General Mills is the owner of US legacy food brands that have been hard hit by sweeping changes to consumption. The company, which has tried break into growth areas such as natural and organic, revealed yesterday (29 June) it will start to prioritise its investment behind the 75% of its portfolio it has identified as “growth businesses”. Will this approach prove effective? Katy Askew investigates.
General Mills has felt the pressure of changes to consumption in the US, its largest sales market. The company has seen pressure on demand for its largest brands – such as YOPLAIT in yoghurt and Cheerios in cereal.
As Sanford Bernstein analyst Alexia Howard notes, the company’s full-year results were reflective of “the ever-escalating pace of change and the amount of disruptions that’s going on in the industry”.
Reporting its results for the 12 months to the end of May yesterday, General Mills revealed total sales were down 6% in the period, reflecting currency exchange, a week less selling time and the sale of the company’s Green Giant brand. However, stripping out one-off items and FX, sales were flat.
Speaking during a conference call with analysts, General Mills CEO Ken Powell said the company had successfully slowed the decline of its sales on an organic basis through renovation and innovation, making its brands more relevant to today’s consumers.
It would appear the company has made some headway.
In the challenged US cereal category, General Mills saw retail sales rise 3% in the fourth quarter – a quarter in which the sector as a whole also returned to growth. The introduction of gluten-free Cheerios returned renovated items – which make up 90% of the Cheerios franchise – to growth. In the second half of the year these products saw sales increase 5% following a decline of 8% in fiscal 2015.
Elsewhere, the move to remove artificial colours and flavours was completed across 75% of General Mills’ cereals by January and the company began advertising behind seven newly renovated cereals including Trix, Golden Grams and Reese’s Puffs.
“I’m very happy to say consumers are responding, these seven varieties posted 8% retail sales growth in the back half of the year compared to 6% decline in 2015. And much of that growth has come from full-priced baseline sales,” Powell revealed.
The chief executive also flagged the progress the group has made to update its snack bars businesses. “Nature Valley bars strengthened throughout the year as our product renovation news gained traction. We made our crunchy bars easier to bite addressing our top consumer complaint. We also told consumers about our gluten-free options and reminded them that Nature Valley bars are free from artificial colours and flavours. Retail sales grew 4% in the second half of fiscal 2016, including 5% growth in the fourth quarter,” he noted.
Powell said: “Net sales for our natural and organic portfolio which includes Lärabar were up double-digit in 2016. In January, we expanded our portfolio with the addition of Epic Provisions meat snacks. We now have a portfolio of nine brands that generates $750m in pro forma net sales in 2016 and we are well on our way to achieving our goal of $1bn in net sales by 2019.”
While some areas of the General Mills portfolio saw an improved performance, others continued to struggle. Notably, General Mills’ yoghurt business continued to prove problematic. Without providing details on the sales slide in yoghurt, Powell conceded: “Now fiscal 2016 was a disappointing year for our US yoghurt topline and share. Dairy deflation sparked increased competition and we were not as aggressive in reinvesting this favourably. In addition, our marketing and innovation efforts underperformed our expectations.”
Looking to the coming year, General Mills said it anticipates similar sales trends, with revenue expected to come in flat-to-down 2%. The company revealed that it has re-evaluated how it invests in its brands, and will be prioritising areas of the business where it sees the greatest growth potential.
“We’re sharpening the way we think about our portfolio by being more choice full about our level of investments and expectations for growth across our businesses resulting in focused growth and strong margin expansion in 2017,” Powell elaborated.
The company has identified a number of growth areas that cover about 75% of its portfolio: “Our growth businesses include cereal, snack bars, our national and organic brands, yoghurt, and Old El Paso… and finally all of our international markets are included in the growth classification,” Powell explained.
By investing behind these brands, categories and markets, General Mills believes it can deliver “low single-digit” sales expansion in these areas of the business in 2017.
The groups other businesses – such as baking and soups – will see lower investment. Less profitable sales will be discontinued and the focus will firmly be placed on margin expansion. The fate of these so-called “foundation” brands is to essentially be used as cash generators to fund investment in growth spaces.
General Mills management believes this will be enough to re-start its growth engines and position it for growth in the long-term. The company believes it will return to “modest” net sales growth – so including any negative impact from currency exchange and discontinued businesses – by 2018.
Euromonitor analyst Lianne van den Bos is more sceptical, and says she questions whether General Mills’ action is “bold” enough to maintain its position as a top-tier global food maker. “Whilst this change in strategy is certainly in the right direction, at this point, the company is still not bold enough to retain its place among the top 10 largest food companies in the world for much longer. The numerous threats facing breakfast cereals in the US (its main market) do not show any signs of subsiding and the continued strong growth of categories like snack bars are attracting new manufacturers and heavy investment in innovation,” she suggests.
While General Mills has increased its investment in higher growth emerging markets – including the acquisition of Brazilian yoghurt marker Carolina earlier this year – the group’s reliance on the competitive and slow-growth US market is a concern for some pundits. Additionally, General Mills conceded its performance in China this year was hampered by lower sales of Häagen-Dazs, which more than offset gains supported by the introduction of Yoplait to the market.
General Mills, nevertheless, maintains it anticipates an improvement in emerging markets such as Brazil and China in the next 12 months and the company is stepping up its efforts to reach consumers in countries such as China, Brazil, India and Mexico.
Powell revealed: “We have exciting news planned for emerging markets in 2017 as well. In Brazil, we are launching new Yoki popcorn products supporting our new Carolina yogurt business and executing pricing and managing mix to maintain our margins. In China, we plan to build on our successful Yoplait launch in Shanghai and just this month we introduced Yoplait in Beijing. We also plan to innovate on our Häagen-Dazs mooncake line launching rose shaped varieties. In India, we’ll drive strong growth for our Pillsbury business to increase distribution and new product launches in sweet snacks and meals, including new cakes and pizza mixes. And finally in Mexico, we’ll leverage digital support in-store, marketing and event sampling to expand our successful Nature Valley franchise.”
As General Mills looks to expand its business in these emerging markets, the group could potentially consider selling off some of its “foundation” businesses in order to generate cash for investment. But management played down this possibility.
“The fact that we’ve been more intentional about our portfolio doesn’t change our position on potential divestitures. We needed to review our portfolio and assess whether if you do this, you drive more value to shareholders via divestiture, but it’s a high bar,” CFO Don Mulligan said. “As we said today, those foundation brands are very profitable, cash generative and quite honestly, generally have low tax bases. So they are very much core.”