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General Mills Posts Solid Profit Growth in the US but International Sales Remain Worrying

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General Mills has recently announced its first fiscal quarter results revealing net revenue growth of 4% in constant-currency basis and profit growth of 20%, one the highest rates in its recent history. Profit growth came off the back the aggressive cost-cutting measures including trimming the workforce, closure of underperforming manufacturing facilities and ousting of extraneous businesses like Green Giant. The US accounted for the bulk of revenue growth, which was driven by Annie’s Homegrown, which the company acquired in October 2014, and ongoing renovation and innovation in cereals leading to 6% growth against the 1% decline in the overall category.  General Mills’ better-than-expected  performance stands in stark contrast with Kellogg, which operates in similar categories. The two companies overlap in multiple markets including the US and Canada breakfast cereals, France snack bars and US frozen bakery which are low growth categories and yet General Mills still managed to grow its share while Kellogg failed to do so.

The push towards organic and natural underpins General Mills’ success in the US


Unlike Kellogg, which has been diversifying away from the US market in an attempt to benefit from the high-growth prospects in emerging markets, General Mills has been focusing on the US market. Within the US, the company made an active effort to focus on items that better appeal to consumers’ hunger for less-processed food. To this end, General Mills has been leveraging Annie’s Homegrown expertise to grow its natural and organic brands and increasing distribution and expanding the brand into new categories. The company’s efforts paid off with Annie’s making three points benefit to sales with two points coming from volume and one point from the price mix.  While the deliberate focus on Annie’s Homegrown makes sense in the short term, General Mills should still need to accelerate growth in its larger cereal brands such as Cinnamon Toast Crunch and Lucky Charms. SKU rationalisation in its underperforming brands could be one of the ways to move forward.

In addition to promoting Annie’s, General Mills has been actively transforming its key brands into healthier  products, which has been resonating well with the US consumers. To this end, the company has launched gluten-free versions of its cereals and plans to turn 90% of its entire Cheerios portfolio gluten-free by 2016, which seems to be a bold move given the current size of the gluten-free market.  General Mills also launched reduced sugar and 100 calorie variants of its Yoplait brand, which is its number one cash generator. 100 calorie Yoplait Greek saw 11% growth  in 2015 Q1, significantly outperforming the wider yoghurt market in the US. Expansion into organic food stores like Whole Foods was one of the main drivers of this growth.

Merchandising execution a critical determinant of sales expansion

The US is by far General Mills’ biggest market and better performing market  with retail sales up by 4%. One of the biggest drivers of these growth (in addition to the company’s push towards organic and natural products) is General Mill’s successful merchandising execution leading to growth across a wide variety of channels. Instead of limiting its sales to big grocery retailers like Walmark and Target, which show dismal growth in breakfast cereals, General Mills focused its efforts to drive distribution in alternative channels, including drug stores (Walgreens), wholesalers (Costco), organic food stores (Whole Foods), dollar stores (Dollar Tree, Dollar General) as well as internet, channels which have grown at high single to double digits over the last five years. Internet has been identified by the company as the future growth priority. According to the company’s forecast e-commerce is set to account for 5%-6% of total grocery spend by 2020, up from its current level of 1%-2%.  This could be the case in categories like breakfast cereals, where growth annual growth is over 15%. To benefit from this opportunity, General Mills aims to  strengthen its relationship with Amazon and walmark.com.

US Breakfast Cereals Distribution: Channel Share in Total 2015 vs Channel Growth 2010-2015


Note: Mixed retailers include warehouse clubs and wholesalers like Costco as well as department stores. Health and Beauty Retailers include drugstores like Walgreens and CVS pharmacy

A tale of two different worlds

While General Mills seems to have gotten it right in the US, the company’s performance outside the US is less staggering. Profit in the international segment fell 20%  and net sales ticked down 11% to US$117 million driven by Latin America where net sales dipped by 26% and Asia Pacific (in particular China) where growth remained flat.  While the company cites negative foreign currency exchange and challenging conditions in Brazil, its largest market in the region, as the primary reasons for its decline in its net sales in Latin America, transaction costs and launch costs of Yoplait have taken a toll on profit growth in China. The company has also not managed to accelerate Häagen-Dazs which remains niche with a market share of 0.2% in contrast to 6% of Yili Chocliz from the leading manufacturer Inner Mongalia Yili and Cornetto from Unilever, which is expected to reach 4.1% share in 2015, up from below 2% in 2010.  General Mills is also likely to struggle with driving retail growth in the yoghurt market, where the top three players, all of which are local companies with established distribution networks, command 61% of the yoghurt market.  The company might consider expanding into foodservice to build brand equity for Yoplait.

General Mills Retail Value Sales and Growth by Country 2014


The first fiscal quarter of 2016 appears to be positive news for General Mills, which has been struggling to accelerate growth since 2012, posting an average value CAGR of 2.6% globally, and below 1% in the US.  However, once analysed in detail, the company’s performance in emerging markets,  is quite worrying.  Emerging market account for 12% of General Mills’ overall packaged food sales but they are forecast to grow by a constant value CAGR of 5% over 2014-2019 in contrast to the 1% CAGR projected for the US. In Asian markets like China, forecast CAGR is set to reach as high as 8% and it is for these reason the company needs to revise its expansion plans in its international markets. While the company’s SKU rationalising strategy of moving distribution towards the fastest growing items first, and discontinuing the worst performing SKUs next might work in the US, this might not the right move for China and Brazil where competition from local players in the retail channel remains fierce. Acquisition of a local player or building brand awareness through foodservice could be a better strategy in beating the late mover disadvantage.

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