Rivalries in the Pet Food Industry 955

USD13.6billion.InJune2009thecompanyannouncedPedigreebiggestbrandrelaunchin
theproductshistoryspendingUSD11.5millionaimingtopromoteconsumertrustindog
food.InIndiathecompanyachievedin2009aretailsalesvalueofUSD450million(Petfood
Industry2006;CorporateInformation2006;PetfoodIndustry2010).

In 1954 the company introduced the brand PAL, which quickly and successfully attacked
leadingproducersofcannedpetfood.BrandnamessuchasPALwererenamedPedigree
Pal. In 1957 the wellknown brand Chappy was renamed Pedigree. This time marked the
startingpointforadownrightsuccessstoryofthispetfoodbrand.

StartingfromtheUSA,MarsexpandedveryearlyintotheattractiveEuropeanmarket.The
kickoff was in Great Britain. In 1959 Mars Pedigree Petfoods, a British subsidiary of the
company,introducedWhiskascatfoodfirstinEnglandthenintherestofEurope.In1960
Mars sold twice as much cat food in Europe as its competitors. Whiskaswas the first pet
food,beingmarketedashealthy,withhighmeatcontent,andavailablein29differentfla
vours.TodayWhiskasisstilloneofthebestknownbrandsinEurope,Japan,andAustralia.
In1964thewellknownbrandChumwasrenamedPedigree.

Asearlyas1965MarsfoundedtheWalthamCentreforPetNutritioninGreatBritain.Ever
sinceithasfunctionedasacentralresearchanddevelopmentinstitutionwithinthegroup
(cf.Waltham2010).

In 1986 Mars acquired Kal Kan. The company thereby increased its market share in the
USAwithinafewyears.KalKanwasoneofthelargestmanufacturersofpetfoodinthe
USA and had been producing cat and dog food since 1936; however, the company was
knownasadogfoodmanufacturer.Asaformermarketleaderthecompanyhadanumber
ofwellpositionedbrandsinthecatanddogfoodsegment.AftertheacquisitionMarssoon
started to rebrand the Kal Kan brands as Whiskas and Pedigree. Bill Saporito, editor at
Fortune,describedForrestMarsaspioneerofthepetfoodindustryandstressesthatForrest
Mars“startedpetfoodindustrylongbeforepeopleinthosecountries[Europe]wouldeven
consider feeding Fifi out of a can. His (Forrest Mars’) kind of pioneering required an or
ganisation that could take an expansion strategy and execute it without much help
(Saporito1994).

In1982ShebawaslaunchedinHamburg.Thishighpricedandasgourmetproductadver
tisedcatfood,thus,starteditsunbrokensalessuccessinEurope.Convincedfromthissuc
cess,MarspresentedthebrandCesarin1984fordogs,therebyescalatingtheladderinthe
first arena of hypercompetition that forced competitors to get ahead with their own pre
mium brands. Currently, Cesar and Sheba are Mars’ top brands in the highpriced and
most profitable market segment. With the dog food Frolic Mars also conquered the Latin
Americanmarketsatanearlypointintime;in1987FrolicwaslaunchedinBrazil.

Alreadyin1995MarsstartedwiththeproductionanddistributionofpetfoodintheSoviet
Union.Theirpetfoodwasproducedinanownplant.InMoscowthesaleofPedigreeand
Whiskasstartedwithahugesuccess.InthesameyearMarsopenedaproductionfacilityin
956 Manfred Fuchs and Claudia Obernhuber

Huaizou,China.SimultaneouslythecompanystartedwiththesaleofPedigreeandWhis
kasinthePeople’sRepublicofChina.

56.3.3 Procter & Gamble (PG)

PGisoneoftheworldwideleadingcompaniesandabsolute“champion”intheproduction
ofbeautyandgroomingproducts.PGhasanextremelysuccessfulproductportfolio.Every
day3billionpeoplebuyproductsfromProcter&Gamble.PGgenerates80%ofitsglobal
turnover with a few brands. According to its own information the company owns 23
brands, of which each generates over 1billionUSD turnover a year (Procter & Gamble
2007a,2007b).BesidesthehighbrandawarenessofPG’sproductsalsothepresenceinde
velopingcountriesisconsideredtobeoneofPG’smajorcompetitiveadvantages.

