Pursuing margins, General Mills deemphasizes frozen, fully baked

by Josh Sosland
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MINNEAPOLIS — In a marked shift from a highly visible strategy, General Mills, Inc. is deemphasizing its focus on frozen fully-baked products in favor of baked products with higher profit margins and greater potential for building household penetration.

The strategy shift was described Jan. 11 in a management presentation before securities analysts.

In what otherwise was a successful first half for the company’s Pillsbury Bakeries and Foodservice division, frozen baked goods sales during the six months ended Nov. 26 declined 5%, said Juliana Chugg, senior vice-president of General Mills and president of Pillsbury USA.

"Pillsbury was the first national brand to enter the frozen baked good segment with their convenient portion control packaging," Ms. Chugg said. "These products gave smaller households a way to enjoy the fresh baked test of Pillsbury biscuits and dinner rolls. Given the growth of empty nesters and single households, this has been an important segment of growth for the division."

Unfortunately, the introduction of lower-priced competitors has pressured margins and share at General Mills, Ms. Chugg said.

"This year, our response has been to prioritize the higher margin biscuit segment, which is significantly developed in the South, and we produced a new ad to drive awareness of these trials," she said.

The company’s move marks a shift from a basic tenet expressed by General Mills management that consumers are "moving up the convenience chain" and that the company would lead the way. In late 2003, Stephen W. Sanger, chairman and chief executive officer, described this trend as ongoing, even as Atkins dieting was peaking.

"We are participating everywhere in the chain of baked goods, and contrary to what the Atkins diet may tell you, people are not cutting back broadly on their consumption of cookies, rolls and biscuits," he said. "But they are tending to move up the convenience chain."

In late 2004, Mr. Sanger described products General Mills was introducing to meet the needs of those seeking ever more convenience. These included Perfect Portions biscuits for smaller households and freezer-to-microwave dinner rolls for consumers in a hurry.

"If you don’t even have the 10 or 15 minutes needed to prepare refrigerated biscuits or rolls, we’ve recently introduced a freezer-to-microwave option," he said. "These are ready in less than 30 seconds and taste like they were just baked fresh. This is a promising addition to our frozen baked goods line that now generates more than $190 million in annual retail sales."

The shift away from this strategy business comes in a year in which the Pillsbury business has achieved a number of positives. The division with $1.6 billion in sales equates to 20% of the General Mills U.S. Retail segment. After a 1% sales decline in fiscal 2006, the renewal of sales growth was a principal objective for the division in fiscal 2007.

"To do that we’re accelerating the growth of our highest margin businesses and really focusing on our core to improve our overall product mix," Ms. Chugg said.

In the first half of the year, Bakeries and Foodservice sales climbed 8% and operating profit surged 27%. Pillsbury division sales rose 2%, and the company has been gaining share in large categories, including a one point gain in refrigerated baked goods.

"In particular, we saw good performance on refrigerated dough during the important holiday baking season," she said. "Retail sales for our refrigerated baked good line increased 2% in November and December."

Helping lift sales has been increased advertising support, Ms. Chugg said.

"We focused on businesses that had the highest return on investment, the media, and drove strong increases in consumer reach and the number of impressions for those brands," she said.

Rather than focusing on staples like frozen dinner rolls, Pillsbury is shifting its emphasis to refrigerated products that Ms. Chugg said generated high margins but also are impulse in nature, requiring advertising spending.

"As a consequence of this dynamic, we have significantly increased our annual spending against these categories, reallocating and adding additional funding to drive growth where it will make the largest impact on our financial performance," she said.

While Pillsbury refrigerated dough overall has a 60% household penetration, individual products have much lower penetration levels, Ms. Chugg said. Pillsbury crescent rolls and sweet rolls have only a 19% penetration; pizza rolls, 17%; Toaster Strudel, 13%; and cookie dough tubes, 8%.

The company has achieved recent success in segments, accelerating sales growth and gaining market share, Ms. Chugg said. For example, a new television campaign was launched in September for the company’s Toaster Strudel frozen pastries. The campaign has helped generate a 17% sales increase during the first half of the year, she said.

Beyond the breakfast category, Ms. Chugg said General Mills sees similar potential in its Totino’s pizza rolls and Pillsbury crescent rolls, as well as cinnamon rolls leveraging the Cinnabon brand.

"Beyond fiscal 2007, we think the growth prospects for refrigerated dough will remain strong in this large category where Pillsbury is the clear leader," Ms. Chugg said. "This is primarily due to the low household penetration of the various segments that have been higher in the past.

"We are confident we can increase penetration through increased consumer investments. Additionally, the convenience of refrigerated dough is more on trend with consumers than ever."

Still, the new strategy is not without skeptics. David Nelson, an analyst with Credit Suisse, Chicago, wondered about what he described as a move contrary to consumers’ desire for greater convenience.

"Products like Perfect Portions biscuits and ready-to-bake cookie dough have failed to meet expectations, and Pillsbury is now focusing its spending on high-margin, high-market share subcategories like sweet rolls, dinner rolls, pizza rolls and cookie dough tubes," he said. "(Ms.) Chugg also hinted that she has a pipeline of new products poised to hit the market in 12 months. It looks like Pillsbury will be introducing more entries in the frozen dough category (perhaps rolls, muffins and cookies), something that competitor Otis Spunkmeyer has been expanding.

"The Pillsbury strategy has some decent logic behind it: why compete head to head with Nestle in ready-to-bake cookies when you have products with dominant share and attractive margins elsewhere to invest in instead? But increasing spending on cookie dough tubes by 452% when household penetration is only 8% sounds questionable to us. Isn't cookie dough in a tube a step backward in the convenience chain? And how is Pillsbury going to persuade new consumers to buy dinner and sweet rolls in an environment where family meal time is in decline? It is the rare consumer that prepares items like these for a meal for one. Bigger picture, we believe that Pillsbury failed to fulfill management's vision of creating innovative dough-enrobed products for handheld snacking."

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