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Morningstar | General Mills’ Brand Investments Should Support Price/Mix and Revitalize Top-Line Growth

In our view, General Mills’ leading share across several domestic food categories, including ready-to-eat cereal (17% of revenue; 30% market share), where it owns three of the top five brands in the United States, and yogurt (15% of revenue; 18% market share), has helped form a wide moat. While we expect General Mills’ positions in these categories to remain strong, we think its exposure to the center store, which has faced declining traffic the past several years as consumers increasingly shop for fresher alternatives in the perimeter, has pressured its brand intangible assets. This dynamic is evidenced by its cereal sales, which have averaged low-single-digit declines the past five years (comparable to the declines faced by the overall category). However, large food manufacturers also contend with mounting pressure from niche players that are often more attuned to evolving consumer preferences. As evidence, General Mills’ share in yogurt has slipped to below 20% from above 25% in 2010, which partly reflects the firm’s slow response to trends like Greek yogurt that nimble upstarts foresaw.From our vantage point, the acquisition of Blue Buffalo (a natural pet food firm) stands to prop up the firm's top line, as humanization and premiumization trends have fueled 5% compound annual growth for U.S. pet food sales over the past decade, without compromising its efforts to strengthen its bottom line. General Mills is targeting $750 million of annual savings (including $50 million of synergies from the Blue Buffalo deal), or around 6% of General Mills' fiscal 2018 cost of goods sold and operating expenses, excluding depreciation and amortization. This should free up resources to bolster its brand spending, which we view as crucial for the company to restore top-line growth. We expect the firm’s combined expenditures on advertising and research and development will average around 7% of sales over the next decade, versus a five-year historical average slightly below 6%. These investments should help the firm launch new or reformulated products that better resonate with consumers and justify the value (and therefore pricing) of its offerings over private-label fare.