General Mills Inc., beset by stagnant sales of cereal and yogurt, is paying around $8 billion for a pet-food business to help it generate revenue growth in the U.S.

The Minneapolis-based food conglomerate, which hasn't sold pet food since the 1960s, said Friday it plans to buy Blue Buffalo Pet Products Inc. as it looks for a piece of the rapidly expanding natural pet-food market.

General Mills Chief Executive Jeff Harmening said the deal accelerates his plan to diversify its business by buying faster-growing brands and offloading some lackluster ones. Last fiscal year, General Mills' sales fell 5.6% to $15.6 billion, as brands in its lineup like Yoplait yogurt and Betty Crocker lost the attention of American consumers.

"The Blue Buffalo acquisition brings back the growth in the U.S. and growth on a consistent basis," Mr. Harmening said in an interview Friday.

The pet-food company was founded by Bill Bishop, its chief executive, and his family in 2002, inspired by their dog Blue, which died of cancer.

Blue Buffalo, now the top natural pet-food brand in the U.S., has been growing faster than rivals in the $30 billion U.S. pet-food segment, Mr. Harmening said. Its annual sales have grown on average by 12% over three years to $1.3 billion in its latest fiscal year.

Mr. Harmening, who became CEO of General Mills in June, said he and Mr. Bishop signed the deal Thursday night over beer and chicken wings at a restaurant in Blue Buffalo's hometown of Wilton, Conn.

Under terms of the agreement, General Mills would pay $40 a share for Blue Buffalo, a premium of more than 17% to its closing price Thursday and double its offering price when the company went public in 2015. Blue Buffalo's majority shareholders have already approved the deal, which is expected to be completed by May. Shares in Blue Buffalo jumped 17% Friday, while General Mills shares dropped 4%.

Jefferies analyst Akshay Jagdale said the deal makes sense strategically, but "the price is steep, and General Mills will have to work to extract value from the deal."

Pet food and pet-care products have been a bright spot in grocery stores. Mainstay canned and packaged foods are struggling as Americans buy more natural food and high-end treats for their pets, just as they are for themselves.

"The humanization and premium-ization is what's driving the pet-food marketplace," said Mr. Bishop, who will retain the chief executive position after the deal.

The fancier products come with higher price tags, making them more profitable for the companies that sell them.

Food makers have been investing in pet-food brands in recent years. Last year, Mars Inc. said it would pay $7.7 billion to buy veterinary and dog day-care company VCA Inc. J.M. Smucker Co. paid more than $3 billion in 2015 to buy Milk-Bone owner Big Heart, and Nestle bought the maker of Purina pet food for more than $10 billion in 2001.

Smucker said its pet-food business, led by the all-natural brands, has been a growth driver for the company, with sales up 2% in the latest quarter.

"Pet food and snacks have now become the largest center-of-the-store category in the U.S. food and beverage market," said Smucker Chief Mark Smucker at a conference this week, adding that Smucker could potentially acquire more.

Pet foods labeled all-natural and grain-free -- especially those that use simple, whole ingredients like chicken, blueberries and sweet potatoes -- are growing faster than mainstream varieties. And industry executives say there is still room for expansion.

Only 10% of American households buy natural pet food now, while 68% own pets, according to General Mills and the American Pet Products Association.

For consumers, the shift is motivated less by scientific evidence and more by a desire to treat their pets like family.

Blue Buffalo says its food uses higher-quality proteins, like chicken rather than poultry byproduct and that it doesn't "cut corners" by using corn like some of its competitors.

In 2014, rival Purina filed a legal complaint against Blue Buffalo, accusing it of making false advertising claims about what its products could do. Blue Buffalo countersued for defamation. The companies settled after two years, though the terms were confidential.

For General Mills, getting into pet food will be a return to its past. The company produced pet food as far back as the 1930s, when it sold dog food; it later added food for cats and birds.

The deal for Blue Buffalo is the first major takeover for Mr. Harmening as General Mills' chief. In previous roles at the company, he won acclaim for spearheading a shift toward natural foods, namely through the 2014 acquisition of Annie's Homegrown.

General Mills says it plans to expand Blue Buffalo by selling it in more places, including convenience stores and big-box retailers, a strategy it says helped make Annie's successful.

But competition is rising, especially as retailers seek to promote their own premium pet products under store brands, said Sikich Investment Banking director Thomas Davenport.

Questions:

• Describe the Blue Buffalo brand and the characteristics of it's products using the concepts of points of parity and points of difference.
• How has the Blue Buffalo brand been positioned in the market - consider the hearts and minds of the target consumers?
• Evaluate the strategy to increase the number and kinds of retail outlets for Blue Buffalo.
• Why did General Mills buy Blue Buffalo? What brand architecture strategy does General Mills employ?

Answer rating: 100% (QA)

a Blue Buffalo is an attractive brand and it has been built over the years by a set of dedicated tea... View the full answer