Two avenues to growth at General Mills

by Josh Sosland
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BOSTON — Taking a disciplined and "holistic" approach toward cost cutting together with a focused effort at building sales will allow General Mills, Inc. to continue to achieve its long-term growth targets, a top executive said.

Specific ways in which the company is following these approaches were offered in a Sept. 4 presentation by Ian R. Friendly, executive vice-president and chief operating officer, U.S. Retail Division. Mr. Friendly addressed the Lehman Brothers Back-to-School Consumer Conference.

Describing what he termed a "very simple game plan" for U.S. Retail, Mr. Friendly said the first objective is to protect margins since it is those margins that allow the company to invest in building its business.

"Our ongoing process of holistic margin management (H.M.M.) will continue to be the key to our success in protecting margins in the face of input cost increases," Mr. Friendly said.

Margins cannot be maintained without offsetting supply cost inflation, averaging from 4% to 7% in the four years ended with fiscal 2008, he said. In the current year, General Mills is projecting supply chain inflation of 9%.

At the heart of combating these expenses is "finding costs that don’t add value for consumers," Mr. Friendly said.

"We eliminate those costs and use the savings to offset input cost inflation and reinvest in our brand," he said. "H.M.M. is a rigorous, formalized process, and we regularly review a rolling three-year plan of initiatives for each U.S. Retail division."

As an example, Mr. Friendly described a number of incremental steps taken to cut costs associated with its Hamburger Helper business. A few years ago, the company generated considerable savings by dropping the poorest selling varieties while reducing the number of different pasta shapes it offers.

In 2007 and 2008, the company increased the density of the pasta, meaning less space was needed in the box, cutting the amount of packaging. Mr. Friendly said those two phases cut the cost of goods sold by 10%.

This year the company is optimizing the package, he said. In addition to deflating the pasta pouch, General Mills is co-mingling spice and ingredient items, which will reduce the amount of packaging used.

"That means we can fit more boxes in the case, more cases on a truck, which means fewer trucks and less fuel to ship our product," he said.

The changes do not affect serving size or number of servings per package but will generate an additional $2 million in savings for the Helpers business.

Product reformulation offers cost saving opportunities that are at least as lucrative, Mr. Friendly said. Turning to the Pillsbury Grands biscuits line, he said consumer taste scores rose when the product was reformulated with reduced fat.

"The result was a better bottom line with savings of $7 million over two years," he said.

The second objective, of top-line growth, will be achieved by "bringing product news" to established brands and "developing new products that are on trend with consumer demand for taste, convenience, health benefits and value," he said.

Mr. Friendly offered numerous examples of moves General Mills has made toward these objectives. He began with yogurt, noting the category is large, growing and on trend with consumers.

Contributing to category growth are the light and functional health segments, accounting for 40% of yogurt sales and growing at double-digit rates.

Over the past year General Mills introduced YoPlus that promotes digestive health with fiber and probiotic cultures. More recently, the company launched Fiber One Yogurt, containing 5 grams of fiber per serving.

"These products are still in their building phase, but together they achieved a 2.3 share in the category over the latest three months," Mr. Friendly said.

In soup, Progresso achieved "fantastic growth" over several years and continues to gain share, Mr. Friendly said.

The most recent driver for growth has been innovation, beginning with Rich and Hearty varieties launched in 2004 to zero point soups introduced in 2007. The latter soups, with 60 calories per serving, score zero Weight Watchers points. Points are calculated based on a food’s calories, fat and fiber, and a zero score suggests consumers would not need to limit their intake (from a weight gain perspective).

The product has in some ways been an unlikely success, Mr. Friendly said.

"Progresso Light soups delivered more than $100 million in retail sales in their first year, despite competing in the smaller, vegetable-only segment of the soup category," he said. FBNFood-at-home strength positive for General Mills

BOSTON — While the weak economy appears to be leading people to eat out less and at home more, the trend will be beneficial to General Mills, Inc., said Ian R. Friendly, executive vice-president and chief operating officer, U.S. Retail Division.

Mr. Friendly spoke Sept. 4 at the Lehman Brothers Back-to-School Consumer Conference.

"Consumers in the U.S. spend more than $1 trillion a year on food," he said. "Just under half of this is spent on food at home, and sales in the grocery channel are expected to grow faster than restaurant and food service sales this year as consumers eat more meals at home. This trade-in trend is a very positive one for food companies like General Mills."

Mr. Friendly acknowledged the "trade-in" trend has raised "trade down" concerns — analysts projecting a shift from branded products to private label. Without dismissing this concern, he said the threat is less severe at General Mills than is the case for other food companies.

"In our major categories, private label share is relatively moderate," he said. "On average, private label holds a 14% share in our major categories. That compares to a 20% average share of food sales across the grocery store."

He said General Mills believes the company is benefiting as consumers opt for branded food at home rather than visiting restaurants or ordering takeout.

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