In these developing markets PG already realises USD23billion. In 2006 the group as a
wholeaccountsfortotalsalesofUSD76billion(cf.Procter&Gamble2010).

PG entered this lucrative market relatively late by acquiring the pet food manufacturers
IAMSandEukanuba(Procter&Gamble2007a).InthepastsevenyearsPGalmostdoubled
itsgroupwidesales(fromUSD39billiontoUSD79billion).PGisamongtheworld’smost
profitable companies. In 2006 it reported earnings before taxes of USD10.3 billion in its
balancesheet(CompanyInformation2007).

A central component of the corporate strategy is the implementation of sustainable and
longterm growth in all core areas. Thecorporate philosophy is consistently characterised
as“designedtogrow”.

At PG the pet food division now belongs to the health and wellbeing business unit. The
productcategorypetnutritionconsistsofthebrandsIAMSandEukanuba.HerePGhasa
6.8% share of the world market; representing a turnover of USD2.48billion (2006). The
Company produces dry food for dogs and cats in its production facilities in Lewisburg
(Ohio,USA),Aurora(Neb.,USA),Henderson(NorthCarolina,USA),Leipsic(Ohio,USA),
andCoevorden(theNetherlands,Europe).InNorthSiouxCity(S.D.,USA),IAMSproduces
cannedfoodfordogsandcats.InGermanyEukanubaisavailableaspremiumfoodforcats
anddogsandIAMSaspremiumfoodforcats.InGermanytheproductsaresoldinspecial
istoutlets(petshopsandveterinarians).EukanubaVeterinaryDiets,specialfoodforthera
peutical support of cats and dogs are available through veterinarians only. Moreover,PG
alsosellshealthinsurancefordogsandcats.
Hypercompetitive Rivalries in the Pet Food Industry 957

PGoutlinesthebusinessriskfortheyearstocomeasfollows:

“Wefacerisksassociatedwithsignificantinternationaloperations.Weconductbusiness
acrosstheglobewithasignificantportionofoursalesoutsidetheUnitedStates.Weex
pecttoachieveourfinancialtargets,inpart,byachievingdisproportionategrowthinde
velopingregions....Oursuccesswilldependinpartonourabilitytomanagecontinued
global political and/or economic uncertainty, especially in our significant geographical
markets,aswellasanypoliticaloreconomicdisruptionduetoterroristandotherhostile
activities.[…]
Ifthereputationofoneormoreofourleadingbrandserodessignificantly,itcouldhave
a material impact on our financial results. Our Company’s financial success is directly
dependentonthesuccessofourbrands,particularlyourbilliondollarbrands.Thesuc
cessofthesebrandscansufferifourmarketingplansorproductinitiativesdonothave
the desired impact on a brand’s image or its ability to attract consumers. Further, our
Company’sresultscouldbeimpactedifoneofourleadingbrandssuffersasubstantial
impedimenttoitsreputationduetorealorperceivedqualityissues.

[…] A material change in customer relationships or in customer demand for our prod
ucts could have a significant impact on our business. Our success is dependent on our
ability to successfully manage relationships with our retail trade customers. This in
cludes our ability to offer trade terms that are acceptable to our customers and are
alignedwithourpricingandprofitabilitytargets.Ourbusinesscouldsufferifwecannot
reachagreementwithakeycustomerbasedonourtradetermsandprinciples.Further,
there is a continuing trend towards retail trade consolidation and this leads to more
complexworkacrossbroadergeographicboundariesforbothusandkeyretailers.

