Del Monte Pet Products Business can Survive Private Label

Del Monte achieved over 20% growth in net sales within the pet products category for its fiscal quarter ending August 2nd 2009, putting the 4.7% growth in consumer products in the shade. Is this pet products action sustainable growth or just one-off pricing action? What are the potential impacts of private label in pet food in the months and years ahead?

Del Monte achieved over 20% growth in net sales within the pet products category for its fiscal quarter ending August 2nd 2009, putting the 4.7% growth in consumer products in the shade. Is this pet products action sustainable growth or just one-off pricing action? What are the potential impacts of private label in pet food in the months and years ahead?

 

Del Monte has a roughly 50:50 split between net sales of its consumer products vs its pet products. The performance trumped all the analysts’ estimates and the shares surged. The company was positive on its outlook.

 

The ‘announcement highlights’ reveal that most of the growth in pet products was pricing action, offset slightly by volume elasticity. Analysts suggest that Del Monte was late with its price increases from the commodity run up in early 08, and some of this was catch-up. Looking ahead Del Monte plans to increase its marketing spend substantially, as it has been doing over the last few years with its strategy to reposition as a branded player.

 

But where is its pet product sales trajectory heading as key retailers eye the private label opportunity. Fortunately, Del Monte is also a private label manufacturer, the key question is, how adaptable is it at playing a hybrid branded and private label supplier?

 

From a supply chain view, private label and branded products are largely similar – there is a conversion cost and some sort of sourcing unit profit or margin - that is all. Hybrid private label and branded manufacturers can make a profit either way from the supply chain. In fact, if volume balance is better, due to more continuous sales, rather than the sometimes unpredictable pull of trade promotions, the supply chain will gain efficiency.

 

On the demand side, integrated private label sales and branded products are a very powerful lever with the large retailers. In all categories I have experienced in the last year, these hybrid manufacturers are doing well.

 

There is no doubt that at some stage the marketing side of the pet products unit at Del Monte is going to come under pressure, if it hasn’t already. In my experience, the increase in advertising spend will end up buying price down to compete with private label. This means that there will be some ‘sleeve’ built into the 2010 number. After that, however, if consumer spending stays in the doghouse, Del Monte will need to leverage its private label manufacturing capability to retain slots for its branded products.

 

In my view, Del Monte is well positioned to compete against private label in the pet products category. On the down-side, the recent surge in net sales was all about pricing and not sustainable growth. Also, innovation plays a big role in the pet category. Branded pet product innovation, primarily natural and functional food, is vital to shake off private label - more needs to be done here.

 

However, a company that’s been shipping fruit for decades, knows a thing or two about commoditization and innovation, it should be able to see its way through with modest share growth.