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General Mills: Uninterrupted Dividends Since 1898

General Mills (GIS) was founded in 1866, owning just a single flour mill at the time. After expanding into a number of different industries like restaurants, toys, and even apparel, the company refocused completely on consumer foods in 1995.

Today, General Mills sells a diversified mix of packaged meals, cereal, snacks, baking products, yogurt, and more. No category accounts for more than 20% of total sales, and General Mills is also one of the largest U.S. producers of organic packaged food (over 5% of sales are from natural and organic products).

The company’s largest brands are Cheerios, Betty Crocker, Yoplait, Pillsbury, Nature Valley, Old El Paso, and Haagen-Dazs, with each brand generating over $1 billion in annual sales.
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The company also made a big push into premium pet food with its $8 billion acquisition of Blue Buffalo in 2018. The pet market generated 8% of the firm's total sales last fiscal year.

General Mills sells its products primarily to large retailers such as Walmart. 79% of the company's sales last year were made in the U.S., though the company is seeking to become more geographically diversified. Asia and Latin America, which offer stronger long-term growth potential, account for 10% of the firm's sales.

Business Analysis
General Mills and its predecessors have been around for more than 150 years. Compared to startup food brands, General Mills benefits from scale, long-standing distribution relationships, entrenched brands, and decades of marketing spend. These advantages have enabled the company to pay uninterrupted dividends since 1898.

With almost any consumer product, marketing and product innovation are keys to long-term success. General Mills can outspend smaller players on marketing campaigns to ensure its products remain top of mind. In fiscal 2019, for example, the firm spent more than $600 million on advertising and media to protect the brand value of its products.

When you start to add up the total dollars General Mills has invested in marketing over the last several decades, it becomes daunting to think about the challenge new food companies face in winning over consumers to their less familiar brands.

This spending has helped General Mills' products reach more than 95% of U.S. households and maintain strong market share positions. Most of the company’s brands hold the number one or number two share positions in their categories, and the brands have proven to be resilient over the years.

In ready-to-eat cereal, for example, General Mills has the second highest global market share and owns three of the top five U.S. brands. In yogurt the company's 18% market share similarly gives it a commanding presence on store shelves.

Many of the company’s core brands have been on the shelves for decades. For example, Cheerios and Nature Valley were introduced in 1941 and 1975, respectively.

Retailers also have little incentive to try out products from new competitors as long as the General Mills' products are selling well. According to Nielsen data, 85% of consumer packaged goods that launch in the U.S. will fail within two years, so it's no surprise retailers are reluctant to displace mainstay brands.

Given the high failure rate of new products, General Mills’ existing portfolio of successful brands is even more valuable.

The company’s product diversification and financial strength allow it to maintain its lead and continue experimenting, too. Few competitors have the luxury to invest over $215 million annually in R&D as General Mills has done in each of the last five years. 

General Mills is also well diversified by product category with the company's highest-grossing segment, snacks, representing only 20% of sales last year. As a result, the company is somewhat hedged as consumer tastes unexpectedly change. When one category changes directions and requires new R&D and marketing investment, another is likely playing to General Mills’ strengths.

Despite the company's diversification into various product offerings, in recent years General Mills' growth has slowed as more consumers have opted for fresher, healthier foods. 

However, General Mills has not hesitated to acquire its way into faster-growing markets or divest declining businesses to keep its product portfolio relevant. By utilizing its global distribution channels, the company can acquire on-trend brands and grow their businesses.

For example, in 2018 the company spent $8 billion to purchase Blue Buffalo, a leader in the fast-growing premium pet food market. (Larry Light, former Chief Marketing Officer of McDonald's, once said, "In many parts of the world, people spend more per calorie to feed their pets than they feed their kids.")

Altogether, the company’s leading market share, entrenched brands, large marketing and R&D budgets, long-standing distribution relationships, and product diversification create a solid moat, albeit one that faces some growth pressures due to evolving market conditions.

Key Risks
Growth is the biggest challenge facing General Mills; the company's revenue remains about 6% below its 2014 peak.

At the heart of the company's problem is that its legacy product lines continue to face pressure from changing consumer tastes, especially in the U.S. Breakfast cereal, for instance, is no longer as popular as it once was.

To help architect its turnaround, the company appointed Jeff Harmening as its new CEO in 2017. Harmening has been with the company for over two decades and most recently served as the COO.

Under Harmening, General Mills acquired Blue Buffalo in 2018. Funded mostly by debt, the acquisition pushed the firm's net debt to EBITDA ratio to 4.9, much higher than the firm's 3.0 leverage ratio in 2017.

As a result, management has frozen the dividend, prioritizing debt reduction in order to protect the company's balance sheet and credit rating. Once the company restores its balance sheet and sees success with its turnaround plan, mid-single-digit earnings and dividend growth is a possibility in the long term.

However, such a reality may not be realized if General Mills' growth efforts struggle.

For one, consumers are increasingly concerned with what they are eating. They want natural, healthier, fresher foods that contain more protein, fiber, and whole grains rather than gluten, carbs, and artificial ingredients.

Combined with the rise of e-commerce (cheap and instant distribution compared to securing physical shelf space), the health food trend has opened the door for new food companies to launch healthier brands and chip away at the high market share positions enjoyed by packaged food giants.

Making matters worse, until recently most large packaged food manufacturers responded to top-line challenges by cutting costs to the bone to boost profits. Management has commented that General Mills cut too far in a number of cases, hurting its brand perception and product innovation. 

Besides evolving consumer preferences and some questionable decisions by management, declining food prices have also hurt growth. Target and Walmart have both announced steep price cuts in recent years, and Amazon’s acquisition of Whole Foods may rattle the landscape further (though much remains to be seen).

Overall, the company's sales growth has been disappointing due to a combination of factors – a soft food and beverage retail environment, the continued shift to healthier foods, and excessive cost cutting by management.

The company's CEO is increasing investment in an effort to rejuvenate profitable long-term sales growth. None of these challenges will be fixed overnight, but hopefully the diversity of General Mills’ expanded and more relevant product portfolio will position it well to survive and eventually adapt. 

Closing Thoughts on General Mills
The sales growth challenges facing General Mills could persist as the packaged food industry continues experiencing meaningful change.

However, General Mills seems ready to tackle the challenges needed to stay relevant with consumers over the long term, especially under the leadership of its new CEO.

General Mills' marketing budget, R&D investments, shelf space, distribution relationships, product diversity, and powerful brands should help the business play catch-up with the latest consumer trends over time.

At the end of the day, General Mills is in one of its multi-year turnarounds that will take time to bear fruit. While the dividend continues to look safe, investors considering the stock need to be patient and have confidence in management's ability to restore profitable growth, especially in light of the firm's somewhat elevated leverage.

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