General Mills US retail business is under scrutiny

General Mills' US retail business is under scrutiny

General Mills' latest numbers have put the US food giant under scrutiny once more.

On Thursday (17 December), the Cheerios and Yoplait owner cut its forecasts for annual sales and earnings on the back of lower sales in the second quarter, a period when its domestic operations came under pressure.

Chairman and CEO Ken Powell insisted the company's results were in line with its expectations at the midway point of its financial year but the figures out of the US have underlined lingering concerns about General Mills' domestic business and prompting industry watchers to ponder what could lie ahead for the group in 2016 and beyond.

In General Mills' last full financial year, a period that ran until the end of May, sales from its core US retail division fell 1% and that was even after natural and organic food maker Annie's, acquired last autumn, added one point to the top line. Operating profit from the unit dropped 7%. In the previous 12-month period, which ran to 25 May 2014, General Mills reported a year of flat US retail sales and falling operating profit. In fact, as Athlos Research principal Jonathan Feeney pointed out this week, General Mills' US retail arm has seen sales fall on an organic basis since the company's 2009 financial year.

The first quarter of General Mills' current financial year saw the company report a 4% increase in net sales from the US retail division, helped by price increases but also a rise in volumes. However, the three months lapped the first quarter of 2014/2015, when US retail net sales dropped 5%.

The sluggish performance from General Mills' core US retail business in the second quarter to 29 November was across the board, the company admitted on Thursday. Its snacks and baking product units each saw sales dip 1%, while its other divisions reported "mid single-digit" declines.

Alongside the numbers and the revised forecasts, General Mills, which has spent recent quarters announcing a range of moves to lower costs in a bid to re-invest in the business, upped its target for cost savings.

General Mills has spent the last 12 months restructuring its manufacturing network in the US (as well as more recently overseas) in a bid to lower costs amid the pressure on sales. It has sought to inject growth into US business with the (albeit pricey) acquisition of Annie's and, this September, offloaded a struggling domestic unit with the disposal of Green Giant to local group B&G Foods. The management has sought to reshape the company in response to changing marketplace dynamics.

However, the second-quarter results issued on Thursday, along with the revised full-year forecasts, brought the concerns over the prospects for General Mills' sustained top-line growth back to the surface.

"More cost cutting and cash returns to shareholders could help to counterbalance weak top-line growth and operational deleveraging, but sales trends appear to be deteriorating fairly sharply," Sanford Bernstein analyst Alexia Howard wrote in a note to clients. "US retail trends do not seem to be improving. The segment is posting year-on-year declines on top of year-on-year declines, with underlying sales down by 3% year-on-year in 2Q:16 on top of 3.5% in 2Q:15. While General Mills is focusing on renovation and innovation efforts, trends are unlikely to improve from here as comps get tougher in 2H:16 for the segment and competition is not abating."

Cereal remains a challenge, snacks is an extremely competitive category and yoghurt is proving no less cut-throat. Moreover, chunks of the General Mills domestic portfolio appears to be at odds with some of the key consumer trends in the US.

General Mills' management said its US cereal business suffered from the company's biggest customer promoting less and it expects to see sales improve on the back of innovation. The company's yoghurt division is another part of the group set to see new products, with the business planning to launch the Annie's brand into the sector.

However, will - and should - the General Mills management team take bolder action in 2016 to improve their growth profile? Could assets be sold? Morningstar's Erin Lash suggests more disposals could be possible. "Following the divestiture of its Green Giant brand earlier this year, we think General Mills could look to part ways with less profitable fare to focus its product set on the highest return opportunities. General Mills has pursued a similar strategic direction within its convenience and food-service segment (11% of sales and 17% of operating profit), and the results - from a profit standpoint -have been striking. The segment margin gains realised (more than 300 basis points of operating margin expansion over the past four years, to nearly 18% in fiscal 2015) indicate to us the profit potential from scrutinising the portfolio," she said.

Howard, who suggests General Mills "will likely need to keep pedaling even harder in terms of innovation and operational efficiencies to reach its long-term targets", touts baking mixes or meals as areas the company could consider for sale.

On the other side of the M&A coin, WhiteWave Foods has long been touted as a target, while the US-centric General Mills could look to strike deals overseas.

However, Howard had an interesting final scenario. "If all else fails and valuations take a hit on weak fundamentals, General Mills could become a target for someone like Kraft-Heinz to extract synergies out of the center-of-the-store, especially since the company has no ownership-based impediments to such a deal."