General Mills insists reorganisation about growth as well as margins

General Mills insists reorganisation about growth as well as margins

General Mills has announced plans to reorganise its business in a move the US company said would enable it to capitalise on its international presence. But will it address some of the fundamental issues limiting growth at the Cheerios-to-Yoplait maker? Katy Askew reports.

General Mills signalled its intention to revamp its operations last week when the US company set out a new organisational structure it said would "drive greater efficiency" at the business. 

From 1 January, General Mills will have four "business groups" - North America retail, Europe & Australia, Asia & Latin America and Convenience & Foodservice. Each unit will be led by a group president who will report into General Mills' overall president and COO Jeff Harmening. 

In addition, General Mills, which owns the Yoplait yogurt and Häagen-Dazs ice cream brands, said its "dairy strategic brand unit" would be "aligned" to the new structure. The France-based unit, which will also report to Harmening, will work alongside the presidents of each of the four divisions "to explore further opportunities to drive growth and innovation for the dairy platform globally", General Mills said. 

The new structure will also have a "global revenue development group", which will look at areas including "strategic revenue management", e-commerce and "marketing innovation". 

Harmening, a 20-year General Mills veteran, was appointed to the newly-created role of COO this summer and rumours have focused on the likelihood of him taking the reins as CEO from Ken Powell as early as next year. In this context, it seems likely General Mills wants to centralise the decision-making process for its global brands under one leader. 

This direction of travel was first signalled in June when Harmening's COO appointment was announced. Speaking at the time, Powell noted: "The timing is right to bring together overall operations under one leader. Jeff is well positioned to accelerate our global consumer-first strategy to drive both growth and profitability." 

The move will advance General Mills' efforts to lower its cost base, the company suggested. Harmening explained: "The capability investments and savings generated by these changes will help us deliver our fiscal 2018 adjusted operating profit margin target of 20%."

In its most recent financial update, for the first quarter to 28 August, General Mills revealed it has been making progress on further strengthening its margins, which rose in the company's last full financial year. During the three-month period, General Mills said its adjusted operating profit margin expanded 80 basis points to 19.2%.

In recent years, the company has been focusing on removing excess capacity in its manufacturing network and those moves have continued in 2016. Earlier this summer, General Mills said it will close a US soup factory in Vineland, New Jersey. Streamlining its international operations has also been a priority. For example, in Brazil, General Mills plans to close one of its snacks manufacturing facilities and cease production operations on certain snacks and meals lines at another facility. The group is reorganising its Chinese snack business and stopping production of underperforming products in the market. Meanwhile, in Australia, General Mills is to close a pasta, sauces and ready meals facility located near Melbourne

The lean approach to manufacturing is a key element in General Mills' drive to cut costs. The group is also implementing a process of zero-based budgeting, which it says is delivering savings, as well as continuing with its existing "holistic margin management" model.  

According to Morningstar analyst Erin Lash the approach has become typical of US food makers with firms across the category taking a "hard look" at their cost structures to drive efficiencies. However, she tells just-food, stringent cost management must be balanced against the need to invest for growth. 

"Our contention has been that in light of the intense competitive landscape, continued brand spending will be necessary to ensure that competitive advantages don't get eaten up, and driving cost savings helps to free-up funds to fuel that spending," she suggests. 

"Consumer preferences are evolving at a rapid clip, and we think the onus is on packaged-food manufacturers like General Mills to ensure that new products consistently resonate with consumers. But just bringing on-trend products to market is insufficient to winning in this marketplace, as even value-added new products can fail if consumers don't know about them. In this light, we believe that maintaining—or even increasing—its brand spending will be crucial to beef up brand awareness."

While theoretically cost savings could be re-invested in brand spending, to date, there is little evidence to suggest that is what General Mills is doing and the company's sales have struggled as a result. The company reported a 7% drop in first-quarter net sales with sales down 4% on an organic basis stripping out currency exchange. During the period, the company cut controllable costs to inflate profits – including a double-digit decrease in marketing behind its "foundation businesses" - refrigerated dough, soup and baking mixes in US retail - and its US yogurt operations.

The risk here is General Mills' lower media spend will further dampen the company's ability to deliver sales growth in businesses that are already struggling to expand. 

As Morgan Stanley Research analysts noted: "The company's planned double-digit reduction in media spend could represent a mid-term headwind as the company seeks to moderate sales declines across both its growth [and] foundation brands and support improved retail takeaway."

General Mills did, nevertheless, insist last week the move to reorganise the business is also about delivering growth. Harmening explained: "We continue to prioritise both growth and returns. The structural changes announced today will help us unlock global growth opportunities and go after them by efficiently restructuring our teams and processes."

It would seem General Mills is attempting to get the best of both worlds through trying to use its understanding of local markets and its global reach. By establishing regional teams General Mills will hope increased on-the-ground visibility will enable it to respond to local conditions in order to effectively manage the business. Meanwhile, the global revenue development group will be able to use global learnings to drive growth areas such as e-commerce. 

At the same time, the company has separated out its convenience and foodservice units. Foodservice, in particular, is increasingly a growth area for packaged food manufacturers and the growing worldwide reach of large foodservice operators makes a strong argument for a unified global approach that utilises General Mills' global footprint. 

General Mills has placed a lot of emphasis on improving its margins and the new corporate structure is likely to contribute towards that. But unless General Mills is also willing to increase investment behind its brands – both in terms of NPD and marketing – it seems unlikely the group will be able to reverse the underlying sales declines it is witnessing.