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It’s been year of ups and downs for General Mills



Published: Sun, February 24, 2013 @ 12:00 a.m.

Star Tribune (Minneapolis)

In the past year, General Mills Inc. has found itself in an unusual position.

Its stock, normally a Wall Street favorite, has trailed food-industry peers and the market generally. Commodity inflation ate at the packaged-food business in 2012, pressuring all food-company stocks. But General Mills had to wrestle with a unique problem that it has yet to conquer: a fundamental shift in the U.S. yogurt market. To make matters worse, General Mills’ big U.S. cereal business has been experiencing cyclical weakness.

“I don’t know if there is a malaise, but they have definitely had their issues over the last year,” said Pete Johnson, an analyst at Mairs and Power, a St. Paul, Minn., money management firm that owns 1.5 million shares of General Mills.

While rock-solid financially, the Golden Valley, Minn.-based packaged-food giant is playing defense to correct missteps in some areas — something it isn’t used to.

As it works to do that, the company enjoys critical advantages. It has been expanding its important international operation with major acquisitions, while its U.S. snacks business — a key growth vehicle — has been booming.

Innovation has been critical to success in snacks. Johnson said the company’s innovation track record helps anchor his confidence in General Mills, even though it was late adapting to the biggest yogurt innovation in years, Greek-style.

“The biggest strength for a company like General Mills is it has a significant amount of dollars to throw at innovation,” Johnson said.

General Mills brings in $17 billion in annual sales with a stable of brands that spans the food industry spectrum: Progresso soup, Old El Paso Mexican foods, Green Giant vegetables, Cheerios and other big cereal names. But beginning in 2011, prices for commodities and other inputs — energy, packaging — began soaring.

General Mills, like its peers, passed down some of its price increases to consumers, who in turn balked at buying.

“There was a little bit of sticker shock, and so we saw [sales] volumes erode in many categories across the industry,” CEO Ken Powell said in a recent interview.

But the food industry’s input prices have stabilized in recent months, and sales have started picking up.

“We expected to see volume stability and volume recovery, and in general, that’s what we are seeing, which is encouraging,” Powell said.

He has to be encouraged somewhat by his company’s stock performance, too, so far this year. Like most packaged-food stocks, General Mills got a boost last week with the announcement of a $23.2 billion buyout of H.J. Heinz Co. by Warren Buffett’s Berkshire Hathaway and private equity firm 3G Capital. Investors sense that more consoli- dation may be in the offing.

But even before the Heinz deal, General Mills’ 2013 return to shareholders was on par with the broad market’s, and just a tad below the packaged-food industry’s average. Contrast that with 2012, when General Mills posted a return of only 2 percent, compared with the broad market’s 14 percent, as measured by Standard & Poor’s, and the industry’s 9 percent.

Yogurt is a key factor. Yoplait had $1.4 billion in U.S. sales during General Mills’ fiscal year ending May 27, and along with Dannon, it’s long been one of the nation’s two big yogurt brands. But the Yoplait division’s sales fell 5 percent in fiscal 2012. And so far in fiscal 2013, they are down 8 percent, though they’ve recovered somewhat from a bleak first quarter.

Part of the problem: General Mills last year upped prices on yogurt. “We took pricing on our core business, which frankly wasn’t accepted by the consumer,” Powell said. So the firm recently ratcheted prices down, and has “seen the momentum kind of return to that business.”

Another challenge, albeit a more short-term one, is revving up cereal sales. Cereal is the company’s largest U.S. business, providing $2.4 billion in revenue last year, and General Mills and Kellogg dominate the market. But General Mills’ cereal sales for the first half of fiscal 2013 are down 2 percent over a year ago.


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