FMCG

by Greg Thain

  But the true General Mills international game-changer came with the 2001 acquisition of Pillsbury. Pillsbury’s advantage was first its ownership, for some time, by overseas companies (Britain’s Grand Metropolitan and subsequently Diageo) and, second, its acquisition along the way of brands that already had strong international profiles, such as Green Giant and Häagen-Dazs. The Häagen-Dazs brand in particular had been a success around the world, quite often setting up joint ventures with local companies. Its Japanese partnership, for example, made sales of more than $300 million in 2004.

  In 1997, Pillsbury had acquired two Hong Kong-based manufacturers, Wanchai Ferry, who made dumplings, and then V. Pearl, a Cantonese dim sum company. This particular Pilsbury connection gave General Mills its first experience of the Chinese market and became the basis of a successful and growing business in this hugely important, exponentially expanding marketplace. General Mills’ instantly showed its worth. Its expertise was crucial in developing the local Chinese product ranges into microwaveable formats, which led inexorably to their US launch, a first time move for General Mills.

  The international divisions of both companies had been fully integrated by 2004, by which time they were delivering $1.5 billion in sales. The biggest single market was Canada, which had been a strong market for both companies and included virtually all of its big US brands. Outside North America, business was dominated by three global brands: Häagen-Dazs, recently supplemented by the launches of Häagen-Dazs Cream Crisp ice cream sandwiches; Green Giant; and Old El Paso, the leading Mexican food brand in Europe that had been acquired by Pillsbury in 1995. Betty Crocker was well established in Australia. In China, Wanchai Ferry was posting a 36% volume increase on the back of new lines. With operations in fifteen countries and sales in over 100, General Mills was a lot more international that it had been, but as its top overseas international market was Canada it could not be said at that stage to be a properly global company.

  By 2012, however, General Mill was well on the way. Total sales rose to $4.2 billion. Asia-Pacific was closing with Canada, both generating close to $1 billion. Crucial in driving the overseas businesses had been the Häagen-Dazs brand, marketed in more than 80 countries and providing a unique presence in markets such as China through more than 160 Häagen-Dazs branded ice cream shops, a concept now expanded to countries such as India and Egypt. The company footprint has been expanded by recent acquisitions such as Yoki in Brazil, and the global brands list augmented by the purchase of a controlling stake in the global Yoplait brand in 2011. And Cereal Partners Worldwide has proved to be a wonderful idea: General Mills cereal brands (branded as Nestlé) sell over 100 countries with, as we have noted, very little effort from, and risk to General Mills.

  How Did It Build Its Modern Business?

  The transition from the General Mills at the beginning of the 1940s to the General Mills of today looks as though it might have pretty linear. After all, Cheerios is the best-selling breakfast cereal in America. Betty Crocker, now in her eighth pictorial likeness, has her image on dozens of easy recipe products and even Gold Medal is still around. More and more brands were developed, some without any sort of wheat background - Cheerios, for example - to the where the grain mills, no longer organically linked to product at all, were sold; the company seamlessly became a manufacturer and purveyor of brands. And although it did start out that way that is not quite what happened,

  The Betty Crocker range had been given a massive shot in the arm in 1948 with the launch of an amazingly good cake mix, Chiffon Cake. General Mills had been approached by the inventor of the recipe who was so confident of his cake idea he charged company executives $5,000 just to watch him bake it – without disclosing to them the ingredients – and for them to sample it from the oven. His recipe was bought on the spot, sum undisclosed, although it will not have come cheap given the cook’s demonstration price. And after Betty Crocker Chiffon Cake Mix came Ginger Cake Mix, Crustyquick, Apple Pyequick, Party Cake Mix, Devil’s Food Cake Mix and so on ad very nearly infinitum. In the meantime, per capita consumption of flour was falling and so General Mills couldn’t waste time in expanding that range.

