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Has General Mills Had Its Wheaties?


Marketing: BREAKFAST CEREALS

HAS GENERAL MILLS HAD ITS WHEATIES?

All he wanted to do was slay the dreaded Bogos. A year ago, Stephen W. Sanger, the No.2 executive at General Mills Inc., tried to put an end to a breakfast-cereal marketing war. Sanger cut back on high-cost coupons and grocery-store promotions--especially the buy-one-get-one-free deals, known as Bogos, that run up sales volume at the expense of profits. At the same time, he lowered prices on many big brands so consumers and retailers would still find them competitive. Sanger confidently predicted that earnings would rise while volume and market share would hold steady.

A year later, Mills has learned that if getting caught in a price war can be dangerous, trying to end one can be even worse. Its market share, volume, and profits have all declined. That's partly the result of bad luck: A crisis involving cereal contaminated by a contractor undermined the new marketing plan in its crucial early stages last summer. But General Mills' woes are also self-inflicted. Its vaunted product-development program ran aground with a string of embarrassing flops. And one competitor poured on its own promotions just as Mills was shutting the spigot. Now, the Minneapolis-based maker of Cheerios and Wheaties is closing in on a second straight year of disappointing results. So is Sanger retreating? "Hell, no," he declares. "We took the medicine to get this category back on the right track. The last thing we want is a relapse."

Instead, he insists, watch for a rebound. On May 28, the end of the fiscal year, the 49-year-old Cincinnati native who got his early training at Procter & Gamble Co., will take over as chief executive, replacing H. Brewster Atwater Jr., who is retiring at age 64. At the same time, General Mills will spin off its $3.5 billion Red Lobster and Olive Garden restaurant subsidiary, allowing Sanger to focus on its $5.5 billion grocery business. The "born again" packaged-food company will enter fiscal 1996 with its marketing strategy finally clicking and product development back on track, says Sanger, who has managed most of the biggest brands in his 21 years with Mills. Recent overhauls of manufacturing and distribution will lower costs and increase productivity. And with most of its capital spending behind it, the company will generate some $300 million annually for stock buybacks, dividend payouts, debt reduction, and acquisitions.

If Sanger fails to deliver, General Mills stands to lose more than a few pennies off its earnings per share. There's buzz in the industry that it could become a takeover target. The cash-rich company has attractive brands besides cereal, including Betty Crocker, Hamburger Helper, and Yoplait yogurt. The spin-off of its erratic, capital-intensive restaurant business makes Mills easier to digest. And it's already linked with a logical parent through an overseas partnership with Nestle, which was once rumored to be stalking Quaker Oats. "Either it puts up strong earnings numbers, or it sells out," one industry expert predicts. Sanger says he's not worried, because he expects "good earnings, good growth prospects, and a high multiple."

With investors betting that a more focused management will concentrate on the food business, the stock has recovered lost ground, closing at 607/8 on Apr. 25, up from 50 in late July. In the first three quarters of fiscal 1995, sales and earnings from continuing food operations dipped slightly. In 1994, General Mills earned $470 million on sales of $8.5 billion. Analysts aren't looking for more this year but expect a jump in 1996.

That depends on whether the truce holds. Last year, General Mills and Kellogg Co. were both deploying the costly Bogos, stealing business from their smaller rivals. But when many companies offer half-price deals, no one makes up in volume what they lose in price. So in April, six months after he became president, Sanger cut back. Kellogg moderated, too. Wall Street analysts applauded, taking it as a sign that cereal makers would build profits instead of fighting for share at all costs.

BUGGED OUT. Not so fast. Like all unilateral cease-fires, Sanger's peace declaration carried a big risk that not everyone would follow along. Kraft Foods' Post Div., maker ef Shredded Wheat and Grape Nuts, had taken a pounding as Mills and Kellogg flooded the market with Bogos. When the two leaders halted the costly promotions, Post saw a chance to regain lost ground. It unleashed its own promotions last fall, recovering its lost market-share--and then some (chart).

Most of Post's gains came from General Mills--which was coincidentally crippled by a bizarre incident involving bug spray. Last spring, a contractor hired to fumigate the company's oats substituted a cheaper pesticide not approved for use on food. By the time General Mills uncovered the problem, it had to halt shipments to retailers, scrap 50 million boxes of cereal, and sell 16 million bushels of oats as animal feed. For nearly two months, Cheerios and its other oat-based brands were in short supply--just as promotions ceased. Although General Mills had cut prices on many of its major brands by an average of 11%, retailers were loath to pass along the savings in the midst of a shortage. So General Mills' prices stayed the same while promotions disappeared, making the brands more expensive than rivals. The disruption made it impossible to evaluate the new marketing strategy for nearly six months.

On top of those woes came a new-product drought, which is particularly damaging in a business where 30% of sales typically comes from products less than five years old. For years, General Mills had led its peers, expanding its Cheerios franchise with the likes of Honey Nut, Apple Cinnamon, and Multi-Grain Cheerios. In fiscal 1994, the company thought it had an innovative hit in Fingos, a premium-priced cereal designed to be eaten dry, straight from the box. But consumers stayed away. Other new General Mills brands also failed to measure up.

Sanger wants to turn that around. In December, he named Jeffrey J. Rotsch, who had a string of new-product successes at the company's Betty Crocker unit, to head the cereal division--a job Sanger once held. Spending on TV advertising, already beefed up in the second half of fiscal 1994, will continue at higher levels as Sanger uses some of his savings from reduced promotions to build brands and support product introductions.

DISTRACTED. Watch for big savings in manufacturing and distribution as well. Buried in the news of its restaurant spin-off last month was $83 million in charges for shutting down obsolete production lines. That move will contribute $20 million to annual profits, and maybe more. "Everybody is dramatically underestimating the impact of the cost reductions," says analyst Michael J. Mauboussin of CS First Boston. General Mills also expanded a management program that increased productivity some 20% at plants where it was tried by allowing worker teams to set their own production schedules, hire new employees, and supervise plant operations. Paring promotions should yield efficiencies, too: Seasonal discounts encourage retailers to stock up, creating steep peaks and valleys in production.

While not every retailer likes the promotion cutbacks, they generally applaud the restaurant spin-off. General Mills executives have been too distracted, says Thomas S. Haggai, CEO of IGA Inc., a chain of 2,500 independent grocers: "That weakened our relationship with them in the cereal business."

The marketing battles have subsided over the past five months, and none of the major players was running the fell Bogos as of late April. Analysts doubt any of the players will risk their bottom lines with another round of costly giveaways in the near future. Even at Kraft, CEO Robert S. Morrison says, "Our interest is in building long-term equity of our brands, not in seeing who can win a giveaway contest." But it only takes one competitive move to break the truce. "That's the catch-22," says William Van Arnum, analyst at the Regents of the University of California, the company's No.2 stockholder as of yearend 1994. Sanger has already taken some hits in ending the Bogos war. Now he needs to show some results before an acquirer eats General Mills for breakfast.By Greg Burns in Chicago


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