General Mills, the US food group, last week made two announcements that underlined the macro-economic dynamics consumer packaged goods firms are battling. The company announced job cuts it says will make it more productive and free up resources to invest in the stagnant markets of the West – and further afield in the BRICs and beyond. Dean Best reports.
The ongoing shift in the balance of power between developed and emerging economies was highlighted last week by two announcements from General Mills, the US food giant.
On Tuesday (22 May), the Haagen-Dazs and Nature Valley maker announced plans to cut 850 jobs. The move comes as consumer packaged goods companies battle tough markets in the West. In recent months, in markets like the UK, Germany and the US, volumes have come under pressure as shoppers baulk at the price increases implemented by suppliers and retailers as they look to offset higher input costs.
Nowhere has this been more obvious than at General Mills, which in February issued a profit warning after admitting volumes in the US had been “weak” in December and January. However, there are precious few signs that trading conditions are improving and so, with growing the top line proving a challenge, companies are looking to their costs to bolster profits – hence General Mills’ decision to reduce its workforce.
The company said the cuts would “accelerate” efficiency and “improve organisational effectiveness”. Tellingly, it also said the move would “support future growth strategies” and, 48 hours later, came proof of one area it sees growth – emerging markets.
On Thursday, General Mills announced a deal to buy Brazilian food manufacturer Yoki Alimentos, a transaction that, it said, would almost double its annual sales in Latin America. The agreement was welcomed by analysts, with one telling just-food that General Mills needed to expand its operations outside the US.
“That was big news,” Jack Russo, an analyst in the US at Edward Jones Research, told just-food. “It’s really doubled their presence in Latin America…so that seemed to be a pretty smart transaction for them and they need to grow their international business a little faster than what they’ve been doing.”
Rumours of a deal first emerged in February when reports in Brazil said General Mills had agreed to buy Yoki, which sells products from popcorn to condiments, for BRL2bn (US$1bn). At the time, General Mills said it would not “respond to rumours or comment on speculation”. But a deal has now been done and it is one that the company no doubt hopes will improve its record in one of the world’s most attractive emerging markets.
General Mills has a mixed record in Brazil. Three years ago, it closed its local pasta and bread businesses, which made products under brands including Forno de Minas. It sold the Forno de Mias brand to local dairy firm Laticínios Condessa. At present, it imports global brands like Haagen-Dazs ice cream and Nature Valley snack bars into Brazil.
Robert Dickerson, who works for Consumer Edge Research at US FMCG analysts, said it was “good to see” General Mills had “finally pulled the trigger”.
Dickerson: “LatAm continues to drive be the core driver of global for many food categories right now including coffee and yoghurt and Mills remains over-exposed to the US. The company’s products have no overlap with Mills’ current products in Brazil. We see whitespace for Mills in yogurt in Brazil among other products and our quick math shows accretion in year one barring additional investment.”
Of course, investing in emerging markets carries particular risks and, for all the potential benefits of the deal, acquiring Yoki will present challenges for General Mills.
“This transaction likely contains some execution-related risks, particularly as General Mills has less emerging market experience than some more global CPG players,” said Barclays Capital analyst Andrew Lazar. “For example, as we understand it, Yoki has a fairly complex supply chain and operates nine separate facilities across a number of different categories, making a potential integration more challenging – though perhaps the larger relative size of Yoki vs. General Mills in Brazil could simplify this process and alleviate some of this risk, as General Mills could fold its own operations into Yoki, rather than the reverse.”
Lazar said the acquisition would provide General Mills with more certainty about whether it can meet its growth targets but added the company may have to invest in Yoki, which could weigh on its profitability.
“Furthermore, although we believe the aforementioned accretion from this deal could provide General Mills with enhanced visibility to its long-term growth algorithm, emerging markets transactions often entail reinvestment needs that could perhaps curb some of the near-term earnings and margins,” he added.
Reappraising your business structure in the face of challenging trading conditions in the West and the buoyant growth of the BRICs markets will be vital for CPG multinationals. General Mills’ US peer Heinz has already undertaken such a process.
Last year, it announced plans to drive profits through increased productivity, plans that involved the closure of a number of manufacturing sites. Heinz has also continued its investment in emerging markets and, last week, as it announced its annual results, the company said it was “actively” seeking to expand further in markets like Brazil and China.
Some companies (think Unilever or Nestle) have long embraced the need to adapt to the changing power shift between mature and emerging markets. Expect more CPG firms to continue to invest in developing nations.
However, as SymphonyIRI vice president of international consulting Rod Street wrote in his just-food column last autumn, the prospect of a long, slow recovery in the West means a “shift in mindset” is critical on more than one front. As well as the recognition that growth will be easier to achieve in markets like Brazil and China, companies need to adapt at home.
As Heinz chairman, president and CEO Bill Johnson said on Thursday, the ketchup giant has had a “difficult” 12 months as it “wrestled with weak consumer metrics and shares”.
General Mills’ moves to cut jobs and focus investment on “future growth strategies” will likely include, but not focus solely on, the emerging markets. The group also seems set to be seeking fresh ways of building General Mills’ brands in developed markets, as it continues to compete in the toughest trading conditions for a generation.