  The launch of the mechanical division in 1940 signalled wider diversification. The division was primarily aimed at the design and manufacture of food preparation equipment, a war-driven initiative that would nonetheless fail in the longer run. The initial interest lay in processing soybeans as a vehicle for expansion into the animal feed market, an idea that led later to the much broader Chemicals division. The post-war consumer boom, driven by rising real incomes and the birth of the supermarket, greatly accelerated brand success. By 1953, the food division alone was generating nearly five times the entire 1930 company profits, a milestone the company celebrated by launching Trix, its first pre-sweetened cereal. The company now had sales of nearly half a billion dollars and controlled one-sixth of the grain-milling capacity of the nation. A year later, as we have noted, the company made its first tentative move abroad by opening a factory in Canada. And the brands were ideally suited for the new medium of television; the company’s destiny seemed assured.

  Then, in 1962 General Mills appointed a new president, Edwin W. Rawlings, a relative newcomer. Rawlings, perhaps because the electronics and mechanics had diversified far beyond bread-mixing machines (partnering the University of Minnesota in developing a flight recorder, a black box forerunner, for example), saw the company’s future reaching far beyond the mundane world of breakfast cereals, flour milling and cake mixes. He first slimmed the company down, selling half the mills, the appliances and animal feeds divisions while bolstering the branded foods side by getting the company into the foodservice sector.

  But these were footling changes compared to what was to come. Rawlings embarked on an acquisition spree that would make General Mills the most conglomerated of conglomerates. 1968 purchases of Rainbow Crafts, Parker Bros. and Kenner, makers of Play-Doh, Monopoly and Spirograph, now made General Mills the world’s largest toy company. (In 1977, it launched the monumentally successful Star Wars action figures.) In 1969, the company entered specialist retailing via the acquisition of Lacoste and Monet Jewellery brands and the Eddie Bauer sportswear brand two years later. In 1970, the company climbed onto the food chain, buying Red Lobster, a five-outlet franchise it would subsequently take national.

  Most outlandish of all was its 1964 designing and building of the submersible that twenty years later would be the first to explore the wreck of the Titanic. There were now thirteen different product categories, along with all the non-grocery-related activities quite enough developments to keep the branded food business rolling and giving it a lasting significance. Then, in 1964, it entered the snack foods business by purchasing Morton Foods. The same year, it launched the Lucky Charms cereal. There was a new snack product, Bugles, in 1966, and the company bought the Tom Huston Peanut Company to bolster the growing snacks business. Two years later, it bought a frozen seafood company.

  It had been the mother of all acquisition sprees for General Mills and it did wonders for the top line. Sales in 1976 reached $2.6 billion, having increased a staggering four-fold in the previous seven years. But many of the acquisitions were short-lived. Three-quarters of the 1975 purchases were sold again within five years. Some did work, providing funds for the aggressive support its foods business during the 1970s, with big advertising spends on established brands and a plethora of new products: Hamburger Helper in 1970, Nature Valley granola cereal in 1973 and, in 1977, the interesting purchase of the US rights to the European yoghurt brand Yoplait; Interesting because, in 1977, yoghourt could hardly be given away, unless to its small fan base of the health-obsessed.

  The acquisition spree had largely played out by the early 1980s as the focus shifted more to growing organically. Everything on the balance sheet seemed to be performing: Lacoste was a $400 million brand, the success of Red Lobster chain inspired the launch of the Italian-themed Olive Garden concept, the toy division was selling as m
any Care Bears as it could make and on the food side, Fruit Roll-Ups, Toaster Strudel and Pop Secret popcorn were excellent new products exploiting the company’s core expertise.

  But the era of conglomerates was coming to an end. Management consultants were preaching focus plus genuine expertise rather than random and disjointed predation. So, in 1985, General Mills began to divest. Toys, fashion and retailing were hived off, with Eddie Bauer and the furniture business not far behind. Fully 25% of sales were ditched, and by the end of the 1980s, General Mills was back to being a food business, although in much better shape than it had been before the spree. Over 90% of the company’s food sales came from number one or number two brands and the innovation pipeline was humming: in the late 1980s, at least a quarter of annual sales growth came from new products. The health-fuelled boom in oat bran gave Cheerios a more than 3% jump in market share within a single year.

