Product quality problems dogging P&G (PG) pet care unit

Natura and Iams brands pull product from shelves

CINCINNATI - It's been a rough month for Procter & Gamble Co.'s pet care division due to the first recall in the 21-year history of its Natura Pet Products subsidiary and mold problems that impacted the launch of a new Iams Shakeables product.

The recent quality-control issues follow years of declining sales volume for P&G pet care, which has yet to recover market share lost in a 2007 industry-wide recall of pet food contaminated by melamine. That 2007 incident, linked to hundreds of pet deaths, altered the competitive landscape by eroding brand loyalty and making consumers wary of the industry's largest manufacturers.

"The safety and well-being of consumers — including pets — is always P&G's highest priority," spokeswoman Jennifer Chelune said in an email response to WCPO Digital questions. "We do all we can to prevent issues — and if we see them, we do whatever it takes to fix them."

Chelune added that P&G remains "a major player in the industry" and has a strong innovation pipeline that positions the unit for future growth.

Nationally, pet food sales grew 3.9 percent to $20.64 billion in the U.S. last year. Sales are projected to grow 2.9 percent to $21.26 billion in 2013, according to figures published by the American Pet Products Association.

P&G provides limited detail on its pet care performance in regulatory filings, but in its last five annual reports, it has pegged its U.S. market share at about 10 percent. Before the pet food recall in 2007, P&G's market share was 12 percent. It has reported declining sales volume in four of the last five years.

Industry experts say P&G is likely to suffer a revenue hit from the recent voluntary announcements involving about 80 different products and five pet food brands.

On March 18, P&G recalled four of its Natura brands (http://www.naturapet.com/recall) – EVO, Innova, California Natural and HealthWise - because a Michigan inspector found salmonella in a bag of dry pet food.

"This was a voluntary recall involving products made on a single manufacturing line during a two-week period," Chelune said.

Four days later, P&G announced the market withdrawal of Shakeabales (http://phx.corporate-ir.net/phoenix.zhtml?c=196265&p=factset40) turkey and lamb pet treats with certain lot numbers.

"A handful of lots were not mixed thoroughly and therefore had the potential to get moldy," Chelune said. "We have adjusted the manufacturing process and do not see any issues going forward."

She added that initial consumer response to Shakeables is positive.

Because no pet illnesses have linked to P&G products this year, the recent quality problems will not have as dramatic an impact on P&G as the 2007 recall, said Shannon Brown, analyst for Packaged Facts, a market research firm based in Rockville, Md.

"However, for a company seeking to maintain a foothold in the growing natural pet food space, this recall is certainly a setback," Brown said. "With two (announcements) coming pretty much on top of each other, that definitely increases the likelihood that Iams sales will be impacted."

The quality issues could raise questions for industry analysts, who have previously called for P&G to sell off the division that started with the 1999 acquisition of the Iams Co. of Dayton. Bernstein Research analyst Ali Dibadj, described the roughly $1.7 billion division as "quite a poor performer" in 2011 in a report that identified it as one of several units that could be sold to boost earnings. This week, Dibadj said via email that the Natura recall wouldn't by itself lead to a sale, but "years of share loss and only a part-time president might."

Dibadj was referring to Jorge Mesquita, who has served since last May as both the leader of global pet care and group president of new business creation and innovation.

Last November, P&G showcased Mesquita's internal initiative to identify dozens of new-product innovations that have the potential to become blockbuster hits like Swiffer, Febreze and Tide Pods. In a Cincinnati meeting with Wall Street analysts, Mesquita said P&G was focusing on ideas that competed in large market segments and were "disruptive solutions that create new categories."

Mesquita didn't identify any specific products at the time, but P&G has announced several new product launches since then, including Shakeables. These are pet treats, packaged in a container that resembles a Pringles can. It was launched in January. Now that problems have surfaced, shareholders and customers will be scrutinizing P&G's response, said Miami University Marketing Professor Mike McCarthy.

"If I'm a shareholder, I'm obviously not happy with this stuff because it hurts returns," McCarthy said. "You're going to have greater risk of reputation issues when you're selling a premium brand. People expect the brand to be better and not have these kinds of issues. So, I think you've got a double whammy there."

Chelune said investors will not draw a link between Mesquita's innovation role and problems with Shakeables. She said there is

ample evidence that P&G's innovation pipeline is robust and getting stronger.

"Our three-year and five-year innovation portfolios are sufficient to deliver our growth goal," Chelune said. "The average initiative size has increased by more than 60 percent and the number of smaller initiatives has decreased by nearly 70 percent."

In the meantime, market research consultant Michael Dillon said P&G will have to navigate trends that "make it very difficult for big companies to adapt."

Dillon said smaller pet food companies, including Blue Buffalo, Castor & Pollux and Taste of the Wild, have claimed market share from large multinationals, including P&G, Nestle' Purina and Colgate-Palmolive, which makes the Science Diet brand.

"There has been a lot of brand shifting," said Dillon, publisher of Dillon Media's annual Pet Industry Strategic Outlook. "Consumers are more than willing to spend more money to purchase higher quality foods."

Some manufacturers have tried to adapt by reformulating their pet product lines, but Dillon said P&G's answer to the trend was the 2010 acquisition of Natura Pet Products, a Fremont, Nebraska-based company that uses "high-quality, natural ingredients to create foods that are denser and richer in essential nutrients," according to its web stie.

Pet food blogger Susan Thixton said the Natura acquisition was one of the best read items she's ever posted.

"People were crushed when it happened," said Thixton, a resident of Safety Harbor, Fla., who tracked the industry at www.truthaboutpetfood.com since 2006. "Pet owners have caution about any big company. P&G, Colgate, Mars, DelMonte, they all have similar reputations. But there are many people who are still faithful to Natura."

Thixton said her readers alerted her to problems with Natura's EVO brand before a random inspection by the Michigan Department of Agriculture led to the discovery of salmonella in a bag of dry pet food. A department spokeswoman said no pet or human illnesses have been confirmed, but complaints have been received and the investigation isn't over.

Thixton said some of her readers told her their pets suffered vomiting and diarrhea after eating EVO canned food.

"I do know the FDA is investigating their canned line of foods. I've heard from consumers who said the FDA has come and gotten their canned lines," Thixton said.

An FDA spokesman said the agency cannot comment on open investigations.

"FDA's normal practice is to follow up on every complaint to try to determine whether an illness or other adverse event can be conclusively linked to a cause," she said.

 

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