For a company that makes consumer staples you probably have in your home right now, General Mills (NYSE:GIS) is in a precarious position. The company's core brands have seen sales stagnate, and even fall in some cases as competition has taken share and organic products have become more popular. Then there's the strong dollar that's hurting international sales, something a lot of companies are struggling with.
Of all the challenges General Mills faces in 2016, these are the three I think investors need to worry most about.
Organic food sales continue to surge
The organic fool revolution is a moving target that General Mills and other big food companies can't seem to figure out. The company used to repackage products every few years, or maybe update a recipe or two, but organic brands and the growth of chains like Whole Foods have changed the rules of the food business. Customers are fundamentally changing the foods they're seeking out.
It's not just organic foods, either. General Mills has to deal with customers who want less gluten, less sugar, and more natural products, just to name a few consumer trends. It's a huge challenge for a business used to dominating grocery store shelves to see small brands become a popular trend, filling niche spaces that eat into sales.
There's no obvious answer to how General Mills can respond to the organic/health food trends. But it's resorted to buying smaller competitors, and that seems like a high-risk option.
Acquisitions don't pan out
When a company like General Mills sees competition from an upstart, the natural reaction is to just buy them out. That's what Kellogg did with Kashi, and it's what General Mills did with Annie's in the fall of 2014. The company paid $820 million for the company, and according to Nielsen NV, the company's sales rose just 9.4% to $235 million in the first year after it was acquired.
As recently as June 6, the company made a similar move, buying natural meat bar maker EPIC Provisions for an unnamed price.
The problem with acquisitions is that General Mills generally has to pay high premiums for these up-and-coming companies, and the cache people love in the acquired brands often disappears when it's acquired by a food giant. Just look at the backlash Annie's got when it announced the acquisition on Facebook.
If acquisitions don't generate solid returns in the form of both revenue and profit growth for General Mills, the stock could fall. This is a big worry as the company becomes more and more desperate for growth.
Foreign sales continue to struggle
A company like General Mills won't be a big growth company in the U.S., so it has to look to international markets for growth. The problem is that General Mills hasn't gained much traction in those markets. Just 26% of fiscal second-quarter sales were international, and that was down 15% from a year ago. Even after adjusting for currency changes, growth was just 3%.
In December, General Mills used a similar tactic of acquisitions to generate growth, buying Carolina Administracao e Participacoes Societarias Ltda., a yogurt company based in Brazil.
General Mills is going to need to get more out of its international business to be a big winner for investors. And if sales in the segment continue to fall, so could the stock.
An uphill battle
Shares of General Mills trade at 23 times trailing earnings, which is a lofty valuation given its falling sales. The company is stuck in a strange place in the food industry: an easy target for upstarts to sell against, and then the enemy when it buys those same upstarts.
I don't see the dynamic changing anytime soon, so all investors have going for them is the 3.2% dividend yield. But even that can be beaten by the company's growing sales and earnings, meaning this is a higher-risk stock than it may appear to be on the surface.