Shortly after Swiss-based Nestle SA outlined a new strategy this summer to focus future capital investment on its high-growth businesses, including Nestle Purina PetCare in St. Louis, the company announced plans for a $320 million new factory in Georgia to make pet food.
The factory — Purina’s 21st U.S. plant and its first new domestic manufacturing and distribution facility in 20 years — reflects the potential Nestle sees in the pet products business whose brands include Beneful, Friskies and Fancy Feast.
“The investment is in line with Nestle’s strategy to increasingly focus capital spending on advancing the high-growth food and beverage categories of coffee, pet care, infant nutrition and bottled water,” Nestle said in a statement when Purina’s Georgia plant was announced late last month.
Nestle, maker of Nespresso coffee and Perrier water among other brands, last month raised its profit margin goal amid pressure from activist investor Daniel Loeb. Loeb, CEO of New York-based hedge fund Third Point LLC, has increased its stake in Nestle this year and urged the company’s board to make changes to improve shareholder value.
Nestle previously indicated it also plans to sell its U.S. confectionery unit as a way to trim its broad portfolio and focus on its strongest businesses. If a sale moves forward, brands such as Butterfinger and Smarties in the U.S. would no longer be owned by Nestle.
“Though small, this deal may be the first sign that new CEO Ulf Mark Schneider is willing to refocus the portfolio, and shed low-growth businesses that do not add to the company’s nutritional credentials,” Morningstar director Philip Gorham wrote in a recent analyst’s note.
Nestle’s capital strategy has implications for St. Louis. Purina traces its roots to 1894 when William H. Danforth and partners formed the Robinson-Danforth Commission Co. in St. Louis. The company was renamed Ralston Purina in 1902 and launched Dog Chow in 1926. In 2001, Ralston was acquired by Nestle S.A. of Switzerland.
Purina had 8,000 employees in the U.S. as of the end of 2016, including 2,186 in St. Louis, the headquarters for Purina’s U.S. and Latin American operations. In the Americas, Purina’s sales totaled $8.7 billion in 2016, the company’s 13th consecutive year of improved sales growth and profit.
“We regard pet food as being somewhat removed from the hyper competitive broader packaged-food industry, as consumers tend to be slightly more brand-loyal and the category is ripe for the value-added nutritional innovation that Nestle’s cost advantage allows it to deliver,” Gorham wrote in his analyst’s note.
Nestle also is poised to increase its local workforce next year when it moves hundreds of IT jobs to St. Louis from California as part of Nestle USA’s relocation of its headquarters from California to northern Virginia. The IT jobs are moving to St. Louis due to its central location and will provide IT support for multiple business units, including Purina.
Purina’s growth coincides with an increase in spending by pet owners. U.S. pet industry expenditures are expected to total $69.36 billion this year, up from $66.75 billion in 2016, according to the American Pet Products Association, an industry trade group. Of that amount, pet food is the largest expense, totaling an estimated $29.69 billion. According to an APPA’s survey, people who own a dog or a cat spend an average of $235 on pet food for each animal.