General Mills this week lifted its forecasts on a couple of key sales and profit metrics after seeing US pantry-loading boost demand. On Wednesday (13 May), chief executive Jeff Harmening outlined to investors what the soup-to-yogurt maker was seeing in its domestic market and discussed a range of issues, from the revival of big brands and the slump in foodservice to China’s early recovery and the company’s thoughts on M&A. Dean Best presents the top takeaways.

Consumer demand remains “strong”

General Mills is among the packaged-food majors to have seen consumers’ stockpiling, particularly in the US, put some rocket fuel behind its sales through retail channels during March and April.

For example, the Progresso soup and Old El Paso meals maker said its Nielsen-measured US retail sales increased 45% and 32% in March and April, respectively, versus the prior year. Such gains led General Mills on Monday to announce it expects to beat its forecasts for annual organic sales and underlying operating profit.

Speaking at BMO Capital Markets’ annual Farm to Market Conference (which, needless to say, was, this year, virtual) on Wednesday, General Mills president and CEO Jeff Harmening – after insisting the US food giant had already been “improving our results” before the impact of Covid-19 – said the US was not the only market boosted by pantry-loading and, notably, said the company was continuing to see an elevated level of demand in early May, even if the stockpiling has subsided.

“Everywhere we operate we’re seeing incredible amounts of demand for food at-home, as well as a significant reduction in food away-from-home,” Harmening said. “As you’ve seen over the past six weeks or so, even through the first week of May, we continue to see strong demand for food eaten at home. It’s fairly clear to us, given the strong trends we continue to see, that there hasn’t been a lot of stocking up in food at home after the initial surge and, because demand has remained so strong for so long, we believe that consumers have largely eaten the food that they have purchased. What they have told us is that they generally have one to two weeks of supply on hand, which wouldn’t be that abnormal.”

Meals hot, snack-bar suffering continues

Delving into General Mills’ product categories, Harmening outlined how the different parts of the company’s product portfolio had been faring.

“We’re seeing improved growth across all of our categories, with the exception of our bars category,” Harmening acknowledged.

General Mills’ performance in snack bars has been under the spotlight in recent quarters, with the company having previously recognised it needed more innovation behind the better-for-you Nature Valley brand and further development of the Fiber One dietary snack line that had slipped out of favour with consumers. In General Mills’ last full fiscal year, which ran to 26 May 2019, the company’s snack-bar sales in its largest market, North America Retail, fell 4%.

When General Mills reported its results for the third quarter of its current financial year, the company did report improving sales trends from its overall US snacks business and predicted recent innovation behind Nature Valley and Fiber One would see that division’s annual results improve year-on-year. By contrast, Europe & Australia, General Mills’ main business unit outside North America, saw its snack sales grow at a double-digit rate in the company’s third quarter.

However, Harmening said on Wednesday: “We’re seeing the same thing in Europe that we’re seeing in the US on bars. Mostly that’s because of bars are eaten up to a large degree on-the-go. With government-imposed lockdowns worldwide and millions of people either furloughed on working from home, a central factor in snack-bar sales is just not there.

“What we’re seeing is consumption for food at home, particularly in our meals categories – and whether that meal is breakfast like cereal, or lunch and dinner like Annie’s macaroni and cheese, or whether it’s dinner occasions like Progresso or Totino’s or Old El Paso, we’re seeing the largest growth in our meals categories.”

General Mills feels big-brand benefit

Much of the cohort of packaged-food multinationals dubbed Big Food and their portfolio of so-called legacy brands are having their day in the sun in a number of markets worldwide, often at the expense of smaller rivals, as Covid-19 re-shapes consumer demand in myriad ways.

Now, a significant question on the lips of many industry executives and investors is how much the gains Big Food has seen in recent weeks will continue. Are big CPG brands back?

On the BMO call, Harmening was asked for his views on the outlook for big brands, their smaller competitors and for private label, the third actor in the play that will likely take more of a leading role as the economic storm clouds gather.

“What I will say is that for our brands, I think consumers are going back to brands they know and trust,” Harmening said. “In a world that’s full of anxiety and uncertainty, the last thing you want to do is compound that by feeding your family something they didn’t know before. The fact that General Mills has so many well-known brands I think serves us well right now.”

The debate will continue to rage in the weeks ahead. Some believe smaller food-and-beverage businesses could emerge from Covid-19 in a stronger position as consumers will want to demonstrate a new interest, for example, in ethical consumption. Others suggests consumers will be keen to look for novelty. What is clear is the early weeks of the Covid-19 crisis have given Big Food’s legacy brands a shot in the arm – but it would be foolhardy to write off emerging brands.

Ready for recession

Global economic recession is on the cards. The only question is how deep the economy could plunge. Packaged food is, of course, relatively more resilient than other sectors, while ‘premium’ brands should not necessarily be dismissed lightly. Shoppers unable to buy a new car or splash out on clothes may still find the odd culinary indulgence in reach.

