What Makes General Mills Worth Owning?

Do General Mills' new strategies make it worth investing in?

Jan 9, 2014 at 10:24AM

Weakness in consumer spending in the U.S. and Europe has been the key problem for retailers, and food retailers are no exception. They too face slowing demand for their products as people try to save every bit of their hard-earned money. This was affirmed once again when General Mills (NYSE:GIS) posted second-quarter results that failed to meet Mr. Market's expectations.

General Mills' disappointment
Revenue for the quarter stood at $4.88 billion, flat from last year, as demand for cereals and packaged foods weakened. Unfavorable currency movement offset increased prices. The decline in customer interest mainly occurred because of customers' unwillingness to open their wallets.

However, General Mills does not face this problem alone. Even peer Kellogg (NYSE:K) has been facing lower demand for its products, especially cereals. Its recent quarter witnessed slightly lower revenue as people started shifting from cereals to other breakfast options. However, the food retailer did not give up. It announced a plan to come up with new flavors for its Special K cereals which should attract customers. Also, Kellogg introduced various breakfast options made from healthier ingredients that provide variety for customers' morning needs.

General Mills managed to keep up with last year's revenue despite sluggish consumer demand and the shift in Thanksgiving to the third quarter. Although the U.S. segment's performance did not measure up to the mark, the international segment performed better. Excluding exchange rate effects, sales from the international segment grew 5% over last year. Volume increased despite several problems such as government regulation in China, which hampered its Haagen-Dazs moon cake sales.

General Mills' secret of success
In fact, the company has made many innovations to stir demand. New products such as Yoplait Greek blended yogurt, Greek yogurt protein bars, Fiber One lemon bars, and the launch of Old El Paso helped the food retailer keep customers hooked. These products attracted consumers, giving them more reasons to buy. However, an increase in input costs led to a gross margin of 35.7% for General Mills, a shrinkage of 100 basis points.

General Mills' key to growth has been its strategic moves. Even last year it managed to perform well by making acquisitions. Its buyouts of Yoki Alimentos and Yoplait added new products and enabled the food retailer to strengthen its yogurt business. However, this time the company itself has been introducing new products.

Even peer Post Holdings (NYSE:POST) has resorted to acquisitions in order to expand its product portfolio. It acquired Premier Nutrition Corporation, which provides protein food and drinks, in September in order to expand into the nutrition and supplement market. Post also bought the organic cereal and snacks business from Hearthside Foods Solutions, which strengthened its organic and natural foods segment. Post made this acquisition to gain health-conscious customers who prefer organic food even if it comes at a higher price point.

The road ahead
General Mills plans to introduce a number of products, which will include new additions to the cereals segment since the company has witnessed falling sales there. In the coming months, General Mills will launch a few items that include Nature Valley Protein Granola with cranberry almond flavor, two more varieties of Fiber One protein cereal, and a new chocolate toast crunch. Such introductions should boost sales in the cereals segment.

Also, the company plans to add 50 new products, such as new Chex chips and breakfast tortillas, to the U.S. retail segment in the second half of the year. The company also plans new packaging and additional flavors for its Mediterranean offerings in 2014. General Mills will back these efforts with increased promotions and advertising efforts, which will lead to higher sales.

In fact, the food retailer reaffirmed its outlook for the year as it is confident that these moves will boost its top line. Moreover, it will add 70 new shops in China, since that market has been quite lucrative. General Mills will also optimize its production in order to manage its margins better. This should be helpful in growing the bottom line.

On one hand, General Mills has shown confidence about its strategies and cost control measures, which has enabled the company to stick to its guidance. On the other hand, Kellogg has lowered its outlook for the year since it expects demand to remain sluggish, which will lead to revenue growth of 4%-5% for the fiscal year.

Final words
General Mills is a great performer that's been making the right moves. Although consumer spending has been weak in the U.S., its new products have been instrumental in driving its revenue higher. Furthermore, General Mills plans to add several products in each segment to lure customers. Additionally, its focus on marketing efforts should help it promote its new items even better. Hence, this food retailer looks quite interesting and it should be a rewarding investment in the months to come.

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Pratik Thacker has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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