General Mills prioritizing brands in food service unit

by Eric Schroeder
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PARIS — While the consumer trend toward eating more food at home is good for General Mills, Inc.’s overall business, it poses a "real challenge for our Bakeries and Foodservice business," said Don Mulligan, chief financial officer, during a June 9 presentation at the Deutsche Bank Securities Global Consumer & Food Retail Conference in Paris.

Mr. Mulligan said the Bakeries and Foodservice business generates $2 billion in sales, with approximately half the sales to restaurant chains and food service distributors and half to convenience stores and bakery channels. And the current weak economic environment that has seen a large number of consumers cutting back on eating out has "dampened industry sales in virtually all of these customer segments," he said.

As a result, Mr. Mulligan said General Mills is prioritizing the branded portion of its product portfolio, gradually increasing the percentage of higher-margin branded products available through food service. Today, more than 65% of food service business is made up of these higher-margin branded products, he said. That growth has been driven by cereal sales, up 11% in the first nine months of fiscal 2009; yogurt sales, up 9%; and snacks, up 13%.

General Mills also is focusing on the customer channels with the most attractive growth and profit opportunities, including schools and universities, hotels and health care facilities.

"By prioritizing our branded products at our most attractive customer channels, we stayed on track to reach our profit goal for this business in 2009," Mr. Mulligan said. "That goal is to match last year’s reported operating profits, which included unusually high earnings from grain merchandising activities when those commodities spiked a year ago. We expect our fourth-quarter results will show strong improvement in operating margin for this business as input costs will be well below year-ago levels. And full-year results, excluding grain merchandising profits from both 2008 and 2009, should show good earnings growth in a very challenging industry environment. As we look to 2010, we expect the reported net sales and volumes for the Bakeries and Foodservice segment will be below 2009 levels."

In projecting lower sales and volumes in the segment in 2010, Mr. Mulligan pointed to the divestiture of businesses late in 2009 that accounted for approximately $150 million in annual sales, as well as overall weak food service industry trends and lower pricing for bakery flour in 2010.

"These factors will reduce reported sales," he said. "However, underlying business trends are expected to show continued good sales growth for our branded product lines."

Beyond 2010, Mr. Mulligan said he likes General Mills’ growth opportunities.

"I don’t know when the economy will rebound, but as it does, we believe consumers will revert to at least some of their former habits of eating away from home," he said. "So we believe the growth prospects of our brands in the away-from-home channels remains excellent."

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