That said, brand owners big and small should be ready for private label to come into play. It’s already a very significant part of many European grocery markets (accounting for circa half of FMCG sales in the UK, for example) but has not managed to make the same inroads in General Mills’ largest market.

“There’s been a lot of talk about trading down to private label,” Harmening said on Wednesday. “General Mills competed very effectively during the last recession. I happen to [have been] around long enough that I actually was running our cereal business during that. Our cereal business grew during that and I think we’ll grow it again.

“Importantly, we kept private label at bay during that time because we did the job that we needed to do, which was focus on our marketing and our advertising and make sure products are available for people.”

Investment in marketing and innovation to come

Harmening did not disclose details on how much General Mills planned to spend in areas as advertising and new product development but he was clear in his belief the company should continue to put resources in those areas, even as it battles an economic downturn.

“There’s been a lot of discussion, you know, ‘should you cut advertising during this period?’ The answer for us is wholeheartedly ‘no’,” the General Mills chief said on Wednesday. “This is the time when you make sure that people know what your brands are and what they stand for.”

Critically, Harmening was right to say it will be important General Mills is seen to be “solving problems for consumers”. Marketing for the sake of it rarely works.

“For many of our consumers now they initially loaded up their pantry with things maybe they hadn’t bought in a while and they weren’t exactly sure how to use some of them. Our traffic to our Betty Crocker and Pillsbury websites is up about 100% since the pandemic hit,” Harmening said, with consumers looking for recipe ideas and the like.

Launching products onto the market will, of course, have its challenges, with retailers curtailing the promotional slots on offer and some of the usual merchandising strategies, such as sampling, off the table in shopping trips defined by social distancing.

General Mills will, Harmening insisted, push ahead with the “big innovations” it was planning for the summer, even if the volume of new products hitting the market may decline.

“As consumers stay at home and they’ve eaten the same thing for a few months on end, it occurs to us that perhaps something new might be a good idea for them,” Harmening reflected. “The key though, is to make sure we do that in a way that doesn’t clog up either our distribution or manufacturing system, or that of our customers. So, you may see fewer new items from us but the big launches, the big ideas, the new big product innovations, we will continue with this summer.”

Adapting amid the great channel shift

More than four-fifths of General Mills’ sales are made through retail but the company still has a sizeable business with foodservice operators, a business that has, of course, shrivelled to almost nothing as the Covid-19 pandemic shut down the eating-out market. The company has, Harmening noted, still been selling flour to the takeaway pizza market.

“Fortunately for General Mills, 85% of our business is food eaten-at-home and 15% is in the foodservice business but, broadly speaking, in the US, which is our biggest foodservice business, about 15% of our foodservice business is in convenience and the other 85% is split between the education channels and then restaurants. When schools aren’t in session, you’re not going to sell much to schools, and when restaurants are closed, you’re not going to sell much there,” he reflected. 

All eyes are on the foodservice markets in countries like China where lockdowns have eased. “We also have a big foodservice business in China … that services high-speed trains and hotels and things like that. Obviously that business is not going to be very strong because consumers aren’t travelling a lot. The thing that we’ve learned from China is that even after there’s an official reopening it takes consumers a little while to adjust and to kind of get back into a rhythm,” Harmening added.

Elsewhere, like many of its packaged-food peers, General Mills has seen a bump up in its e-commerce sales. “As we look in the future, we anticipated growth from e commerce; the recent pandemic has probably sped up by three years the penetration we’ve seen. About 4.5-5% of our business in the US was online before the pandemic. It’s now probably 6.5-7%. A meaningful increase in a very short period of time,” Harmening said. “We think it’s a great opportunity for General Mills because we have leading brands, good capabilities.”

General Mills still wants to sell assets

What is General Mills’ latest thinking around possible asset disposals? The company has said for a couple of years it wants to offload parts of its business. Back in February 2018, Harmening publicly said General Mills would look to sell assets that account for “roughly about 5% of our sales”, businesses that are “slower growth and lower margin”.

Last summer, at General Mills’ annual investor day, he reiterated the company was continuing “to look for opportunities to divest in order to enhance our growth profile, and focus on our most important businesses, but only if we think we can generate returns for shareholders”.

On Wednesday, Harmening was asked if the current business context had changed the company’s thinking on disposals. “Our long-term view on portfolio shaping really hasn’t changed a lot,” he insisted.

“We’ll continue to look for acquisition candidates and we’ll continue to look for divestiture candidates. I talked about roughly 5% of our portfolio and that’s still our thought. Clearly the current environment, both in terms of tactics and point of fact, has maybe changed that timeline a little bit. It may cause us to think on a couple of businesses but, in this current environment with so much uncertainty, it strikes me it’s very difficult to either buy or sell a business.

“We think there’s actually a good chance in the short term to get growth out of some businesses that have been always profitable, always quite profitable, but the challenge has been growth. Now that we have growth, that’ll make the profitability and the attractiveness of those businesses in the short term much better. I think it probably changes in the short term, what we see in terms of divestitures, but it doesn’t necessarily change our long term perspective that we need to continue to shape our portfolio.”