Pet food investment

Activist Dan Loeb barks loudly at Colgate’s door. Should they let him in?

Colgate Palmolive has come under fire from activist shareholder Dan Loeb’s Third Point hedge fund. He now holds a $1 billion stake in the company. Thirdpoint invests in companies undergoing spinoffs and pushes for “corporate change”. Loeb’s stake in Colgate is around 6% of the fund’s assets.

Activist investors are becoming increasingly active in the consumer products industry. Nelson Peltz has a stake in Unilever and previously invested in Heinz, P&G and Nestlé. Elliott investment in the UK forced the divestment of Haleon from GSK. 

Activists have thus far been mainly focused on large Western companies. 

(Aside to hedge fund managers. In Asia-Pacific there are many under performing consumer companies who would merit closer focus!)

Consumer companies typically have a wide range of brands, and they are stable; building brands takes time. Stability can breed complacency, often internal candidates are favoured resulting in a myopic and risk averse culture. Inevitably some parts of the portfolio become neglected.

Colgate operates in two distinct areas, Oral, Personal and Healthcare, and Pet nutrition. Pet accounts for around 16% of revenue and is a separately managed business run from Topeka, Kansas.

Pet nutrition excites Loeb, saying Hills is “a strong brand with a long runway for growth.”

Photo: Karlo Tottoc

Having spent some time in the pet business, what could that runway be?

Hills Science Diet Brand

The Hills brand was one of the first to target Veterinarians and highly involved pet owners. There is no stronger advocate than a vet, far more powerful than any TV or social media campaign. 

However, competition in this space has grown from large corporates like Mars with Royal Canin, Nestlé Purina as well as start-ups. Even flavour companies like Symrise have entered the pet nutrition space.

How has Hills responded? Yes there have been improvements but not substantial ones in my view.

In August Hills (Colgate) acquired 3 plants from Red Collar pet foods in South Carolina, Oklahoma and Ohio. These were more about bolstering Hills manufacturing capacity rather than acquiring new brands or pet technology.

Veterinary equipment & goods

This is an expanding area and there are an increasing number of pet biotech and medical device companies. Hills certainly has the brand equity amongst Vets to be credible in this space. Many of its staff are vets. It also has the geographic reach many of these players lack. Apart from the above deal there has been little pet M&A by Colgate recently.

Leverage and expand EC

In the US Hills has a direct sales operation for veterinary diets. This route-to-market model should be far more profitable than selling through pet retailers and clinics. It’s also a treasure trove of pet owner insights. What other complementary goods and services could Hills add? 

Pet insurance might be a good start.

Photo: Karsten Winegeart

Colgate/Hills gets largely positive reviews on Glassdoor, the site where employees anonymously review employers. But there are some gaps. One that caught my eye read, “poor management not connected to pet world at this time.”

I understand why Hills is based in Kansas. There are copious quantities of raw materials, grains and meats to make pet foods. However, there is certainly geographical growth for the brand especially in developing markets. How much of this can be understood or realised by teams sitting in Topeka, I am not convinced.