• by Thom Forbes  @tforbes, April 6, 2018

The J.M. Smucker Co. is buying Ainsworth Pet Nutrition, which makes Rachael Ray's Nutrish dog treats, for $1.7 billion in a deal announced Wednesday. At the same time, it confirmed reports that it’s looking to unload its carb-heavy, human-targeted baking brands led by Pillsbury.

Why is it heading for the dogs? Consider the first bullet point in Smucker's news release announcing the deal:

“Pet food and pet snacks has become the largest center-of-the-store category in the U.S. food and beverage market, generating over $30 billion in annual retail sales across all channels, and remains one of the fastest-growing categories. This acquisition and the addition of the high-growth Nutrish brand will increase the scale and further accelerate the growth profile of the company's pet food business.”

Indeed, the acquisition “comes as the upscale pet-food segment looks increasingly delectable to human-chow manufacturers. It reflects a trend in which major food companies are trying to diversify their businesses and distance themselves from packaged and processed foods as American consumers choose items perceived as more natural,” observes Nathan Bomey for USA Today. “General Mills, maker of Cheerios cereal and Yoplait yogurt, reached a deal in February to acquire Blue Buffalo Pet Products for about $8 billion. 

“For Smucker and General Mills, premium pet food holds promise. ‘Wholesome' products make up 10% of the pet food market and are gaining market share.”

“The humanization trend is here to stay,” Smucker’s CEO Mark Smucker tells Bloomberg’s Craig Giammona in an interview. “This brand fits exactly where we need it to — it’s very important to continue to gain scale where it’s relevant.”

He also says that Smucker will be beefing up its online efforts. “Online sales currently only account for about 3% of Smucker’s business,” Giammona reports. “But the category is growing fast: In the first three quarters of the current fiscal year, pet sales through e-commerce have surged 70%, according to the company.”

That General Mills acquisition a couple of months ago wasn’t quite the deal as the Smucker one is, at least as far as investors are initially concerned, points out Aaron Back for the Wall Street Journal.

“General Mills shares fell by 6.4% the following two trading sessions on fears that the company was overpaying and would have few synergies with the newly acquired business,” he writes. "Unlike General Mills, Smucker already has a large pet-food business, having acquired Meow Mix-maker Big Heart Pet Brands in 2015. This makes it easier to reap cost savings by combining the two units. Smucker said these savings would come to $25 million in the first year, rising to an annual $55 million in three years.”

“Akshay Jagdale, equity analyst at Jefferies, notes that while Nutrish is primarily sold in grocery stores, ‘there seems to be a big opportunity to expand into the Specialty channel (the Nutrish brand recently announced expansion into PetSmart) and e-commerce, which are channels where Smucker’s [ticker symbol: SJM] pet food business is more established. Furthermore, SJM believes the Nutrish brand can extend into the cat and pet snacks category, where its current presence is negligible.’”

The Meadville, Penn.-based Ainsworth Pet Nutrition is a privately held company "founded by George Ainsworth Lang in 1933 as Dad’s Pet Care. The company changed its name in 2010,” Stephanie Ritenbaugh reports for the Pittsburgh Post-Gazette. “The Rachael Ray Nutrish line has been the centerpiece of Ainsworth’s portfolio, with two-thirds to three-fourths of the company’s revenue generated from it. The company also has select private label partnerships, such as Walmart’s Pure Balance brand.”

“We took great care to find the right home for our brands and our people, to whom we are so grateful. The J.M. Smucker Co., also a fifth-generation family company, is led by a like-minded family to our own,” Ainsworth executive chairman Sean Lang said in a statement.

The Smucker release also confirmed a story broken by Bloomberg’s Kiel Porter and Shruti Date Singh last month that it is reviewing strategic options, including a potential divestiture, for its U.S. baking business that primarily encompasses products sold in U.S. retail channels under the Pillsbury, Martha White, Hungry Jack, White Lily and Jim Dandy brands.

“Our current strategic priorities include an increased emphasis and allocation of resources toward growing our coffee, pet and snacking food businesses,” CEO Smucker said.