General Mills has been hit by category softness and changing consumer preferences at its US business. With US retail sales representing the group's largest revenue stream, this has weighed on the group's overall results and addressing these issues is a priority for the Cheerios maker. But are General Mills' product innovation and renovation plans enough to get the top line moving in the US? Katy Askew investigates.
General Mills reported a 2% decline in full-year sales this week, which slid to US$17.6bn in the 12-month period. While currency exchange trimmed 4% off the top line, a poor volume performance from the US retail division – General Mills' largest unit – has focused attention on the group's lacklustre domestic performance. US retail volumes, excluding acquisitions, were down 4% in the fourth quarter.
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Speaking to analysts during a conference call to discuss the result, chairman and CEO Ken Powell conceded the performance of US retail was not where the group would like it to be. However, he said General Mills has formulated a plan that, it believes, will get its US retail sales back on track during 2016.
"We have four clear priorities for US retail in 2016. They are first and foremost to grow our cereal business. Second, to accelerate our performance in better-for-you snacking which includes both our yoghurt and snacks operating units. Third, to drive double-digit growth on our natural and organic portfolio by leveraging the combination of Annie's and our heritage natural and organic brands. Finally, to deliver consumer first value on select brands in a way that generates positive returns for our business," Powell explained.
General Mills' efforts to reinvigorate its cereal and snacks businesses centre largely on product renovation – to align the core line with consumer trends – and new product development.
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In cereal, General Mills confirmed plans to make its five largest Cheerios varieties – accounting for 90% of the franchise's sales – gluten free. "We have developed a technology that separates our oats which are naturally gluten-free from other gluten containing grains that find their way into the oats supply," Powell explained. Later in the year, General Mills is also making its Lucky Charms range gluten-free.
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By GlobalDataIn cereal, General Mills is rolling out a "strong slate" of innovation "geared toward growing segments of the cereal category", Powell said. The company will introduce two varieties of Nature Valley Protein soft baked granola bites as well as two new varieties of Nature Valley Protein hot oatmeal: maple pecan crunch and toasted coconut almond crunch. It also intends to capitalise on "consumer interest in simple, less processed foods" through the launch of Nature Valley Toasted Oats Muesli in original and blueberry flavours. Meanwhile, General Mills will expand its organic cereal brand, Cascadian Farm, with the launch of a honey oat crunch variety this summer.
General Mills intends to follow a similar playbook for its yoghurt and snack brands, with renovation and innovation focusing on key consumer trends.
"Core brand renovation is at the heart of our 2016 growth plan for original style Yoplait. We recently rolled out a 25% sugar reduction across the entire line and early response has been positive. In Greek, we have a new line called Yoplait Plenti. These eight varieties include whole-grain oats, flax and pumpkin seeds. We are also launching two new flavours of Yoplait Greek 100 Whips, coconut macaroon and chocolate cherry, and we will grow our kid yoghurts by partnering with movie equities like Disney's Frozen and by leveraging our Go-Gurt Get the Last Drop advertising campaign," Powell detailed.
"In the second quarter, we are rolling out an improved Nature Valley Crunchy Bar that is easier to bite and we will be marketing 20% of the Nature Valley portfolio as gluten-free. In fiscal 2016 we are launching two new Fiber One cheesecake bars in salted caramel and strawberry flavours and we are introducing a pair of new Nature Valley simple nut bars featuring whole, simple ingredients for consumers interested in less processed snacks," he continued.
Matthew Grainger, an analyst at Morgan Stanley, praised these efforts as a "worthwhile investment" but cautioned they may not be enough to offset ongoing category weakness. "While we view this renovation as a worthwhile investment, the total scale of these products remains relatively small in the context of its broader portfolio and, in our view, may not be sufficient to offset continued category weakness. Overall, we expect US retail sales to remain soft in 2016 due to the company's exposure to unfavourable end markets and ongoing share losses in key categories (granola bars/soup/frozen vegetables)," he wrote in an investor note.
Elsewhere, the company says it can raise the trajectory of its relatively small but high-growth natural and organic brands, which include the recently acquired Annie's business. "We have a strong growth plan for natural and organic in 2016 which we expect will deliver double-digit sales growth. We will use General Mills sales strength in traditional channels and Annie's strength in the natural channel to grow distribution across our natural and organic portfolio," Powell told analysts.
The company is launching a range of Annie's soups, which will be available "later this summer", including five new flavours. Elsewhere, General Mills is launching Food Should Taste Good Real Good bars and intends to double consumer investment on Larabar.
Through increased support, General Mills believes it can step up the pace of growth at its natural and organic business and the company set the target of raising sales from $700m to $1bn by 2020. Sanford Bernstein analyst Alexia Howard said the goal was "commendable" but cautioned the group's natural and organic brands run the risk of "getting lost" in the much larger General Mills portfolio.
Perhaps of greater concern for General Mills is lifting the performance of its large centre-plate categories. Here, it appears management intends to focus on the value proposition of these categories. Powell said: "On Helpers, we are launching a 20% more initiative to better meet the needs of larger families. On Totino's Pizza Rolls, we are adding value with a crispier crust product improvement. On Betty Crocker desserts, we are making a clearer distinction for consumers between our everyday value products and our more premium value added mixes."
According to Howard, this might not be enough to raise the game of General Mills' large but stagnant legacy brands. And without improvement in these areas, she said, we can expect ongoing softness in US retail. "We believe that volume weakness in the US retail segment's centre-of-plate categories including baking mixes, meals and frozen vegetables is likely to continue as consumers shift into fresher foods and smaller brands with simple ingredients."
As an aside, it is worth noting General Mills' comments in its results announcement on frozen and canned vegetable brand Green Giant. In March, there were reports the company was looking into the possible sale of the business, which analysts say have seen sales come under pressure.
The brand remains part of General Mills' portfolio but, announcing its results on Wednesday, the company said: "At the end of the fourth quarter of fiscal 2015, we made a strategic decision to redirect certain resources supporting our Green Giant business in our US retail segment to other businesses within the segment."
General Mills said projections for future sales and profitability for Green Giant have declined and the company recorded a $260m impairment charge in "restructuring, impairment, and other exit costs" related to the business.
In short, General Mills appears to believe other parts of its portfolio – like cereals, yoghurt and snacks – have better prospects and it has a very clear view of where it wants these brands to be. The company intends to re-engage with consumers through product innovation and renovation that will tap into growth trends in the US.
With Green Giant, it has taken the decision to shift resources elsewhere. That said, there are still other sizeable areas of the business – notably meals, baking mixes – where its plans are less clear and the company does not appear to have formulated a roadmap for how to return these areas to growth. Without it, US retail volumes are likely to remain challenged.
