Over the past year, General Mills has found itself in an unusual position.
Its stock, normally a Wall Street favorite, has trailed food industry peers and the market generally. Commodity inflation ate at the packaged food business in 2012, pressuring all food-company stocks. But General Mills had to wrestle with a unique problem that it has yet to conquer: a fundamental shift in the U.S. yogurt market. To make matters worse, General Mills' big U.S. cereal business has been experiencing cyclical weakness.
"I don't know if there is a malaise, but they have definitely had their issues over the last year," said Pete Johnson, an analyst at Mairs and Power, a St. Paul money management firm that owns 1.5 million shares of General Mills.
While rock-solid financially, the Golden Valley-based packaged-food giant is playing defense to correct missteps in some areas — something it isn't used to.
As it works to do that, the company enjoys critical advantages. It has been expanding its important international operation with major acquisitions, while its U.S. snacks business — a key growth vehicle — has been booming.
Innovation has been critical to success in snacks. Johnson said the company's innovation track record helps anchor his confidence in General Mills, even though it was late adapting to the biggest yogurt innovation in years, Greek-style.
"The biggest strength for a company like General Mills is it has a significant amount of dollars to throw at innovation," Johnson said.
General Mills brings in $17 billion in annual sales with a stable of brands that spans the food industry spectrum: Progresso soup, Old El Paso Mexican foods, Green Giant vegetables, Cheerios and other big cereal names. But beginning in 2011, prices for commodities and other inputs — energy, packaging — began soaring.
General Mills, like its peers, passed down some of its price increases to consumers, who in turn balked at buying.
"There was a little bit of sticker shock. and so we saw [sales] volumes erode in many categories across the industry," CEO Ken Powell said in a recent interview.
But the food industry's input prices have stabilized in recent months, and sales have started picking up.
"We expected to see volume stability and volume recovery, and in general that's what we are seeing, which is encouraging," Powell said.
He has to be encouraged somewhat by his company's stock performance, too, so far this year. Like most packaged-food stocks, General Mills got a boost last week with the announcement of a $23.2 billion buyout of H.J. Heinz Co. by Warren Buffett's Berkshire Hathaway and private equity firm 3G Capital. Investors sense that more consolidation may be in the offing.
But even before the Heinz deal, General Mills' 2013 return to shareholders was on par with the broad market's, and just a tad below the packaged-food industry's average. Contrast that with 2012, when General Mills posted a return of only 2 percent, compared with the broad market's 14 percent, as measured by Standard & Poor's, and the industry's 9 percent.
Yogurt is a key factor. Yoplait had $1.4 billion in U.S. sales during General Mills' fiscal year ending May 27, and along with Dannon, it's long been one of the nation's two big yogurt brands. But the Yoplait division's sales fell 5 percent in fiscal 2012. And so far in fiscal 2013, they are down 8 percent, though they've recovered somewhat from a bleak first quarter.
Part of the problem: General Mills last year upped prices on yogurt. "We took pricing on our core business, which frankly wasn't accepted by the consumer," Powell said. So the firm recently ratcheted prices down, and has "seen the momentum kind of return to that business."
The company's bigger long-term yogurt conundrum is the Greek market, which has been dominated by the upstart Chobani brand. Greek-style yogurt has gone from only about 2 percent of the total U.S. yogurt market in 2007 — the year Chobani was launched — to 36 percent in 2012, according to a November report by Bernstein Research stock analysts.
Tardy to the Greek party, General Mills has only 9 percent of the Greek market. And with Greek's rise, Yoplait's overall yogurt market share has experienced a "massive" drop, according to the Bernstein report.
Did General Mills misjudge Greek as just a fad? Powell said no. "We were monitoring it. … Greek was running along at a relatively small level within the overall yogurt category, and I think what happened is it reached a tipping point, and then it really took off in a way that we didn't expect."
Powell doesn't see Greek as a lost cause. "We want our fair share, which would certainly be 20 percent, and we're almost halfway there." The company's initial production capacity constraints for Greek yogurt were solved last summer, and its new "Greek 100," a lower-calorie offering, has done well, Powell said, adding that "It will be a winner for us."
Gaining ground in Greek is a big challenge, though stock analysts aren't counting out General Mills. "They have the Yoplait brand, which is a very powerful and recognized brand," said Jack Russo, an analyst with Edward Jones.
Challenges in cereal
Another challenge, albeit a more short-term one, is revving up cereal sales. Cereal is the company's largest U.S. business, providing $2.4 billion in revenue last year, and General Mills and Kellogg dominate the market. But General Mills' cereal sales for the first half of fiscal 2013 are down 2 percent over a year ago.
The company's innovation in cereal "is failing to drive growth," according to a report by Goldman Sachs analyst Jason English, who put a "sell" rating on General Mills' stock last month, a rarity.
"We see a risk of product discontinuation ahead ... or at a minimum, continued ineffectiveness of net innovation," English wrote.
He singled out Cheerios, General Mills' largest cereal franchise. The emphasis on extending the brand — Chocolate Cheerios, Peanut Butter Cheerios, etc. — may be running out of steam, he wrote.
Powell said General Mills' lagging cereal sales stem from ramped-up promotions in the category. "Several competitors increased [promotion], and ours was a little bit lower than it needed to be. We have to adjust."
He dismissed the notion of an innovation slowdown. Cheerios line extensions have been an "incredible success," he said. A new one — Honey Nut Medley Crunch — hit store shelves recently, along with a new iteration of Fiber One cereal and Peanut Butter Toast Crunch, a spinoff of Cinnamon Toast Crunch.
Success in snacks
New product offerings and brands have been critical to General Mills' success in its snacks business, which had $1.6 billion in U.S. sales last year, and has grown at an annual average of over 8 percent since 2007. For the first half of fiscal 2013, sales were up 10 percent year-over-year.
The company brought its Fiber One brand to snacks in 2007, and it's now the market leader for nutritional snacks, according to SymphonyIRI Group, which tracks sales in traditional grocery stores. General Mills said Fiber One bars racked up more than $300 million in sales during fiscal 2012.
The Nature Valley brand, which comes in ever-evolving varieties and flavors, leads the U.S. granola bar market with more than $700 million in sales last year. "The snack division is doing fantastic," said Mairs and Power's Johnson. "They are gaining share significantly within snacks and their products really skew toward health and wellness."
Major acquisitions
In 2012, General Mills moved further into snacks — and more importantly, fast-growing international markets — by acquiring Yoki Alimentos SA for almost $1 billion. The deal for the Brazilian foodmaker was General Mills' second big international acquisition within a year. In 2011, it paid $1.2 billion for a controlling stake in France's Yoplait SA, the global yogurt powerhouse that had long licensed the Yoplait brand to General Mills in the United States.
More than 30 percent of General Mills' sales come from international operations. Expanding in dynamic markets like Brazil and China is critical to overall sales growth, including through acquisitions. "We are interested in getting scale in a few other places," Powell said, pointing to India.
"We've got a business there now built around Pillsbury flour products, and we just acquired a very small company called Parampara [which makes spice and sauce mixes]. We like that business and we can grow it. But we'd like to be bigger in India, which is a huge market and is going to be so important."
Still, Powell added, "you can never really predict how merger and acquisition activity will unfold."
Mike Hughlett • 612-673-7003
