On the money: General Mills "very bullish" on cereal prospects
General Mills believes new cereals, including the Monsters range, can boost sales in US
General Mills has expressed its confidence in the prospects for the breakfast cereals sector in the US, where manufacturers have struggled to get sales growing in recent years.
Jim Murphy, president of General Mills' US breakfast cereals business, Big G, said yesterday (18 September) he was "very bullish" about the outlook for the sector, as questions persist about how manufacturers can drive growth in a challenging category.
Healthier, more convenient products or eating breakfast outside the home has lured consumers away from cereal. According to Euromonitor, retail sales in the US were flat at just under US$10bn in 2012; volume sales fell 2%.
Some industry watchers have cast doubt on the long-term outlook for breakfast cereal in the US but manufacturers like General Mills believe investment across the category in advertising and innovation could reignite interest and boost sales.
In General Mills' last financial year, which ran until 26 May, its US breakfast cereal sales fell. It also saw its market share fall. However, in the first quarter of General Mills new financial year, the company saw sales increase. It did not break out sales by division but said its Big G cereals unit contributed to the 4% increase in US retail sales it saw across its portfolio.
Speaking to analysts after the results were announced, Jim Murphy, president of General Mills' Big G cereals business, said the company saw its sales and market share grow during the quarter. "We're off to a solid start," he said.
Some in the industry have questioned the innovation record of the larger players in the US. Speaking to just-food for our management briefing on the global breakfast cereals sector earlier this year, James Richardson, senior vice president at Hartman Strategy, the consulting arm of market researchers The Hartman Group, said manufacturers had largely only launched simple additions to existing portfolios or turn to marketing campaigns for existing brands. Richardson questioned how effective such moves would be in growing the category.
Outlining General Mills' plans for the current financial year, Murphy yesterday told Wall Street analysts the company planned more new products, "renovation" of some items and investment in marketing.
"Our plans include core brand renovation that is relevant to consumers. We're launching a strong slate of differential new product innovation and we're investing to develop innovative marketing ideas that bring increased consumer excitement to cereal. It's really a simple formula, but it works. Where we are bringing relevant product news and innovation to market, we are seeing the sales growth," he said.
Bryan Spillane, an analyst at Bank of America Merrill Lynch, said there was a "debate going in the market about the health of the category". He asked whether, with volumes being "soft" in recent years across the category, whether there was a "temptation" to turn to price to drive sales. He also asked Murphy about how General Mills was addressing different consumer demographics, particularly families with children.
"We believe that the product news, innovation and investment from the branded players need to increase in order to make this category grow healthily in the future," Murphy responded. "On demographics, we see that the families, the mainstream families who are after taste and branded value and fun in the breakfast occasion are strongest consumers right now. We don't see a weak spot really across the demographics. In fact, Hispanics, as I said consume more cereal than anybody and that's a growth driver for us in the future. So demographically cereal has got a lot of tailwinds actually going forward."
General Mills' first-quarter results including a fall in earnings as the company lapped numbers a year earlier that were boosted by a tax benefit and a higher mark-to-market valuation of some of its commodity positions.
Operating profit was down 5.8% at $734.8m. Segment operating profit, which excludes corporate expenses, was up 6%.
Net sales climbed 8% to $4.37bn. General Mills said new businesses acquired in the last year, including the Canadian Yoplait business and Brazilian firm Yoki, boosted the top line by five percentage points.
Chairman and CEO Ken Powell said the company as a whole was "off to a solid start" and was "excited" about the year.
"We continue to be excited about the year. We have more impactful advertising and increased levels of innovation in market right now with additional efforts planned for the remainder of the year. We see a manageable level of input cost inflation this year and our categories are showing modest balanced growth," he said.
In a note to clients, Jonathan Fenney, analyst at Janney Montgomery Scott, wrote: "While today's call was a positive inflection point in tone – with both increased ad spend and taking ownership of what we think are fixable problems in cereal – the tepid US retail volume growth (+1%) despite easy comparisons and heavy new product introductions show that three years of declining relative ad spend are still taking their toll. We maintain our FY13 and FY14 EPS estimates of $2.89 and $3.08."
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