  By 1993, sales had reached $8 billion, two-thirds from packaged goods and the remainder from the booming restaurants division; five Red Lobster outlets had increased to 657 and Olive Garden wasn’t far behind with 429 restaurants, although these two restaurant successes were not typical; other themed restaurants - steakhouses, Mexican, health food joints, the Chinese China Coast in 1991 – all failed to take off. However, the rapid growth of the two successful brands was driving profits and powering General Mills to a return on equity of over 40%. But the company was, in effect, running two entirely separate businesses, with vastly different dynamics and little to no synergy. So, in 1995, the restaurants division was spun off as Darden Restaurants Inc. And General Mills returned to its fons et origo: a packaged goods company.

  That the company had now come back to its roots was precisely encapsulated by what it did next: launch Frosted Cheerios in 1995 and mastermind a PR hoopla around the ageless Betty Crocker’s 75th anniversary. A year later, General Mills, still strictly in character, made its largest acquisition yet, buying the cereals and snacks business Ralcorp Holdings Inc., which included brands such as Chex, Chex Mix and Cookie Crisp. This $570m spend, a beefed-up portfolio and a laser-like focus on what was now the company’s largest category by meant it could at last seriously challenge long-time foe Kellogg’s hegemony in the breakfast cereals market. In 1999, it came within 0.1% of taking the lead..

  Nor were convenience foods suffering any neglect. General Mills now owned the Go-GURT range of portable yoghurts, had pioneered Betty Crocker rice and pasta mixes and was marketing yoghurt in a tube. It acquired Lloyd’s Barbeque Company, Farmhouse Foods, Gardetto’s Bakery and - an inspired early punt onto the organic market - Small Planet Foods. However, and as we have noted, transformed came in 2001 with acquisition of long-time competitor The Pillsbury Company. It too had once been just a miller, with origins almost as old as General Mills’.

  The deal was worth an eye-watering $10.5 billion. It almost doubled annual sales from $5.5 billion to $10.5 billion, giving General Mills a renewed level of clout with all the major retailers. It also brought into the company many valuable brand properties: the annual Pillsbury Bake-Off Contest, running since 1949, the Pillsbury Doughboy, who had arrived on the advertising scene in 1965 and the extremely venerable Green Giant brand, acquired by Pillsbury in 1979. In fact, General Mills had first though to sell off Green Giant. It changed its mind. Its near-global Häagen-Dazs licence also sweetened the deal Pillsbury had launched a 50/50 venture with Nestlé two years earlier, giving Nestlé the right to a 99-year licence for the brand in the US and Canada should Pillsbury be sold. Another gem in the Pillsbury portfolio was Old El Paso, which fitted very comfortably into General Mills’ portfolio of fast, pre-prepared convenience foods. Above all perhaps, Pillsbury transformed General Mills’ international presence.

  How Is It Structured?

  General Mills has been through four distinct phases: a holding company for flour millers, a milling company with a centralised packaged goods component, an industrial conglomerate and finally, after the Pillsbury acquisition, a packaged goods company.

  The original holding company lasted barely eight years, until 1st June 1937, when the subsidiary companies under the holding company umbrella were liquidated and General Mills became an operating company rather than purely an administrative entity. At this point the company had two divisions: Grocery Products and Flour & Feed. By 1953, matters were getting a little more complicated. Flour & Feed was split, making three key divisions along with Grocery Products. The there were four: the chemicals division marking the shift of General Mills into non-foods. As for the conglomerate years, the spree years, they are practically shapeless: following the sale of the chemicals division in 1997, Food Processing, Restaurants, Games and Toys, Fashion and Speciality Retailing all hung out in the same corporate bar, if at separate tables.

