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April 10, 2011 10:29 pm
Eating Pringles is not a solitary activity. Tens of millions of shoppers spend a total of $1.4bn on the potato crisps every year, picking the trademark canisters off supermarket shelves in more than 140 countries, led by Americans and Brits.
But in spite of the global sociability of Pringles consumption, for the brand’s US owner, Procter & Gamble, it has been a lonely outsider. Pringles is an orphan brand, out of place among P&G’s Pantene shampoos, Gillette razors and Ariel detergents.
P&G is not alone in clearing its shelves of orphan brands. Consumer goods companies frequently have a long tail of brands, acquired over decades of mergers and acquisitions, some of which no longer sit comfortably in their portfolios. Charlie Mills, analyst at Credit Suisse in London, says jettisoning orphan brands is inevitable given the trend for “more sales under fewer labels, and making these labels themselves more powerful”.
Unilever, the Anglo-Dutch conglomerate, has demonstrated the trend by leaving frozen foods in 2006 and selling its Italian frozen food business last year to Birds Eye Iglo, a private equity-owned group, for more than €800m.
Similarly, some bankers point to Nestlé’s $1bn-plus Herta brand, which makes frankfurters. This business, they say, is at odds with Nestlé’s push into health and wellness – although the Swiss group says it is committed to the brand.
Orphan brands can often be revitalised by a bit more attention and investment. Local brands especially tend to get lost inside mega corporations.
P&G began sharpening its focus under former chairman and chief executive AG Lafley in 2000. It has been looking to dispose of Pringles since at least 2007. That is why Mr Lafley’s successor, Bob McDonald, could not hide his satisfaction last week at selling it for what analysts said was a respectable valuation.
But if P&G is so eager to be rid of Pringles – a desire that analysts say can only have been heightened by rising potato prices and the continuing dominance of PepsiCo’s Frito-Lay in the snack food sector – why would anyone else want it?
The answer is that what looks like a small and peripheral business to the world’s biggest consumer goods company looks like a large and essential one to little Diamond. To P&G, Pringles’ profit margin of 17 per cent was below par, but to Diamond that is better than its current 15 per cent.
“This is a great strategic fit ... This brand is a thoroughbred,” said Michael Mendes, chairman and chief executive of Diamond, even as analysts expressed concern about the practical difficulties of a deal that will triple Diamond’s size.
Diamond will put Pringles under the same roof as its nut and popcorn products as well as Kettle chips – which it acquired for $615m last year from Lion Capital – and it will try to exploit cross-snack economies of scale in development, marketing and distribution. Although Diamond has limited experience in emerging markets, it wants to reinvest some of Pringles’ earnings in expanding its presence in Brazil and China.
P&G’s sale marks its final withdrawal from the conventional food business following its $3.3bn spin off of Folgers coffee in 2008 to JM Smucker, a US food company that merged itself with P&G’s Jif peanut butter and Crisco cooking oil businesses in a $1bn deal 10 years ago. “It’s vital for us to be able to innovate and it’s very difficult for us to innovate in a category like food,” said a P&G spokesman. “Peanut butter is peanut butter.”
Multinationals also want to have top-ranking brands in their portfolios to give them leverage with retailers. But Pringles are only the fourth-biggest global snack brand, with a 2.4 per cent market share after Lays, Doritos and Cheetos, all owned by Frito-Lay. Diamond and Pringles combined will still have a share of just 3.3 per cent share, but Diamond will be more willing than P&G to invest marketing money to win space higher up the supermarket shelf.
Jack Russo, analyst at Edward Jones in St Louis, says: “Retailers want to do deals with manufacturers that can spend behind the brand, that can incentivise them.” Diamond will do that. Provided shareholders agree and antitrust regulators don’t stand in the way, Pringles will no longer be P&G’s orphan. The challenge will then be to take on Frito-Lay – and avoid simply turning Diamond into an even bigger orphan.
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