Here’s How General Mills Could Benefit from Blue Buffalo

Sales growth could accelerate

General Mills (GIS) has been disappointing investors with its sales, reflecting soft demand for its products. The continued decline in yogurt sales has further pressured its top-line growth, which is expected to stay flat or mark a marginal improvement in fiscal 2018. However, the company’s snacks portfolio is showing signs of growth. With the acquisition of Blue Buffalo Pet Products, its sales are expected to show improvement in fiscal 2019.

Blue Buffalo is one the fastest growing pet food makers in the United States. Its sales have grown at a CAGR (compound annual growth rate) of 12% in the past three years, while its profit margins remain high driven by premiumization.

Here’s How General Mills Could Benefit from Blue Buffalo

Factors that could drive its top-line growth

General Mills’ expansion into the pet food segment is likely to accelerate its top-line growth rate since the US pet food market is growing at a healthy pace. Growth can be attributed to premiumization and repeat purchases due to the subscription-like buying pattern leading to a low switch rate.

Blue Buffalo, with its strong portfolio of brands, is currently the market leader in the wholesome natural pet food category, which is growing at a brisk pace since consumers are increasingly buying natural, healthy treats for their pets.

Blue Buffalo, which until now was focused on pet specialty and e-commerce channels to drive its sales, is making its way into the mainstream retail segment, which could significantly boost its top-line growth rate. The company’s initial success in the FDM (food, drug, and mass) channel provides the basis for strong growth.

General Mills management stated that the transaction is expected to be immediately accretive to its sales and operating margin. It will create a new pet operating segment, which will be led by Billy Bishop, Blue Buffalo’s CEO (chief executive officer).

However, it may not be smooth sailing for General Mills since the pet foods market is already crowded with renowned brands such as Mars, Nestlé, J.M. Smucker (SJM), and Colgate’s (CL) subsidiary Hill’s Pet Nutrition.