Lee Schafer: High stakes in growth struggle at General Mills

The worrisome days continue for General Mills.

There's no financial crisis looming there, of course, as the company just reported its fifth straight quarter with an expanded operating margin. Yet the news was once again that sales had slipped, including in its big U.S. retail segment.

If sales growth doesn't come, it becomes ever more likely General Mills ends up being run by executives who think the growth era is over in traditional packaged foods and the way to make more money is to get rid of many of the brand managers and scientists now trying to increase sales.

There's a financial firm in New York called 3G Capital that's shown it sure sees the world that way. It's laid off thousands of employees at H.J. Heinz Co. and Kraft Foods.

There's no good reason to expect a 3G bid for Golden Valley-based General Mills any time soon, as 3G's plate may be plenty full. But what 3G has kicked off in the industry segment called Big Food looks to be a fundamental shift to a leaner operating model. And if anything is true in business, it's that market leaders quickly attract imitators.

A Brazilian billionaire and his partners created 3G Capital and it certainly saw an opportunity in the U.S. food industry, with its own money as well as capital from American billionaire Warren Buffett's far bigger Berkshire Hathaway.

First 3G took over Burger King, then H.J. Heinz with Berkshire as its partner. Later it used Heinz to take control of Kraft Foods, and between Berkshire and 3G they own a controlling stake in what's now called the Kraft Heinz Co.

Employees are the biggest expense to cut, of course, and at least it could be said of 3G that it doesn't exclude the executive suite.

In an episode recounted by Fortune, about a week after 3G closed its takeover of Heinz in 2013, the top 50 or so Heinz executives came together for an annual leadership meeting. For the new CEO from 3G, this turned out to be the perfect occasion to let all but one of the 12 top Heinz executives know they had just been fired.

Heinz ended up cutting about 7,400 jobs in the first 20 months under 3G control. The job cut announcements followed quickly after the closing of the Kraft deal, too.

Even Warren Buffett's fans became curious how the way 3G runs companies fits with his avuncular, hands-off approach. His first question at last year's Berkshire Hathaway annual meeting was whether Berkshire is ethical, given lending practices in a housing unit and its high-profile partnership with the ruthless job-cutter 3G Capital.

"We have never said that there should be more people running the business than needed," he responded to the 3G part of the question.

In a nutshell, it's when managers spend money only on what's needed now and can be shown to deliver a return. It doesn't matter at all what was spent on an item last year.

The biggest payoff comes, the consulting firm McKinsey & Co. has found, when managers learn to "stop trying to prove why something is the way it is and start thinking actively about ways to make it better, the same way they do at home when the money is coming out of their own wallet."

Zero-based budgeting has caught on in the industry, including having been brought to ConAgra by a new CEO last year.

When ConAgra last fall said it was moving from Omaha to Chicago, the 1,500 jobs it also planned to cut would make ConAgra "one of the leanest organizations in the food industry when we're done," its CEO said at the time.

General Mills has far more quietly adopted zero-based budgeting, too, also working hard to become more efficient. Its regulatory filings spell out the painful job reductions and other details, with initiatives called things like Project Catalyst and Project Century.

As for who is working on growth, the company's recruiting claim of "we find the best and brightest" is no exaggeration. Three of the first 10 General Mills marketing managers turned over on a quick LinkedIn search had gotten their degrees from the Harvard Business School. That list also included graduates of the top-shelf business schools at the University of Minnesota, Indiana University and Duke University.

They had better be smart, as they are working on very tough problems. A good recent example of the challenge came with the launch of two versions of Cheerios Protein.

It certainly seems worth trying to add protein to its venerable Cheerios, given an increasing consumer preference for starting the day with protein-rich foods. It didn't take long though, for a consumer advocacy group to sue, claiming that if serving sizes were the same in terms of calories, the new cereal barely has any more protein than traditional Cheerios.

Sales of Cheerios Protein have not done well lately and sales of cereal in the U.S. retail segment declined 2 percent in the most recent quarter.

You can see how a big private equity investor might wonder what the point is of paying a lot for a brilliant marketing staff if sales don't ever seem to grow.