General Mills challenged by yogurt, cereal trends

by Keith Nunes
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General Mills cereal and yogurt
Weak performances in its yogurt and cereal businesses hindered General Mills’ financial performance.

MINNEAPOLIS — Weak performances in its yogurt and cereal businesses hindered General Mills, Inc.’s financial performance during the first quarter of fiscal 2017. Management stood by its guidance for the full fiscal year, but categorized the overall market for food and beverages as “challenging.”

Ken Powell, General Mills
Ken Powell, chairman and c.e.o. of General Mills

“Performance for our U.S. Retail businesses in the first quarter was mixed,” said Kendall J. Powell, chairman and chief executive officer, during a Sept. 21 conference call with financial analysts. “We had a slower start than we planned on Yoplait, Fiber One bars and in our cereal business. And we’re working to improve our performance in these categories going forward with innovation, renovation, and good messaging.”

For the quarter ended Aug. 28, net income fell 4% when compared with the same period of the previous year to $409 million, equal to 68c per share on the common stock.

Sales for the quarter fell 7% to $3,907.9 million.

General Mills Yoplait Greek 100 yogurt
Yoplait Greek 100 yogurt has struggled in a competitive market.

“We continue to see challenging trends on our U.S. yogurt business, driven primarily by significant declines on our Yoplait Light and Greek 100 product lines,” Mr. Powell said. “Consumers of traditional light yogurts are pivoting away from this segment in favor of products that provide more (satiety) like Greek yogurts.”

General Mills will continue to manufacture and market Yoplait Light to what Mr. Powell called “deeply loyal consumers,” but will leverage category management programs in an effort to reach those consumers.

“On Greek 100, we were the first to market in the light Greek segment and built a strong early position,” Mr. Powell said. “However, with significant competition in this segment, our products have become less differentiated. So we’re looking to change that by rolling out a significant product improvement over the next few months.”

General Mills Yoplait Kids yogurt
General Mill recently revamped its Yoplait kids line with larger multi-packs and new packaging.

A reformulated line of Greek 100 products will be introduced in January that features 40% more protein, still only 100 calories and 9 grams of sugar.

“And we have yogurt renovation planned beyond Greek 100,” Mr. Powell said. “In fact, by the end of the year we will have renovated 60% of our yogurt portfolio. So far we’ve made changes to our entire kid portfolio, including new packaging and a whole-milk formula on our Yoplait kids line, larger multi-packs and kid equity cups, and new science in fresh packaging on Gogurt yogurt in a tube.”

Jeff Harmening, General Mills
Jeff Harmening, president and c.o.o. of General Mills

Additional new products that will be added to the company’s yogurt line during the second half of the year will focus on snacking and dessert, said Jeff Harmening, president and chief operating officer. Mr. Harmening declined to go into specifics about the new products, but said, “We have confidence that we can improve our business in the back half of F.Y. '17 and also again in F.Y. '18 because we have a pipeline of offerings that we really like.”

Net U.S. cereal sales fell 4% during the quarter, with part of the decline due to a reduction in customer inventory levels. In Nielsen-measured channels, Mr. Powell said cereal sales were down 2%.

“But when looking at our cereal performance on a rolling 12-month basis, we’ve seen marked improvement from our trends a year ago, with our latest 12-month retail sales down just under 1%,” he said. “And when we include non-measured channels, we would estimate that performance would be closer to flat. We think we can continue to drive improvement in our cereal business by putting the consumer first and consistently delivering on their needs with innovation and renovation, just as we’ve been doing.”

General Mills gluten-free Cheerios and Reese's Puffs without artificial colors
Gluten-free Cheerios and cereals manufactured without artificial flavors or colors performed well during the quarter.

He specifically noted gluten-free Cheerios and cereals manufactured without artificial flavors or colors performed well during the quarter.

“We like the traction we’ve gotten on our cereal renovation efforts, and we’re also encouraged by the early results we’re seeing on cereal innovation, like Nature Valley and Annie’s target squarely toward current consumer interests,” Mr. Powell said.

Don Mulligan, chief financial officer, said the company has a number of restructuring efforts under way designed to help improve margins.

General Mills new cereal - Nature Valley, Annie's
General Mills has gained traction with its new Nature Valley and Annie's cereals.

“We plan to close our soup factory in Vineland, N.J., in order to eliminate excess capacity in our U.S. Retail supply chain,” Mr. Mulligan said. “We expect this action will be completed by the end of F.Y. '19.

Don Mulligan, General Mills
Don Mulligan, c.f.o. of General Mills

“Additionally, we are eliminating excess capacity and exiting unprofitable businesses in our International segment. In Brazil we will close one of our snacks manufacturing facilities, and we’ll cease production operations on certain snacks and meals products at another facility. We’re also restructuring our snacks business in China and have plans to stop production on certain under-performing products in that market. We expect these actions to be completed by the end of F.Y. '17.”

Despite the challenges during the quarter, Mr. Mulligan reaffirmed the company’s guidance for fiscal 2017.

“We expect organic net sales growth to be between flat and down 2%,” he said. “We are targeting total segment operating profit growth of 6% to 8% on a constant currency basis, with adjusted operating profit margin expansion of 150 basis points. And we expect adjusted diluted e.p.s. (earnings per share) will be up between 6% and 8% in constant currency.” 
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