General Mills (GIS -0.03%) may be one of the most identifiable consumer staple companies in the world, owning brands like Cheerios, Pillsbury, Betty Crocker, and Yoplait, just to name a few. But that brand presence hasn't helped sales or the stock recently, which has underperformed the S&P 500's total return over the past five years.
If we look back 10 or 20 years, the stock has beaten the market -- but has this company lost its way for good? There are a few concerning signs for investors to look out for.
Sales continue to drop
General Mills has reported six straight quarters of falling sales, something it hasn't done in 20 years. That's not a good sign for any company, and shows just how far away from General Mills' bread and butter the market has moved.
During the recession General Mills fared well as people transitioned to lower cost food items and ate in more, but now the trend is toward eating out and eating healthy, organic foods at home. The organic craze drove the $820 million acquisition of Annie's last year, and there have been rumors that WhiteWave Foods, Boulder Brands, or Hain Celestial Group could be their next target.
Stemming the drop in sales will take more than a small acquisition like Annie's. The company is going to have to find a way to be in growth products, which may be easier said than done.
It may be time to jettison some businesses
Another strategic move that many analysts think is possible is the sale of Betty Crocker or Green Giant. Both are struggling to grow, and the most alarming figure from fiscal third quarter earnings was the 9% drop in baking product sales.
But what do you do with slow growth in a market where everyone wants high growth? Stifel Financial analyst Christopher Growe estimated that Green Giant could sell for $1.5 billion, but at that price why sell it at all?
Maybe the biggest challenge for General Mills is how to turn its well-known but aging brands into hip brands for a new generation of consumers.
Behind the organic curve
The Annie's acquisition and any potential acquisition in the near future will be centered around the wave of more natural products consumers are demanding today. Look around at a Whole Foods Market and you'll see a lot of non-traditional -- and, more importantly, non-General Mills -- brands. That's troubling given the fact that Whole Foods, and similar health conscious grocery stores, are taking market share from traditional grocery stores.
SVU Revenue (TTM) data by YCharts
General Mills' core products aren't organic, and many aren't even particularly healthy, so the company is starting from behind the curve. Reformulating products and/or rebranding would be a long and costly process, with the risk that the strategy won't succeed. So General Mills is missing out on a growth market, and its best strategy may be buying the products it needs in its portfolio, a costly proposition.
Starting from behind the curve in organics is a place of weakness, and that is driving all of the problems I've pointed out above. Unless General Mills can improve its healthy and organic offerings it may have to buy a high growth competitor, and that's not a position any consumer staple wants to be forced into.
I think General Mills can turn its business around, but it'll be a tough few years with many changes ahead. Investors who aren't willing to wait out those changes would be better served looking for growth elsewhere.