  · Today the company is back to three main divisions: US Retail, International and Bakeries & Foodservice, a fairly standard arrangement for a US food company. Within the divisions, US Retail ($10.5 billion, 63% of total company) reports seven segments:

  · Big G (the breakfast cereals) – $2.4 billion

  · Baking Products – $1.8 billion

  · Frozen Foods – $1.6 billion

  · Snacks – $1.6 billion

  · Meals – $1.5 billion

  · Yoplait (America’s leading brand of yoghurt) – $1.4 billion

  · Small Planet Foods and other – $0.2 billion.

  On the international side, the company is dived into four regions:

  · Europe – $2 billion (almost double the pre-Yoplait purchase level)

  · Canada – $1 billion

  · Asia-Pacific – $0.8 billion

  · Latin America – $0.4 billion.

  Bizarrely, Bakeries & Foodservice includes, as well as Foodservice Distributors and Bakeries & National Accounts Restaurants, the small but rapidly growing Convenience Stores. But for route-to-market reasons, CS would fit better strategically in US Retail.

  What Has It Been Doing Recently?

  2004

  With the Pillsbury acquisition fully completed, the new General Mills emerged in 2004 as an $11 billion turnover business, but heavily US-dominated even with the Pillsbury international components: only 14% of sales and 6% of profits came from outside the US, although the joint ventures with Nestlé and PepsiCo added another billion in sales attributable, but not reportable, to General Mills brands.

  Within the US, the new company had become a powerful force in grocery. It competed in twelve product categories and at the end of 2004 the company was market leader in seven (yoghurt, frozen vegetables, refrigerated dough, dessert mixes, frozen baked goods, dry dinners and fruits snacks) and running second in the remaining five (ready-to-eat cereals, Mexican products, ready-to-serve soup, microwave popcorn and frozen hot snacks). As with virtually all US-dominated packaged goods companies, there was a dangerously high degree of concentration in the customer base. The top-five US retail customers accounted for 43% of sales; Wal-Mart alone made up 19%

  After the endless upheavals of the conglomerate years, the company philosophy was much more steady-as-she-goes. There were four key elements:

  · Product innovation

  · Channel expansion

  · International expansion

  · Margin expansion.

  So, little to raise the eyebrows here. In the prepared foods business, product innovation is an absolute essential just to stand still, channel expansion makes sense given the concentration of business in a small number of over-influential retailers, whilst international expansion was a strategic necessity: so little of the company’s business came from the high-growth, high-potential markets. But margin expansion was tough. The categories involved are highly competitive, which makes price increases a risky proposition. Growth here came mostly from Nature Valley snack bars and Yoplait yoghurt – both far-sighted acquisitions made before either category was showing much promise.

  2005

  As with most large-scale mergers, the anticipated acceleration in sale
s growth from the new behemoth proved somewhat illusory, with sales inching up a miserly 2%. The margin expansion goal was missed thanks to increasing commodity price increases and anything salvaged from compensatory price increases had to re-spent on promotion: competitors, particularly Kellogg’s, had absorbed the cost increases and kept their prices unchanged. Thus, within the US Retail segment, Big G cereals – the biggest category – suffered volume declines despite a host of new products. Only Yoplait, driven by Yoplait Light and the Progresso reduced-calorie soup brand, showed significant growth. To help keep the year’s bottom line respectable, marketing spend reduced by more than $50 million.

  With the US-centric Foodservice division flat on the year, the only genuine good news came from the International division, where sales were up by 11% and operating profit by 40%, albeit bother were aided by favourable foreign exchange swings. However, volume was up by 6% in total with the Asia-Pacific region leading the way at more than12%. Here, Wanchai Ferry did more than its fare share, with sales increasing by almost 25%. One major change in business outside North America was the end Snack Ventures Europe. As we noted earlier, PepsiCo so liked the look of its performance it bought out the General Mills 40.5% stake.

  2006

  Matters improved slightly in 2006 as sales increased by 4%, not least because of over 300 new products launches, although this did involve the restoration of last year’s higher marketing spend. But even though overall performance improved, basic trends remained the same: strong growth in the US from the healthier end of the portfolio, with Yoplait, Progresso and Nature Valley sales percentages all growing by double digits, and decline in the bigger and less-trendier cereal and Pillsbury categories.