General Mills has lowered forecasts due to a slow integration of Pillsbury and the slowing economy. General Mills should not be too worried by the need to issue this latest warning. Although Pillsbury will need some sorting out, the long-term benefits of the deal far outweigh the consequence of inaction in the fast-consolidating food industry.

General Mills’ (GM) acquisition of Pillsbury, which was finally completed on October 31, has made it one the top ten food producers in the world. GM’s latest announcement points to some problems that may have tinted the rosy outlook for the deal. Q2 earnings are forecast at 61-64 cents a share before one-time items, somewhat below previous forecast earnings of 66-80 cents a share.

This latest revision has been put down to the unexpectedly drawn-out approval process for the Pillsbury acquisition, combined with retailers cutting their inventories as the economy cools.

Pillsbury’s performance was negatively affected by uncertainty over whether the deal would go ahead. However, more worrying perhaps is Pillsbury’s significant exposure to foodservice, which is expected to perform poorly due to a decline in travel and eating out following the events of September 11.

However, GM will not be overly worried, since the long-term outlook remains positive. GM stands to gain around $400 million in cost savings from the merger by 2004. The combined sales of the two companies are expected to create revenues of $13 billion, while annual sales are expected to hit 7% growth over the long-term – an impressive rate in the painfully slow growth food industry.

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The Pillsbury deal is a necessary move in what has become a fast-consolidating industry, as companies seek to protect themselves from the food industry giants. The consolidation is being driven by the slow growth in food demand, which has made manufacturers focus on building global brands.

To do this, companies have begun rationalizing their product portfolio, adding businesses that have synergies with their existing product range and disposing of those that are unlikely to achieve a critical mass. Smaller companies are therefore focusing on high value niches, making mid-sized players particularly vulnerable to takeover by the new generation of food industry giants.

While the Pillsbury deal is already proving to be more complicated than hoped, it will still put GM in a much better position in the long run.

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