Pillsbury's sales are poppin'

General Mills' acquisition of Pillsbury had a rough start.

The deal took more than a year to complete, Pillsbury's sales were sliding at the time and it was losing money. Its parent then, Diageo PLC, said it wanted to focus on its higher-margin beverage businesses, not the comfort food brands of Progresso soups, Old El Paso Mexican foods and Pillsbury refrigerated pie crusts. General Mills stock fell the day the deal was announced.

But in a down economy, comfort sells.

As companies see sales shrinking and shed jobs to pare losses, General Mills has been thriving. Part of the food manufacturer's growth is Pillsbury, one of its largest divisions, with $1.7 billion in annual sales. It has managed to grow both its high-end labels, such as its namesake crescent and dinner rolls, as well as its bargain brands, namely Totino's Pizza, which can be had for $1 a frozen pie. And even with rising ingredient costs, the division's margins continue to improve.

"We've been really focused on how we can accelerate growth," said Juliana Chugg, president of Pillsbury. Talks began about a year ago to look for ways to raise the Pillsbury franchise, she added. It has tripled its marketing budget on some products from three years ago.

Many of the economic trends fueling Pillsbury's growth are driving gains across General Mills. As people eat out less and eat at home more, they're baking again. Bisquick, the multipurpose flour mix first introduced during the Great Depression, posted a 24 percent sales spike in the first half of 2009. Flour sales are up 34 percent, partly because of increased prices, and the baking division as a whole is up 7 percent for the first half of the year, including a 13 percent gain in the crucial holiday baking month of December compared with the same period a year ago.

"After 9/11, the consumption of comfort foods and junk food went through the roof," said Akshay Rao, director of the Institute for Research in Marketing at the University of Minnesota Carlson School of Business. "The level of uncertainty in the economy today is greater than after 9/11."

The Pillsbury story may be the most rewarding for General Mills executives, who saw the 2001 acquisition as a strategic fit that would pay off despite the market's initial misgivings over the company swallowing another roughly equivalent in size.

Charles A. Pillsbury founded his Minneapolis flour milling operation in 1872. His "A" mill, considered the largest grain mill in the world at the time of its construction, still overlooks St. Anthony Falls. The company in 1951 acquired the Ballard & Ballard Co., the inventor of refrigerated dough, and the Pillsbury Doughboy appeared in advertisements for the first time 14 years later.

But by the time General Mills bought Pillsbury in 2001 for $10.4 billion, it had lost $371 million in its previous two fiscal years, dragged down by its parent's debt.

Over the next few years, its sales were inconsistent, rising and falling with some of the food trends of the day, including the low-carb craze that had everyone spurning muffins, cookies, bread and rolls. After Pillsbury sales grew 2 percent in 2005, they fell 1 percent in 2006. Sales rebounded the next year with a 3 percent gain.

This year, it's another story: Sales are up 9 percent in the first half of this fiscal year, which ends in May, and 12 percent in the second quarter, compared with the same period a year ago.

Like Bisquick, some of Pillsbury's flagship products seem to find renewed strength with each drop of the Dow. Its Grands Sweet Rolls are up 16 percent so far this fiscal year, crescent and biscuits are each up 9 percent and even refrigerated cookies, which had seen several years of declining sales, are up 2 percent.

Demand for Jeno's and Totino's Pizza rose so quickly this year that Pillsbury was forced to go "on allocation" from July through October, meaning it limited the amount of product it shipped to various retail outlets to ensure everyone had at least some.

Demand for the pizzas "was higher than we had seen over the last five years," said Chugg. Pillsbury increased prices, partially in response to its higher ingredient costs, but consumers continued to buy. Totino's pizza sales are up 11 percent for the first half of the fiscal year, while its pizza rolls are up 10 percent.

Much of the improvement has come from focusing coupons and consumer marketing at the portfolio's highest-margin brands, including Totino's Pizza Rolls, Pillsbury Grands biscuits and crescent rolls. Those so-called lead growth brands have posted double-digit sales growth so far this year, as well as in the past two years, and account for an increasing chunk of the portfolio. So far this fiscal year, those products make up 57 percent of the Pillsbury portfolio, up from 46 percent in fiscal 2008.

Chugg, who joined General Mills in Australia in 1996 and was promoted to Pillsbury's top spot in 2006, told analysts recently that focusing consumer spending on those high margin brands will continue.

"They're benefiting from macroeconomic things and also from the marketing they're making in their core brands," said Erin Swanson, an equity analyst at Morningstar, a Chicago-based market research firm.

The company is only getting more aggressive. A campaign, developed by the company's advertising agency, Saatchi & Saatchi, resonated so well with test audiences that Pillsbury stepped up its plans and launched it in December, said Chugg. The campaign, "Home is calling," shows people wishing they could be home and includes billboard, radio and television components.

More advertising has also been the rule at the company's baking division, the home of Betty Crocker and Gold Medal Flour. The division increased its advertising budget by 11 percent in the first half of the year, according to Ann Simonds, president.

"We are thrilled and completely understand why people are rediscovering the baking category," Simonds said.

Pillsbury has also benefited from a hardnosed search for efficiency within the company: It buys plastic film for packaging cookies from China now, having ditched the earlier and more expensive Thai provider. Some sugar now comes from Mexico, the result of a temporary deal made after Hurricane Katrina upset sugar supplies and forced the company to search for new vendors. Margins are up more than 2 percentage points in the past two fiscal years with another 70 basis points expected this year.

So what happens if food prices drop and restaurants become more affordable? An end to Pillsbury's baking-at-home resurgence? Not quite, said Swanson, the Morningstar Analyst.

"Consumers are dealing with a lot of headwinds right now. I don't know if consumers will jump back into restaurants even if food prices come down, given the other pressures going on in the market."

Matt McKinney • 612-673-7329