Friday, 14 August 2009

Nestlé Finds Pet Owners More Willing to Spend


Link to Article Here from Wall Street Journal




By GORAN MIJUK and ANITA GREIL

Nestlé SA, the world's largest food and drink producer by sales, reported a drop in first half profit and revenue Wednesday as consumers scaled back purchases of items like bottled water, prepared meals and dairy products.

But the company did a lot better with animals than it did with humans.

The same focus on premium, higher-margin products that may have put a damper on overall sales growth paid off in the company's big pet-care division, as recession-stressed consumers still found ways to spend more on their dogs and cats.

The strength of spending on pets has caught the eye of companies across the world economy.

The main beneficiaries are companies selling pet food, but the growing market is drawing increasing interest from players in sectors ranging from health care to insurance.

"Growth in pet care remains resilient," said Nestlé Chief Financial Officer Jim Singh. The company, Mr. Singh said, is scaling back underperforming and mainstream products in favor of premium offerings "that are delivering improved nutritional benefits for pets."

Overall, the Swiss owner of brands such as Nescafé and Perrier said first-half profit fell 2.7% to 5.1 billion Swiss francs ($4.7 billion), while sales dropped 1.5% to 52.3 billion Swiss francs.


The company said organic growth, which measures the change in sales after stripping out divisions that were recently bought or sold as well as currency moves, came in at 3.5% in the first half.

Nestlé said it would do better in the second half, but ditched its target of growth approaching 5%. The company, however, said performance in its pet-care business was "excellent."

The American Pet Products Association, a trade group, estimates U.S. spending on pets will rise to $45.4 billion this year, from $43.2 billion in 2008.

The total includes $17.4 billion for food and more than $22 billion for over-the-counter medicine and veterinary care.

Nestlé, one of the biggest producers of pet food following its 2001 acquisition of Ralston Purina Co., is in a good spot to tap into that market.

The company said sales at its pet care division posted organic growth of 9.1% in the first half, better than all but one of the company's seven main food and beverage product areas. The division's sales came in at 6.4 billion Swiss francs, 12% of the company's total.

Despite the tough economic times, consumers weren't deterred by Nestlé's price increases, which helped lift the pet-care division's profit margin by more than a percentage point to 15.7%.

Purina and Friskies are among Nestlé's fastest growing brands, with sales of each up by more than 6% in the first half. Dog Chow, which saw sales jump by more than 16%, had the second-fastest growth among Nestlé's major products, outstripped only by coffee system Nespresso, which has a growth rate above 20%.

Drug companies also are chasing after pets. Sanofi-Aventis SA put $4 billion on the table last month to buy the 50% of animal-health company Merial it didn't already own from U.S. peer Merck & Co. The deal includes an option to buy the veterinary business of Schering-Plough once the two U.S. firms complete their pending merger.

Sanofi Chief Executive Chris Viehbacher said sales at Merial have grown 50% over the past five years to nearly $2.7 billion in 2008, while delivering an operating margin of close to 30%.

Eli Lilly & Co. Chief Executive John Lechleiter has also expressed interest in building up his animal-health business.

The bright outlook for pet products is also luring insurers into the market in search of growth rates faster than those for traditional car and life plans. Swiss property and casualty insurer Mobiliar earlier this year launched Switzerland's first pet insurance product.

Every third household in Switzerland owns a cat or a dog, a potential customer base of around 1.8 million, said Stephan Guenther, product manager at MobiCasa, Mobiliar's household unit.

—Martin Gelnar contributed to this article.
Write to Goran Mijuk at goran.mijuk@dowjones.com and Anita Greil at anita.greil@dowjones.com

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