(Procter&Gamble2007b)

56.3.4 Colgate-Palmolive
In1806WilliamColgatefoundedasmallcompanyinNYCthatspecialisedinthemanufac
ture of starch, soap and candles. Soon his company supplied individual households with
soap.In1866Colgateproducedscentedsoapforthefirsttime.Atthesametimethecom
panystartedtoprofessionallyadvertiseitsproducts.In1873Colgateintroducedtoothpaste
injars.In1902thecompany advertiseditsproductsspecifically,usingmodernmarketing
techniques.Alreadyinthe1920sColgateinternationalisedintonewmarkets,firstentering
the European market, then supplying the Asian, Latin American, and African countries
withitsproducts.

Colgate’s global sales amounted to USD12.23billion in 2006; reporting sales of
USD1.66billion in the Pet Nutrition division, which corresponds a growth in sales of al
most 10% compared to the previous year. For 2006 the company had an operative profit
frompetfoodofUSD447.9millioninthepetfooddivision(Colgate2008).Petfoodmakes
up a 14% share of the company’s total sales in 2006 (Colgate 2008, p. 6). In 2006 Colgate
investedaboutUSD223.4millioninresearchanddevelopment.
958 Manfred Fuchs and Claudia Obernhuber

In 1976 Colgate entered the attractive pet food sector by acquiring Hill’s Pet Food. The
company was founded in 1939. From the beginning Hill’s product portfolio was deter
minedbyaveterinarian’sattemptstoavoidcertainanimaldiseasesthroughcarefullyfor
mulatednutrition.Apartofthecompany’smythistheboldrescueofaguidedogsuffering
fromkidneyfailurethroughtherapeuticnutrition.TodayHill’sofferspetfoodforpuppies
andspecialpetfoodforoverweightdogsanddyspepticcats.Forthenutritionalsupportof
seniordogsandcatsHill’soffersPrescriptionDietCanine/Feline,whichwasdevelopedby
veterinary surgeons for the treatment of kidney diseases. With Nature’s Best Hill’s also
offerscolourantfreedogandcatfoodwithnaturalflavours(cf.Hillspet2010).

Colgate’smanagementassessesthemarketrisksforthisbusinessunitinthefollowingway:

“Ourproductsaresoldinahighlycompetitiveglobalmarketplacewhichisexperiencing
increasedtradeconcentrationandthegrowingpresenceoflargeformatretailersanddis
counters.Withthegrowingtrendtowardretailtradeconsolidation,especiallyindevel
opedmarketssuchastheUSandEurope,weareincreasinglydependentonkeyretailers,
andsomeoftheseretailers,includinglargeformatretailers,mayhavegreaterbargaining
strengththanwedo.Theymayusethisleveragetodemandhighertradediscounts,al
lowancesorslottingfees,whichcouldleadtoreducedsalesorprofitability.Wemayalso
benegativelyaffectedbychangesinthepoliciesofourretailtradecustomers,suchasin
ventory destocking, limitations on access to shelf space, delisting of our products and
otherconditions.Inaddition,privatelabelbrandssoldbyretailtradechains,whichare
typically sold at lower prices, are a source of competition for certain of our product
lines.”

(Colgate2008)

56.3.5 Del Monte

AsabrandDelMontehasexistedsince1892,thecompany,however,wasnotfoundeduntil
1916,whenfourmajorfruitandvegetablepackagingcompaniesmergedwiththeCalifor
nian Packaging Corporation. In the USA Del Monte was the first company to market
cannedfruitsandvegetablesnationwide.In1979itsrivalRJRNabiscoboughtDelMonte.
In the 1970s PJR Nabiscosells dog and catbiscuits, having a market share of 38% in this
lucrative segment. 1990 Nabisco sells Del Monte to a group of investors and in 1999 Del
MontesharesareforthefirsttimeinyearstradedontheNewYorkStockExchangeandon
the Pacific Stock Exchange. In 2006 the company’s turnover amounted to approximately
USD3.18billion, with the pet food area accounting for about USD840million (Company
Information,DelMonte2007b).

