No one would think you're nuts for thinking privately held Del Monte was just a fruit company, and indeed, at 30%, it is has the largest market share of any other fruit company, including Dole Food at 22% (though Chiquita Brands is the biggest banana company). And don't confuse it with Fresh Del Monte Produce, which it spun off several years ago.
Yet what you might not realize is that Del Monte is also the fourth-biggest pet food maker and it's that segment of its business that's not only driving the company forward, but is also larger than fruit, accounting for just more than half of its $3.67 billion in revenues in fiscal 2012. Where industrywide fruit supply constraints caused net sales to fall 5.5% in the first quarter of the year, pet food sales witnessed a 5% jump despite tough competition.
As I noted last month, the American Pet Products Association says pet food will continue to comprise the lion's share of spending that owners dole out this year on pet care, comprising 38% of the $55.5 billion total.
Colgate-Palmolive suffered a setback after it was forced to change the name of its Hill's Science Diet brand following some backlash over the non-natural sounding source of its food, but sales were still up 3.5% year over year and it will account for a full 13% of Colgate's revenues. Nestle , the biggest pet food purveyor, saw sales rise 6.8% over the first six months of the year to more than $5.5 billion.
The strength in pet food combined with the weakness in fruit has analysts believing Del Monte will carry through on the expectation it will sell off the fruit business and concentrate fully on pet products. The tough fruit market is what's driving Dole to go private again, a move that's expected to be completed by the end of the year if no higher competing bids are received.
Other signs it may happen include Del Monte acquiring pet food maker Natural Balance for $338 million and taking a minority equity interest in a pet product co-packer, so it certainly looks like it's setting itself up for the strategic move. And while it's not top dog in the pet food space, brands like Kibbles 'n Bits, Meow Mix, and Milk-Bone (the leading branded player in dog snacks) carry significant mind share with consumers.
The biggest threat in the space, though, is from private-label food manufacturers. From mass retailers like Wal-Mart to specialty stores such as PetSmart , the rise of premium and super-premium store-branded foods are reaping the largest amount of sales with consumers. While the discount store doesn't break out pet food sales, its consumables division wherein such sales reside, gained market share last quarter when all else was pretty miserable for the retailer.
PetSmart significantly beat analyst expectations for the quarter in no small part because it's dedicated three-quarters of its food business to the premium or better space, whether of its own mix -- and it reports seeing good growth there -- or to others, like Blue Buffalo.
In short, this isn't a "tail wagging the dog" scenario, but a realization that as owners continue to humanize their pets, the segment has more room to expand. So even when a fruit company like Del Monte decides it really wants to be a pet food business instead and focuses all its resources on it, there will still be plenty of profit to be made by other players in the field. No one's going to have to sit-stay, but can go fetch whatever share of the market they can reach.
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The article This Pet Food Company Sounds a Little Fruity originally appeared on Fool.com.
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