General Mills enjoys grain-based foods efficiencies

by Josh Sosland
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MINNEAPOLIS — Marked improvement in the manufacturing efficiency of grain-based foods production, including improvements in flour milling yields, play an important role in strengthening profit margins at General Mills, Inc., a top company executive said.

The efficiencies were highlighted Dec. 16 by John Church, senior vice-president, supply chain in a presentation to investment analysts. The remarks were part of a regular earnings conference call in which company executives were upbeat about earnings prospects in the months ahead and previewed wide-ranging product innovations to be rolled out in 2011.

Mr. Church reviewed a General Mills’ holistic margin management program with what he described as “many levers we can pull to protect our margins.” The levers include mix management, list price increases, promotional spending, administrative processes and supply-chain productivity.

A “pipeline of H.M.M. initiatives,” Mr. Church noted are targeted both toward specific products and “broader product platforms.”

Among examples of these endeavors was a reference to increased efficiency in U.S. flour milling.

“Now we have been milling flour since 1866,” Mr. Church said. “But through dedicated efforts started a couple years ago, we’ve been able to significantly increase yields from our milling facilities, essentially getting more flour out of the same amount of wheat. This improvement benefits a number of our product platforms from cereal to baking mixes to food service products.”

The improved yields were achieved in a period of improving flour milling yields industry wide. Over the last three years, U.S. wheat milling yields in July-September averaged 77% (77 lbs of flour milled from each 100 lbs of wheat), 1.5 percentage points higher than the 75.5% average in July-September 2006-07. Going back further, milling yields averaged 74.3% in 2000-2005 (full year figures).

General Mills declined to say whether the yield gains in recent years were greater than the industry average

Grain-based foods also were targets of other H.M.M. initiatives highlighted by Mr. Church.

He said the company has switched rice varieties used for the company’s Rice Chex ready-to-eat breakfast cereal. The new variety is sourced from locations far closer to the company’s manufacturing plant.

“So we get the same quality ingredient but at a lower transportation cost,” he said.

For the company’s Cookie Crisp cereal, Mr. Church said a new formula for the chocolate chips has improved efficiency by making the chips adhere better to the cereal. The chips are made in house, rather than purchased from a supplier. As a result, the company is reducing the level of chocolate chip waste in its system and is cutting the amount of ingredient and shipping costs, Mr. Church said.

A range of packaging efficiencies for grain-based products internationally were reviewed by Mr. Church, including a cut of 10% in packaging costs for Old El Paso in Australia by using a single packaging supplier identified through a global sourcing initiative.

“As we expand Nature Valley granola bars to more markets, we’re using a package design first implemented in Europe, and we’re taking it to Australia and India,” he said. “We kept the bars the same size, but made the boxes smaller, allowing us to fit more boxes in a case, saving us packaging and transportation costs.”
Intriguing flour milling advances also were identified by Mr. Church in a discussion of steps to make the Cereal Partners Worldwide business more efficient. In particular, he discussed emerging markets where the cost of procuring, shipping and storing raw materials is high.

“We started an initiative to actually mill the flour as needed on site at each of our manufacturing plants,” he said. “This eliminates shipping and storage costs for raw materials, and improves product quality because the flour is fresher. The results of all these actions has been reduced manufacturing costs and increased productivity.”

Discussing prospects for supply-chain initiatives, Mr. Church expressed confidence the company will “keep the H.M.M. wheel rolling,” suggesting that projects to enhance efficiencies often beget additional new ideas for projects.

“This is a collaborative effort,” he said. “Employees across our business are empowered and engaged in improving our performance. That approach fits the unique culture of General Mills, which is why it’s been so successful for us. Our culture embraces collaboration, and we’re highly focused on innovation.”

Turning to another aspect of H.M.M., Mr. Church noted the program was established in 2005 and that high levels of cost inflation have been experienced since then, followed by a brief period of deflation in 2010.

“But we’re seeing inflation again this year, around 4% to 5%, on total input costs for us,” he said. “The biggest drivers behind this are dairy ingredients, resin-based packaging, fuel, cocoa and wheat, actually some of the same items that drove deflation in 2010. We’re now about 80% covered for our fiscal 2011 commodity and energy needs. We expect input cost inflation to continue beyond fiscal 2011, driven by global macroeconomic factors, so H.M.M. remains a key component in managing our margins. With H.M.M., we’ve been successful in offsetting input cost inflation and protecting our margins.”

Expanding on the inflationary environment was Ken Powell, General Mills chairman and chief executive officer. Following the presentation by Mr. Church, Mr. Powell noted pricing action General Mills has taken in several categories, effective in the final half of the fiscal year (December 2010-May 2011).

“We have also made trade merchandising changes in various categories,” Mr. Powell said. “We will continue to monitor inflation and category pricing levels across our portfolio. So for our U.S. Retail businesses, we’re working to lead category growth through innovation. We believe that the return of input cost inflation will result in improved price realization and sales trends in our categories. And we see our U.S. Retail business on track to meet our fiscal 2011 targets of low single-digit sales growth and faster growth in operating profits.”

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