Evaluating General Mills Amid the Economic Downturn

December 3/Minneapolis/Business Monitor International Ltd. (BMI) -- General Mills is the world's sixth largest food firm and owns a number of leading brands in the cereal and convenience categories. The company has posted resilient results during the downturn, and in contrast to many firms in the food industry, it has managed to increase volumes over the last two years. General Mills' portfolio is well suited to the economic climate, with the firm's positioning in the cereal and convenience category allowing it to benefit from the trend toward eating more meals at home. In addition, General Mills' focus on brands that are leaders in their respective categories also seems to have shielded the firm from the trend towards private labels. General Mills' major weakness is its comparative lack of exposure in high-growth emerging markets, and BMI would expect this to be the major focus for in coming years, with increased efforts to take its leading brands to more markets and to buy or develop new products that would have strong emerging market appeal

BMI attributes General Mills' resilience during the downturn to strength of the company's brands. It owns many of the best-known products in the U.S. food sector, including Cheerios and Green Giant. This has meant that the firm has had to engage in less discounting during the downturn, and it has been able to post healthy growth in its margins. In contrast, firms that focus on brands that are not leaders in their respective categories are more vulnerable to consumers trading down to private labels, and to mitigate this risk, they have had to engage in more aggressive price promotions, which take their toll on the bottom line.

The trend toward private labels has been quite slow to take hold in the U.S., and consumers still lag a long way behind Europe when it comes to abandoning their favorite brands in favor of store brands. However, over the last three years, the reluctance to buy private labels has decreased, and the U.S. private label sector is quickly catching up with the European market. BMI's forecasts for the U.S. consumer sector suggest there is little prospect of this trend abating in the short term, with unemployment staying stubbornly high and signs emerging that the private sector debt deleveraging cycle will take years to unwind. This leads BMI to the conclusion that firms with market-leading brands will continue to outperform, which means that in the U.S. market, General Mills, Kellogg's and Heinz are better placed than rival operators such as Conagra and Sara Lee.

General Mills' major weakness is its relatively low exposure to fast growing emerging markets. BMI estimates the firm generates around 10% of its sales in emerging markets, which compares unfavorably with many of its peers, including Nestlé, Unilever and Kraft. This is one of the reasons why BMI has made General Mills one of the favorites to buy French dairy company Yoplait, which has been put up for sale by its private equity owners. For 30 years, General Mills has held a licence to produce the Yoplait brand in the U.S., but in early September 2010, it announced that it was fighting an attempt by the French group to terminate the agreement. With the owners of Yoplait having expressed an interest in selling the business, BMI believes this move could well have been designed to encourage General Mills to bid for the unit -- a strategy that looks like it may achieve its desired objective.

In addition to securing its U.S. licensing deal, the move would give the firm a brand with strong potential to grow in emerging markets. Yoplait is already distributed in Eastern Europe and Latin America, and BMI believes the brand could grow exponentially with the support of a major food firm such as General Mills. BMI also believes the acquisition would fit with General Mills' focus on brands that are leaders in their respective categories. Its financial position suggests that it is reasonably well placed to make a bid, with a debt-to-EBITDA ratio that is slightly below average for the industry and significantly below Kraft, Danone and Heinz.

Even if a takeover of Yoplait does not materialize, BMI believes this financial flexibility could mean General Mills takes a more aggressive approach to expanding in emerging markets through acquisitions. Currently the firm's product portfolio, which is typified by its "easy to make" desserts and "dinner kits" based on traditional U.S. meals, is perhaps less well positioned to cater to emerging market tastes than many of its rivals, and BMI sees takeovers as a key way to remedy this. The firm has had some success in China and Hong Kong with its Wanchai Ferry range of Chinese ingredients and meal kits. Acquisitions, or significant investment in product development, could yield similar results in other major emerging markets.

General Mills' strong recent performance highlights that emerging markets are not the only game in town and that some firms without a massive emerging market presence have been able to post resilient results during the downturn by doing what they do well and keeping a tight rein on costs. However, we believe that a strong emerging markets business will become increasingly crucial if the firm wants to maintain its record of outperformance, and BMI therefore thinks it will look to augment its dynamic domestic performance with a stronger international unit through takeovers.

From the December 20, 2010, Prepared Foods E-dition