General Mills has come a long way since Jeff Harmening was promoted to CEO in June 2017 — though he’s the first to say it still has a long way to go.
The food CPG giant, which has been underperforming the market for multiple years, saw flat sales in 2017. But in its latest (Q3 fiscal 2019) quarter, net sales rose 8% (after four consecutive top-line misses), gross margin increased by 200 basis points, operating profit was up 14%, and adjusted EPS was up 6% versus the year-ago period. The company is now growing share in seven of its 10 categories, and on track to deliver its declared financial priorities. All of which caused management to raise its guidance for the year.
The progress is being realized in part through innovation (new products and existing brand innovations now represent 5% of global sales, up from 3.8% in 2017); effective consumer and in-store marketing; and accelerated international and domestic growth strategies in four promising segments: Häagen-Dazs ice cream, snack bars, Old El Paso Mexican food, and natural and organic food brands.
A few strategic acquisitions — notably, last year’s buy of Blue Buffalo, the ecommerce-driven, leading natural pet food brand that General Mills is now also introducing at mass retail — are being balanced by strategic divestitures and debt-cutting, enabling the continuation of the 150-year-old company’s unbroken run of dividends for shareholders.
Harmening had much to say about all of this during an interview at last week’s Bernstein Strategic Decisions Conference, conducted by the equity firm’s consumer goods analyst, Alexia Howard.
Before segueing into some depth on his comments on ecommerce, here are some lightly edited highlights of his refreshingly straightforward comments on some other key areas and issues (with an assist from Seeking Alpha):
On his biggest achievement thus far: “What I'm most proud of is… the change in culture… We've brought in a lot of people from outside of the organization who have added a lot of value in things like strategic revenue management and global sourcing and ecommerce, and a new chief marketing officer [Ivan Pollard, who came from Coca-Cola North America in July 2017, and is building a global marketing/media planning structure]. And we’ve blended [them] with our internal talent.
"I'm pleased that we're able to make decisions faster than we were two years ago. We flattened our organization, and all the segments now report into me. I'm pleased that we’re able to share ideas better than we have before. We created these accelerated platforms and we're sharing a lot more across boundaries on Häagen-Dazs and Old El Paso and [snack] bars.”
On the importance of brand and marketing in acquisitions: “Annie's has been really successful for us. We doubled the business in the first four years, and we improved their growth rate from when we acquired them… There are really good marketers at Annie's, and [at] Blue Buffalo...and they build great brands…
"The first rule is ‘Respect the brand. [Companies] get in trouble when they either don't understand the culture or they don't respect the brand. I mean, you can get by if you stumble on logistics or something doesn't go quite right in your financial integration. But if you screw up the brand, that lasts a long time.”
On innovation: “Focusing more on growth and a little bit less on just cost has been helpful. But we've also changed the way we do innovation. We're much more iterative… We studied how entrepreneurs do innovation… We have a dedicated team of people from different functions, marketing, R&D and even finance [who] do nothing but work on new products… Based on consumer feedback [through actually trying to sell an innovation in stores], we can go back to our R&D labs and overnight change the packaging or change the product or change the name, then go back out into the market the next day and try to sell it again…
"When we started on Oui by Yoplait, which has been a huge success for us… [it] was not anywhere similar to what it [became]. Over time, we listened to what consumers wanted and made a pretty quick turnaround on that business… I don't think we saw what was going on with Greek yogurt fast enough, but I can guarantee you we do now… We see things a lot faster than we did before... [One lesson learned was] if you're going to lead the category...then you need to be first in innovation.”
On the changing food industry: “The industry [is] much more dynamic than it has been historically, and certainly that presents challenges. But…anytime you see change in an industry, there's going to be an area for opportunity. The three biggest changes we've seen are the change in consumer food values, change in the retail landscape — particularly with ecommerce and discounters — and [CPG companies’] changes in structure and focus on costs and how [they go] to market.”
General Mills has responded to these shifts by adapting its product portfolio, ecommerce and innovation, he noted.
On the current retail climate: “You see a lot of growth in ecommerce — whether that's direct store delivery or click-and-collect — and [in] discounters. I think being a retailer in the U.S. now is probably as tough as it ever has been in the food sector. The question is, how do you deal with that? A lot gets made about the tensions that might exist between retail and CPG, but our retail customers are all looking for one thing, and that's growth. They're looking for the people who can deliver [growth] solutions…whether that's through new products or data and analytics capabilities…
"That's why I've talked about growing share in seven of our top 10 categories… [Pricing] conversations are a lot better if you can assure [retailers] that you're plowing those investments back into growing your business and growing their business for them.”
On private label: “When we talk about private label, we talk about them as ‘retail brands’… What's interesting is our prices have gone up over the last year about 2%... [competitive national brands’ prices] have gone up, and retail brand prices have also gone up… because we've all faced the same kind of pressure from input cost inflation, labor inflation, logistics inflation.”
On data, analytics and marketing through retailers: Some retailers “are driving a lot more innovation through their data and analytic capabilities… What [those retailers] can offer is a lot of information on the customers that go into their stores. But we can offer a lot of information on how people shop across channels and across categories, because we participate in 26 different categories here in the U.S…
"We also have our own unique data capabilities. We have three of the top five food websites in the U.S… [we] have tens of millions of consumers in the household database. So we can educate our retail customers on what's going on more broadly across channels… As our retailer customers increase their level of sophistication about data and analytics, I think it presents an opportunity for CPG companies who are equally driven by data and analytics.
“There are certainly some retailers who have become more sophisticated in how they identify shoppers and shopper behavior and have marketing work through them… We've been pretty agnostic for a long time about where our marketing spend takes place. And whether it's on TV or Hulu or search on Google, the key for us has always been and will always be, 'What is the objective you're trying to accomplish, and what is the best way to do that?'"
The Power, And Limits, of Ecommerce
Harmening pointed out that General Mills actually has a higher share in ecommerce than it does in brick-and-mortar. “That’s not an accident,” he said. “We have our biggest brands invested behind that.”
But he also said that he doesn’t expect ecommerce, which now represents about 3% of the company’s U.S. sales, to grow beyond 10% within the next five years. “So we need to make investments in ecommerce… but we also have to pay attention to the 90% that will not be ecommerce,” he said.
Cross-channel expansion makes great sense in part because “great brands travel” in the CPG space, Harmening stressed. “We sell Cheerios at places like Whole Foods, we sell it in ecommerce, we sell it at Walmart and Kroger, and it travels well across those different channels. We're seeing the exact same thing with Blue Buffalo, [which is] the number one in the pet specialty channel [and] number one in ecommerce.”
Blue Buffalo’s ecommerce sales have grown more than 20% this year, and its sales in mass retail channels are growing in double digits, he reported. The latter has caused specialty-channel sales to decline, but that was expected — and the company believes it can grow that channel again over time, as it’s done in the organic retail channel with Annie’s and Lärabar.
Harmening also said that he believes that there will be “a variety of winners” in ecommerce, at least in the food sector.“In Europe, it's not dominated by one player, and I don't think that's going to be the case in the U.S.,” he said. “We're seeing a lot of [successful] competitors, whether it’s traditional grocers or new, pureplay entrants… The implication for us is that we're going to have to be good with multiple customers. It's just not going to be good enough to win with one customer.”