In2002DelMonteacquiredH.J.Heinz’spetfooddivision,whichwasequippedwithwell
known brand names; H.J. Heinz thereby spinning off this underperforming business and
exitingthepetfoodindustry.AtthesametimeDelMonteenteredtheattractivepetfood
marketasacompanywithastrongdistributionstructure.WiththeacquisitionofHeinzDel
Montegotholdofwellknownandtopsellingdogandcatfoodbrands.Beforethedivesti
Hypercompetitive Rivalries in the Pet Food Industry 959

tureHeinzhadashareofnearly15%oftheUSmarket.Thetopbrand9Lives,USA’sbest
knownbrandforcatfood,currentlyaccountsfor26%ofthecompany’sturnover.9Livesis
positionedashighqualitycatfoodbeingsoldincansandasdrycatfood.Withthisacquisi
tion Del Monte also managed to gain a foothold in two difficult foreign markets: Japan
(wherethecompanyholdsamarketshareof15%)andNewZealand(wherethecompany
holds a market share of 51%). In general the acquired product portfolio included brands
suchasKibblesn’Bits,Pounce,PupPeroni,MeatyBonesandNawBones,productsbelong
ing to the pet snack segment and thereby to the industry’s fastestgrowing product seg
ment.WiththisacquisitionDelMontealsobecametheUSA’sleadingmanufacturerofdog
chews. The company advertises its dog chew with the following slogan: “Chew Lotta is
morethanaplainoldbiscuit”(cf.DelMonte2007a).

Thecompany’smanagementassessestherisksasfollows:

“Foodproducershavebeenimpactedbytwokeytrendsaffectingtheirretailcustomers:
consolidationandincreasedcompetitivepressures.Retailersarerationalisingcostsinan
efforttoimproveprofitability,includingeffortstoreduceinventorylevels,increasesup
plychainefficiencyanddecreaseworkingcapitalrequirements....

Inaddition,moretraditionalgrocershaveexperiencedincreasingcompetitionfromrap
idly growing club stores, supercentres and mass merchandisers, which generally offer
everydaylowprices.Retailercustomersgenerallyofferaprivatelabelstorebrandinad
ditiontoofferingthenumberoneandnumbertwonationalorregionalbrandsindiffer
ent product categories. ... Sustaining strong relationships with retailers has become a
criticalsuccessfactorforfoodcompaniesandisdrivinginitiativessuchascategoryand
inventorymanagement.Foodcompaniesthatoffersuchvalueaddedserviceshavebeen
able to increase shelf space, maximize distribution efficiencies, further strengthen their
relationshipswithretailersandmaintaintheirleadershippositions.”

(CompanyInformation2006;DelMonte2005)

DelMonteattestsgreatgrowthopportunitiesforitspetfooddivision:

“Ourpetproductsrepresentsomeoftheleadingpetfoodandpetsnacksbrandsinthe
UnitedStates,withastrongpresenceinmostmajorproductcategories.Ourpetproducts
portfolioincludeswellrecognisednationalbrands.…

Theproductsinthepetfoodscategoriesareprimarilymarketedundernationallyrecog
nised, industry leading brands. 9Lives cat food is associated by consumers with the
widelyrecognisableiconMorristhecat.…

We are focused on expanding our sales in the pet snacks category through continued
productandpackaginginnovationandthetargetingofnewconsumermarkets…

Competitioninthepetfoodandpetsnackscategoriesingroceryandpetstoreoutletsis
primarilybasedontaste,brandrecognition,nutrition,varietyandprice.

(CompanyInformation2006;DelMonte2005)
960 Manfred Fuchs and Claudia Obernhuber

Assignments
1. Whatdoesthestructureofthepetfoodindustrylooklike?

2. Whichstagesofthehybridcompetitionhasthepetfoodindustrygonethrough?

3. Atwhatstageofhypercompetitionisthepetfoodindustrycurrently?

Hints
Beyondthereferenceslistedbelow,informationontherelevantcompaniesinthisindustry
canbefoundonthecorporatewebsitesofProcterandGamble,MarsInc,RalstonPurinaPet
Care, Nestlé, Del Monte, and ClogatePalmolive. For the individual companies the latest
10k filings, available for listed companies, can be retrieved from the SEC in New York.
Beforereadingthecasestudythestudentsshouldevaluatethisinformationtogetanover
viewofthecompaniesandtheirdifferentbrands.

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