CAFE AU LAIT, A CROISSANT--AND TRIX
Toucan Sam, Tony le Tigre, and Snap, Crackle, et Pop are European celebrities. Roaming abroad for years, they have helped Kellogg cereals build an even stronger position overseas than at home. Yet their archrivals--the Lucky Charms leprechaun and the Trix rabbit--have never even bothered to get visas. The reason: As other American foodmakers elbowed their way onto Europe's grocery shelves in the 1980s, General Mills Inc. and its spokestoons single-mindedly stuck to North American shores.
Well, they've finally packed their bags for a round-the-world tour. While General Mills still sees plenty of room to build domestic sales and profits, it recognizes that it can't afford to neglect the rest of the globe. With only a small snack-food business overseas, it needed to get up to speed fast. So it's taking an unorthodox route for the packaged-food industry: joint ventures. The suburban Minneapolis company has launched an ambitious assault on the $3.5 billion European cereal market, with help from Nestle. And on Aug. 6, General Mills and PepsiCo Inc. won European Commission approval to merge their European snack-food businesses, catapulting the combined company into the largest player in the $17 billion market.
TO HAVE AND TO HOLD? Such partnerships can be risky. They often end up dissolving, with one partner splitting off and using what it has learned to become an even stronger competitor. But General Mills figures the potential rewards far outweigh the risks--especially given its late start. In cereals, Kellogg Co. has a 70-year head start abroad: In some countries, it controls as much as 80% of the ready-to-eat cereal business. Thanks to the 1980s' mania for food acquisitions, takeover candidates are few and pricey. On the other hand, building factories and distribution channels from scratch "would have taken years and years," explains Vice-Chairman Arthur R. Schulze. "We felt a sense of urgency."
In some ways, coming late to the game could turn out to be a blessing for General Mills. Nestle's and PepsiCo's well-known brands, plus their distribution and marketing muscle in Europe, will instantly give General Mills strength that many of its go-it-alone competitors lack. PepsiCo, for instance, brings its vaunted "store-door" distribution system, in which Pepsi delivers its products directly to each store, not through a warehouse. Even rivals admire the alliances. The snack venture is "an excellent move for PepsiCo and General Mills, because two very complementary businesses have been put together," says John Warren, finance director at London's United Biscuits PLC, which will now be No. 2 in European snacks.
International markets do offer a golden opportunity for growth. Europeans on average eat just three pounds of cereal a year per capita, compared with 10 pounds in the U.S. Starting from a small base, sales volume in some markets, such as Spain and Portugal, has been growing at 20% to 50% a year, vs. 5% in the U.S.
INSTANT BREAKFAST. Cereal Partners Worldwide (CPW), the Nestle-General Mills hookup, has quickly gained a solid foothold in Europe. In 1990, the venture snapped up the Rank Hovis McDougall PLC cereal unit for $165 million, giving it an instant 15% market share in Britain and a launching pad for the Continent. General Mills has ditched most of Nestle's laggard cereal brands and is rolling out such staples of its own as Cheerios and Golden Grahams under the Nestle label. General Mills has also directed a makeover of Nestle's Chocapic cereal, including reformulating the taste, redesigning the packaging, and introducing new ads featuring a cartoon puppy.
CPW's sales have climbed to $250 million, in several countries surpassing Quaker Oats Co., long Europe's No. 2 cereal marketer. CPW seems well on its way to achieving its goal of $1 billion in sales and a 20% share by 2000. This month, it tackles its first non-European market: Mexico. But catching up with Kellogg in Europe will be a stiff challenge. Says Ginette Dupaty, a buyer ata big French su-permarket chain, Groupe Casino: "Nestle is a good 10 years away from threatening to overtake Kellogg as France's No. 1 cereal brand."
Profits are proving similarly elusive. Because of hefty startup costs, the venture lost $70 million in fiscal 1992, ended May 31, according to Prudential Securities Inc. analyst John McMillin. And it may not move into the black until the second half of the decade. "The breakeven point will depend on the speed at which we expand," says Rupert Gasser, who oversees CPW for Nestle. Because General Mills owns half of the venture, it splits the losses with Nestle, so they'll hit earnings this year by no more than 10 a share, or 3%, according to Smith Barney, Harris Upham & Co. Managing Director Ronald B. Morrow.
Snack Ventures Europe, as the PepsiCo-General Mills deal is known, will start off with revenues of around $641 million. General Mills owns 40% of the venture, to PepsiCo's 60%. The partners say it will be profitable immediately, although they decline to give numbers. With just 4% of the fragmented market, the duo sees plenty of chances to grow by bringing distinct product and technological capabilities to the partnership.
For example, General Mills is good at making products that are extruded into distinct shapes, such as its Bugles snacks, while PepsiCo dominates the chip business. "The driving force is going to be our ability to generate new products," says Michael J. Dolan, the PepsiCo executive who has just become chief executive of the venture. Geographically, there's little overlap: PepsiCo is strong in Southern Europe, while General Mills is a leader in the Benelux countries.
Back at home, General Mills continues to deliver dazzling results, even as most other foodmakers struggle through the recession. In fiscal 1992, profits from continuing operations rose 16%, to $505.6 million, on a sales increase of 9%, to $7.8 billion. Packaged foods such as Betty Crocker cake mixes and Hamburger Helper dinners, as well as Wheaties, Kix, and other Big G cereals, are General Mills' biggest businesses. Its Red Lobster and Olive Garden restaurants kicked in about 23% of operating profits and one-third of sales.
DESPERATE NEED? To export its success to global markets, General Mills may have had no choice but to seek partners. But observers say cracks almost inevitably appear in such alliances--especially if one partner ends up contributing more than the other. For example, some outsiders already question General Mills' wisdom in allowing Nestle to plaster its name on all General Mills cereals outside North America. In a business where brand names are all-important, they say, that decision effectively hands those cereal brands over to Nestle. "As long as they need each other desperately, it will work," says Kevin Rollins, a vice-president at the management consulting firm Bain & Co. "But if the economics change, that's when joint ventures start falling apart."
In both cases, General Mills and its partners vow that they'll stay together for the long haul. Schulze of General Mills insists the company did not enter into the deals lightly. And so far, its positive experience with Nestle has persuaded General Mills that there's nothing like a traveling companion to make foreign terrain seem a bit less alien.Lois Therrien in St. Louis Park, Minn., with Charlie Hoots in Paris