A slide in food sales volume in 2011 and 2012 appears to have run its course, said Donald L. Mulligan, executive vice-president and chief financial officer of General Mills, Inc.
In a presentation May 30 at the Citi Global Consumer Conference in New York, Mr. Mulligan said General Mills’ growth model, built around five key global businesses, positioned the company well to outperform the industry overall in the year ahead.
Mr. Mulligan commented on the two-year decline in volumes and the recovery in response to a question from the conference host — David C. Driscoll, senior research analyst, Citi Research, Citigroup, Inc.
While a variety of analysts have identified many contributors to the weaker volumes in 2011-12, Mr. Mulligan focused on two as “big factors.”
“One is pricing that was taken across the space,” he said. “There was some significant inflation that came through in our fiscal 2012 — calendar 2011-2012. And in our case it was fairly representative. We had double-digit inflation, which is a historically high level. And as a result there was mid-single-digit pricing across our categories. Now that happened at the same time that the consumers were very stretched coming out of the recession and the combination of those two things — the consumers found ways to economize, whether it was pantry de-loading originally, more efficient use of leftovers as the recession wore on especially with the pricing.
“The good news is two things — one, the economy looks like it’s stabilizing. But probably more important and more directly impacting our volumes is that we in the industry are lapping the pricing that we took a year ago. So if you look over the last several months pricing has been fairly neutral in our space. And we have seen volume start to pick up or the past quarter plus we have seen positive volume growth and still a little bit of price mix positive across our aggregate categories.”
Mr. Mulligan began his presentation by stating, ahead of the release of fiscal 2013 earnings, that General Mills has a solid track record of financial performance.
“Since fiscal 2007 our net sales and segment operating profit have been growing at a mid-single-digit rate,” he said. “And our adjusted diluted earnings per share increased at a double-digit rate over those five years.”
Key to sustaining that growth will be the five key product lines in the company’s portfolio, Mr. Mulligan said — ready-to-eat cereal; super premium ice cream; convenient meals; wholesome snack bars; and yogurt.
“These categories are on trend with consumer demand for great tasting foods that are nutritious, affordable and easy to prepare,” he said. “In our core U.S. market these products are found in 60% or more of households nationwide.”
The five categories account for about two thirds of General Mills worldwide sales, Mr. Mulligan said.
“We see excellent growth prospects in each of these platforms moving forward,” he said.
Turning to the categories one at a time, Mr. Mulligan began by acknowledging General Mills’ original “key product line” — ready-to-eat cereal — has had its ups and downs in recent years. Still, he said prospects for cereal were good.
“We believe demographic trends bode well for the U.S. cereal category in the years ahead,” he said. “Over the balance of the current decade children 12 and under and adults 55 and over are projected to account for over 80% of total U.S. population growth, and these groups have the highest rate of per capita cereal consumption. So we expect these trends to provide a tailwind to category growth in the years ahead.”
Mr. Mulligan described the dry dinner performance in fiscal 2013 as falling short of the company’s expectations. He said an action plan to improve the business has been implemented and is “just entering the market.” Juliana Chugg, president of the Meals Division, will share the details with analysts in July, he said.
More positive were trends and results for the healthy snacking category. Mr. Mulligan said eating between meals is at an all-time high.
“In the U.S. over half of eating occasions are now a snack,” he said. “And better-for-you snacks is the fastest-growing segment of the U.S. snack category, projected to grow at a 5% compound rate over the current decade.”
Noting nearly four decades have elapsed since Nature Valley crunchy granola bars first were introduced by General Mills, Mr. Mulligan said the company has expanded in the category with new varieties as well as new brands such as Fiber One, as a source of fiber, and Cascadian Farm, an organic snack bar.
“Since 2008 we’ve added over nine points of market share on our grain snacks business,” he said. “And with strong recent innovation, like protein offerings for both Nature Valley and Fiber One, we expect to deliver great growth in this business moving forward. Grain snacks are popular with international consumers, too. Our Nature Valley brand is now available in nearly 80 markets worldwide. Sales are growing at a double-digit rate led by Nature Valley in the U.K. and both Fibre 1 and Nature Valley in Canada. And we are still in the very early stages of marketing our core product offerings in these international markets. We’ve only just begun to tap into the product pipeline that we’ve built here in the U.S.”
Yet another entry into the better-for-you snacks category has been the Larabar business acquired by General Mills in 2008. Mr. Mulligan said the all-natural fruit and nut bars have enjoyed robust double-digit growth.
“Our latest addition to the lineup, Larabar Alt gets the high-protein content from peas,” he said. “We’re also quickly expanding availability of our Food Should Taste Good savory snacks. This line is still only in a small percentage of traditional retail customers today, so we see tremendous growth ahead for this business.”
Discussing the ice cream category, Mr. Mulligan focused principally on international markets — specifically China.
“(The ice cream) category generates over $70 billion in annual sales and it’s projected to grow at a mid-single-digit rate in the years ahead, led by the super premium segment of this category,” Mr. Mulligan said.
He said the company’s Haagen-Dazs is the No. 1 ice cream brand not only in the super premium category but in the total ice cream segment.
“The brand is marketed in more than 80 countries today, and sales in constant currency have been growing at a 9% compound rate,” he said. “China is our single largest Haagen-Dazs market. Our growth strategy there starts with entering new cities with our upscale Haagen-Dazs shops. And today shops make up the largest piece of our Haagen-Dazs business in this market. We now have over 260 shops in operation across greater China.
“Our shops build brand equity and that increases demand for Haagen-Dazs products in food retail outlets. This distribution is just getting started in China, year-to-date sales in retail outlets have increased at a double-digit rate.”
Yogurt was described by Mr. Mulligan as the fifth global platform, bolstered by its 2011 acquisition of Yoplait International.
“Yogurt is a terrific category with global retail sales of $76 billion worldwide expected to grow at a high-single-digit pace in the years ahead,” he said. “The U.S. is our largest yogurt market with annual retail sales of over $6.5 billion. Recently category sales growth has been led by the Greek segment. When you look at units instead of dollars, light, regular and kid varieties are equally popular. In the Greek segment we’ve added nearly three points of market share led by the launch of Yoplait Greek 100, 100 calorie yogurt. Year one retail sales for this product line are expected to surpass $140 million and we have more Greek innovation coming in fiscal 2014.
“With an improved product offering and competitive merchandise price points, we stabilized our Yoplait Original and Yoplait Light Yoplait product lines. Year-to-date unit turns are up 8%. Go-Gurt twisted yogurt is the latest addition to the leading yogurt brand in the kid’s segment. We’re adding two new flavors to the line the summer. And in away-from-home channels Yoplait Parfait Pro gives food service operators an easy way to prepare layered yogurt parfaits.”
Amid the positives, Mr. Mulligan said the General Mills’ business fell shy of the company’s goals for fiscal 2013.
“However, we are very encouraged by the progress we are making,” he said. “We achieved a number of key objectives we set for fiscal 2013 including share growth in Greek, stabilizing the core and working with our retail partners in expanding the yogurt shelf set. We are exiting the year with momentum in yogurt including another quarter of sequential volume improvement and we have another terrific innovation lineup and increased marketing support planned for 2014.”
