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Published February 21, 2013, 11:30 PM

For General Mills, a year of ups and downs

In the past year, General Mills Inc. has found itself in an unusual position.

By: Mike Hughlett, Star Tribune (Minneapolis), INFORUM

In the past year, General Mills Inc. has found itself in an unusual position.

Its stock, normally a Wall Street favorite, has trailed food industry peers and the market generally. Commodity inflation ate at the packaged food business in 2012, pressuring all food-company stocks.

General Mills had to wrestle with a unique problem that it has yet to conquer: a fundamental shift in the U.S. yogurt market. To make matters worse, General Mills’ big U.S. cereal business has been experiencing cyclical weakness.

“I don’t know if there is a malaise, but they have definitely had their issues over the last year,” said Pete Johnson, an analyst at Mairs and Power, a St. Paul money management firm that owns 1.5 million shares of General Mills.

While rock-solid financially, the Golden Valley, Minn.-based packaged-food giant is playing defense to correct missteps in some areas – something it isn’t used to.

As it works to do that, the company enjoys critical advantages. It has been expanding its important international operation with major acquisitions, while its U.S. snacks business – a key growth vehicle – has been booming.

Innovation has been critical to success in snacks. Johnson said the company’s innovation track record helps anchor his confidence in General Mills, even though it was late adapting to the biggest yogurt innovation in years, Greek-style.

“The biggest strength for a company like General Mills is it has a significant amount of dollars to throw at innovation,” Johnson said.

General Mills brings in $17 billion in annual sales with a stable of brands that spans the food industry spectrum: Progresso soup, Old El Paso Mexican foods, Green Giant vegetables, Cheerios and other big cereal names. But beginning in 2011, prices for commodities and other inputs – energy, packaging – began soaring.

General Mills, like its peers, passed down some of its price increases to consumers, who in turn balked at buying.

“There was a little bit of sticker shock, and so we saw (sales) volumes erode in many categories across the industry,” CEO Ken Powell said in a recent interview.

But the food industry’s input prices have stabilized in recent months, and sales have started picking up.

“We expected to see volume stability and volume recovery, and in general that’s what we are seeing, which is encouraging,” Powell said.

Except in yogurt sales. Yoplait had $1.4 billion in U.S. sales during General Mills’ fiscal year ending May 27, and along with Dannon, it’s long been one of the nation’s two big yogurt brands. But the Yoplait division’s sales fell 5 percent in fiscal 2012. And so far in fiscal 2013, they are down 8 percent, though they’ve recovered somewhat from a bleak first quarter.

Part of the problem: General Mills last year upped prices on yogurt. “We took pricing on our core business, which frankly wasn’t accepted by the consumer,” Powell said. So the firm recently ratcheted prices down, and has “seen the momentum kind of return to that business.”

The company’s bigger long-term yogurt conundrum is the Greek market, which has been dominated by the upstart Chobani brand. Greek-style yogurt has gone from only about 2 percent of the total U.S. yogurt market in 2007 – the year Chobani was launched – to 36 percent in 2012, according to a November report by Bernstein Research stock analysts.

Tardy to the Greek party, General Mills has only 9 percent of the Greek market. And with Greek’s rise, Yoplait’s overall yogurt market share has experienced a “massive” drop, according to the Bernstein report.

Gaining ground in Greek is a big challenge, though stock analysts aren’t counting out General Mills. “They have the Yoplait brand, which is a very powerful and recognized brand,” said Jack Russo, an analyst with Edward Jones.


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