General Mills CEO Jeff Harmening's bold first-year bets are paying off big

Jeff Harmening said he knows his first year as chief executive of General Mills was rocky. His second was more like a rocket.

During the first, Harmening and the company made a bold bet with the $8 billion purchase of Blue Buffalo pet foods.

Some investors thought General Mills spent too much, and its stock sank. A short time after that, rising freight costs eroded profits. And the stock dropped even more. A few months after that, the company again missed a profit goal and investors grew more critical.

"At that point, I knew we were going to get a lot better or things were going to get worse," Harmening said. "We were very open with employees that we had not distinguished ourselves. There was a lot of energy, but we needed to better direct that energy."

Today, Blue Buffalo is bolstering sales growth and the naysayers of that blockbuster deal have quieted down. The company has slowed the sales hemorrhage in its bedrock business, North America retail. And in some key food categories, like U.S. cereal, it has regained the No. 1 market position.

General Mills' stock is up nearly 25% from a year ago.

"The company has performed great under Jeff's leadership," said Rebecca Scheuneman, a food-industry analyst with Morningstar Research Services. "When he took the helm, they were actually losing share in many categories."

"We certainly realize the world around us is changing and will continue to change," he said. "And that affects both what we sell and how we do things."

Harmening took the reins just as the packaged-food industry was coming out of a tense and stressful era. For several years, General Mills and its peers were under pressure from investors and industry consolidators like 3G Capital to implement austere cost-cutting measures. If they didn't, they risked a hostile takeover. At the Golden Valley-based food company, that led to job cuts, plant closures and other purse-tightening efforts.

Former CEO Ken Powell passed the torch to Harmening just as the industry's mind-set was shifting from a defensive position to an offensive one, now aimed at achieving real sales growth.

3G "made the assumption that consumers would keep on eating the things they've always eaten, and they just needed to focus on being efficient. That's just fundamentally not true," Harmening said. "Those of us who have been in food for a quarter of a century, which I have, know brands are living, breathing organisms, and you have to keep them alive."

The challenges facing General Mills and its packaged-food peers are much deeper and long-term than any accounting changes can fix.

General Mills has adapted by taking on more natural and organic brands, reducing genetically modified organisms (GMOs) and artificial colors and flavors used in some of its products, and cutting back sugar where it can, Harmening said.

Last year, General Mills pledged to convert 1 million acres of farmland in its supply chain from traditional monoculture practices to one that applies the principles of regenerative agriculture, like cover crops and reduced tillage. The company also saved 4.2 billion pounds of food waste last year.

"I do think they've done what they can control. They've made some shifts in their portfolio to make them more compelling to the consumer," Scheuneman said. "That said, they still have a portfolio of processed foods and highly sugary processed foods. I do think they will have some challenges."

General Mills sells more cereal than any other company in America. With that leading role comes scrutiny over the nutrition of its boxed cereals, especially those marketed to kids.

"Look, if all kids wanted to eat plain Cheerios, I would be all for it, but that's not going to be the case. We have a responsibility to provide consumers what they want and to help change that over time," Harmening said. "We've reduced sugar in our cereals significantly over time so that whole grain is the No. 1 ingredient, and they still taste good. We've reduced sodium in Cheerios over the years by quite a bit, and I mean quite a bit, and it's still the No. 1 breakfast cereal. We do have a responsibility for health, but it's not a nanny state. People are complex and they want a lot of different things."

Mega-food companies — like General Mills, Kraft Heinz and Campbell's — know they need to be more like the small, upstart food companies, which are delivering those unique products that modern consumers seek. The advent of e-commerce diminished the role of brick-and-mortar grocery stores by removing the middleman between companies and buyers, ushering in an era of bootstrapping brands rising in popularity.

This has made rapid innovation more important than ever. General Mills learned the hard way the importance of responding quickly to consumer demand. A decade ago it failed to recognize Greek yogurt as more than a passing fad. The company's entry into Greek yogurt was years too late, and its yogurt business is still recovering.

"That was extremely painful and expensive, so they made some changes to their agility," Scheuneman said. "Now they are able to react more quickly to changes in the marketplace and greatly reduced the time it takes to launch a new product."

General Mills has acquired a number of these smaller brands, like Epic Provisions, Larabar and Annie's. It also has an in-house venture-capital arm that looks for young brands to invest in. But the company will need to develop fresh ideas internally, and that is harder to do in a behemoth like General Mills that has layers of decisionmakers.

"I think the first thing is that if you want to be agile as an organization, you need to have direct points of contact with the consumer," Harmening said. "Do we have it today? No. But I'm never fully satisfied. I think we are getting better at that."

"Anytime you have lots of points of views, you see the truth from a different point of view — and you see that especially with new innovation and ideas," Harmening said.