EUR 850.00 For Business Accounts Only

Morningstar | General Mills' Competitive Edge Persists, but Secular Headwinds Prompt Moat Downgrade to Narrow

We remain confident that strong brand equity, preferred status with retailers, and cost advantage have secured General Mills a competitive edge. However, as consumers increasingly shop for unprocessed, fresh fare in lieu of these well-established brands, we have lost our conviction that General Mills will report outsize returns for the next 20 years, a metric required for a wide moat rating, and as such, we are revising our moat rating to narrow. General Mills is the market leader in cereal, baking mixes and ingredients, refrigerated dough, and natural pet food, and it holds the number-two spot in snack bars and soup. In the past few years, the company has held or gained share in most categories in which it competes, and many of its brands command a price premium. These strong brands have resulted in preferred relationships with the company’s retail partners and a scale-based cost advantage. However, due to evolving nutritional preferences, consumers are shifting from processed fare to fresh, natural options. As such, growth in General Mills’ categories has slowed. The company has responded by reformulating its products to eliminate artificial ingredients, offer gluten-free and non-GMO options, and simplify ingredient lists. In addition, it has acquired several organic companies, such as Annie’s, Larabar, and Blue Buffalo. While these actions and its strong brands have allowed the company to maintain or gain share within its categories, its categories have lost share of consumers’ wallets, resulting in the company’s flat organic growth over the past five years.We expect the Blue Buffalo business to improve the company’s revenue trajectory. Blue Buffalo is the leader in natural pet food, which is growing at a high-single-digit pace. The business is highly profitable, reporting operating margins in the low 20s. However, good businesses do not come cheap, and the transaction included a significant amount of goodwill, which has damped returns on invested capital. We expect General Mills to continue to adjust its portfolio to better align with secular trends, but this strategy has limitations, as it can also impair economic profits.