Colgate Bets $1 Billion on Fastest-Growing Unit: Pet Food

(Bloomberg) — Colgate-Palmolive Co. recently announced it will shell out $700 million for three US manufacturing facilities. The plants won’t crank out toothpaste or soap — they’ll make pet food.

The investment is part of a plan by the world’s largest oral care company to grow its Hill’s Pet Nutrition unit, a line for dogs and cats acquired in 1976 that bills itself as “backed by science.” Executives see a favorable backdrop for wringing more sales from a brand that accounts for a fifth of Colgate’s revenue and over the past 12 months has driven about 70% of its growth.

US consumers have developed a penchant for treating their furry companions like children, increasing spending on pets 27% between 2019 and 2021 to a record $123.6 billion, according to the American Pet Products Association. About one in five households welcomed a dog or cat during the first year of the pandemic, creating a fresh opportunity to lure customers.

It won’t be easy to make the increased production pay off. Hill’s, a premium brand, is smaller and lesser known than rivals. Only 34% of respondents in a survey by Stifel Financial Corp. had heard of it, compared with 63% for Nestle SA’s Purina. Its US share of the pet food and treats market hovers around 4.5%, according to research firm Numerator, and it’s even lower abroad.

“We’ve really focused on driving that brand awareness,” said Nicki Baty, President of Hill’s US. “We’ve still got significant headroom to grow.”

Colgate’s effort to boost the brand is bound to bump up against challenges facing consumer-goods businesses right now: Inflation for raw materials, packaging and transportation has dented margins at Hill’s, which has raised prices to offset higher costs. Consumers could balk at those increases, especially with talk of a recession heating up.

Still, Goldman Sachs analyst Jason English sees reason for optimism about the expansion effort.“They’ve got a lot of momentum,” English said. “And they’ve got a lot of consumer behavioral changes that are proving to be a real tailwind.”

Colgate was facing a stretch of flagging results — annual sales declined 11% between 2013 and 2018 — when it embarked on an overhaul about four years ago. Hill’s also needed some changes. The company realized the 74-year-old brand was too nerdy and that the pile of scientific claims on its bags was overwhelming.

In 2018, Hill’s relaunched its Science Diet line. The unit improved the look and taste of the kibble, revamped product sizes and slapped giant photos of quirky dogs and cats on its packaging to make it more relatable.

Despite the setback of a major product recall the following year, Hill’s saw signs that the changes were working, with growth accelerating in 2019 and then surging during the pandemic. The brand increased revenue 14% to $3.5 billion in the year through June. Meanwhile, sales at the rest of Colgate’s businesses rose just 1.4% to $14.2 billion.

“Hill’s is an important part of our growth algorithm,” said Colgate Chief Executive Officer Noel Wallace.

That makes the brand all the more crucial for investors. Colgate’s stock rallied early in the pandemic, but has since given away those gains. Only about a third of analysts recommend buying the shares, according to data compiled by Bloomberg.

To continue its good stretch, Hill’s is revitalizing its Prescription Diet line for sick pets. The work starts at a 180-acre research center in Topeka, Kansas, that houses about 900 cats and dogs whose main job is to be professional tasters. The company’s scientists experiment with ingredients and formulations before putting their findings to the ultimate test: Will Rover eat it?

That lab created Derm Complete, a dry dog food product that vows to tackle both environmental and food sensitivities to improve a pet’s skin. Another launch includes a digestive health formula.

Hill’s is also focusing on small and miniature dogs, which according to the company now account for over half of pet canines in the US and around the world.

“In the US, the American Labrador retriever is kind of being replaced by the French bulldog,” said Dave Baloga, who leads science and technology at Hill’s.

Those smaller dogs live longer and need food that’s more nutritionally dense because they eat less in one sitting. Last year, Hill’s opened a $30 million innovation center housing 80 dogs weighing under 20 pounds that will allow researchers to study the specific needs of these breeds.

The success of the Hill’s revamp will hinge on its ability to elbow aside fierce competition in the $50 billion US pet food and treats category, which grew 14% between in 2021, according to the American Pet Products Association.

Mars Inc.-owned Pedigree is in almost 26% of US households, according to Numerator, compared to around 8% for Colgate’s brand. Large companies have been snapping up competitors, with Mars acquiring pet-food brand Nom Nom this year and General Mills buying Tyson Foods Inc.’s pet treats business for $1.2 billion in 2021. Colgate is also going against a slew of startups pitching natural and organic alternatives that appeal to younger consumers.

Hill’s has historically focused on touting its products through vets and pet specialty stores, particularly for Prescription Diet, a term it trademarked. It added to its approach around 2019 to tout the revamped Science Diet products, currently advertising online and at times on TV. 

Now, with refreshed Prescription Diet items in the market, it is using ads to prime pet owners to ask for those products when they walk into a vet’s office — similar to drug company commercials that encourage consumers to ask their doctors about medications.

The message has changed, too. An ongoing campaign spotlights bouncy dogs and curious cats that presumably got the pep from Hill’s food. The takeaway: “Science did that.”

“We’ve tried to find a way to communicate science and emotionality,” said Hill’s President John Hazlin.

The $700 million acquisition of pet food factories is meant to help meet what Hill’s expects to be growing demand. It is also building a $250 million factory in Kansas and purchased a facility in Europe while expanding existing production from five days a week to seven.

“We will continue to invest,” said Wallace, the Colgate CEO. “We feel very good about the growth trajectory.”

©2022 Bloomberg L.P.