More yogurt troubles sour sales, profits at General Mills

Yogurt sales for General Mills suffered a brutal summer, shouldering the blame for the company's overall drop in sales and profits last quarter.

The category is the company's second largest in its U.S. retail business, but General Mills has watched its sales and market position drop precipitously over the last five years as consumers flocked to Greek and organic yogurt varieties offered by its competitors. In the latest quarter, reported Wednesday, the company said U.S. yogurt sales fell 15 percent.

General Mills is working feverishly to resuscitate yogurt by overhauling 60 percent of its U.S. product offerings, but executives said it will still be several months before seeing positive benefits from the reboot.

The Golden Valley-based food manufacturer beat investor expectations on profitability despite a 4 percent drop in net profit for the June-to-August period, its 2017 fiscal first quarter. But it missed on sales with a bigger-than-expected 7 percent decline.

General Mills is moving resources out of its foundational businesses, which have slow-growing or declining sales, and in to its higher-growth businesses like Mexican food, cereal and snacks. Yogurt is also considered a higher-growth product, but because of its trouble those growth businesses in total experienced a 2 percent sales drop in the latest quarter, said Don Mulligan, General Mills' chief financial officer.

In 2007, Greek yogurt was beginning to take root, but General Mills underestimated its staying power. Greek-style yogurt jumped from 1 percent of all U.S. yogurt sales in 2007 to more than 50 percent last year. Chobani, which was a tiny company in 2007 and helped popularize the higher-protein Greek yogurt, has been rapidly eating away at General Mills' market share ever since.

In the latest quarter, General Mills was clobbered on Yoplait Light and Yoplait Greek 100. Low-fat and low-calorie foods have fallen out of vogue with younger consumers who are looking for nutrient-dense foods that are more filling. Many of the low-calorie products that soared in popularity in the 1980s and 1990s replaced fat content with sugar. Now, sugar is the dirty word among many U.S. consumers who are looking for foods rich in protein and not afraid of fat, like Greek.

General Mills has also struggled to carve out a significant position within the organic yogurt market. The company hopes to chip away at this with its premium yogurt line Liberte — which is made with whole milk and organic ingredients — and its new Annie's yogurt. Both started appearing on U.S. store shelves last quarter.

Jeff Harmening, president and chief operating officer, said he expects these initiatives to have a positive impact on yogurt sales in early 2017, which is the second half of the company's fiscal year.

"So, it's not a swift turnaround," Harmening said.

Executives touted cost-reduction measures and favorable tax conditions that led to an improvement in profit margin, but investors expressed worry about the ongoing sales pressure, which is being felt by many giant food companies due in part to fickle consumer tastes and constant competition from smaller, regional players that pick away at their revenue.

"Sales were really disappointing," said Brittany Weissman, an analyst with Edward Jones. "Yogurt especially weighed on U.S. retail sales. When you have a category that is so big and is supposed to be one of your growth categories, that is concerning."

In fact, the company's snacking business, which includes other brands like Nature Valley, was the only U.S. segment that saw positive year-over-year growth in this category.

U.S. sales of cereal — the biggest business of General Mills — dropped 4 percent last quarter after a positive turnaround at the end of fiscal year 2016 in May.

Powell notes that much of these declines were impacted by an extraordinarily strong first quarter last year, making for challenging comparisons. Still, he said, several of the recent changes made to its cereal products are now paying off. Gluten-free Cheerios grew 2 percent and seven cereal varieties that transitioned to no artificial colors or flavors grew 3 percent. The company said to expect more of these tales as it continues to adapt products to fit similar consumer trends.

While sales were sluggish at $3.9 billion, General Mills' adjusted earnings per share beat expectations at 78 cents. Consensus among 15 analysts tracked by Thomson Reuters predicted earnings of 75 cents per share. Its operating profit margin expand 30 basis points to 16.5 percent of net sales.

The company's stock rose nearly 1 percent Wednesday.