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Can a $40m cost-cutting program bolster General Mills?

By Kacey Culliney+

Last updated on 01-Jul-2014 at 10:31 GMT2014-07-01T10:31:35Z

'You can’t fault them for it, but you have to wonder if cutting costs is the salvation,' says business strategy consultant
'You can’t fault them for it, but you have to wonder if cutting costs is the salvation,' says business strategy consultant

Amid “disappointing” fiscal 2014 results, General Mills has kick-started a cost-cutting plan to boost efficiency and support growth – a move that can’t be faulted but isn’t necessarily a ticket to success, a consultant says.

Net sales for General Mills were up only 1% for fiscal 2014 to $17.9bn while operating profits were down 2% on the previous year. Company CEO Ken Powell called the results disappointing.

In the company’s Q4 analyst call last week CFO Don Mulligan announced a cost-cutting program that aimed to generate $40m in free tax savings for next fiscal year.

“We are beginning to work on new cost reduction initiatives designed to boost our efficiency and sharped business focus behind our key growth strategies. We began a formal review of our North American manufacturing and distribution network, with the goals of streamlining operations and identifying potential capacity reductions,” he said. 

Jerry Smiley, partner of business consultancy firm Strategic Growth Partners, described the announcement as interesting.

“You can’t fault them for it, but you have to wonder if cutting costs is the salvation,” he told 

'It’s a tough place to be when you’re swimming up-stream – if consumption of breakfast cereals is down,' Jerry Smiley, partner of Strategic Growth Partners

Fighting against a lag in cereal consumption 

Smiley – an expert in the breakfast cereal sector – said General Mills was fighting against the tide. “It’s a tough place to be when you’re swimming up-stream – if consumption of breakfast cereals is down.”

The cost-cutting program could help bottom line profitability but would unlikely bolster top line sales, he said.

“It would be difficult to expect growth in a category which not only is declining, but declining for a reason. It’s not that we haven’t innovated; it’s just people don’t have time to have a bowl of cereal at breakfast.”

Breakfast cereal had healthy margins; the product itself was profitable, he said, and so stakeholders had certain expectations. “…When your shareholders get used to those healthy margins, the only way is to cut costs.”

However, Smiley warned that innovation would also be crucial. “Continuing innovation is without a doubt, the right way to go. But as you’re waiting for that to happen, and maybe it’s not happening, your alternative is to cut costs.”

Capacity, headcount or markets 

General Mills' cereal and snack NPD plans

General Mills will chase protein and gluten-free trends in cereal with a gluten-free Chex hot cereal and more high-protein cereals. It will also launch ancient grains Cheerios in Canada.

In snacks, General Mills will launch two new Fiber One products - a wholegrain, fruit streusel bars and a 120-calorie cookie in the US. It will also introduce Nature Valley Fruteria bars that target Hispanic consumers.

In addition, it will extend its Lärabar brand beyond nutrition bars with the introduction of Lärabar Renola – a nut, fruit and seed mix in three varieties. Its Food Should Taste Good brand would also be expanded with Pita Puffs and brown rice crackers introduced to the line.

General Mills revealed no details of its cost-cutting plans, but Smiley said the program would involve any or all of three things – removing capacity, reducing headcount or exiting businesses.

This, he said, could be removing production lines from plants or full plant closures; letting staff go; and either exiting businesses or selling them off.

“It’s a wait and see. When they start detailing what they mean, the future will be clearer.”

CEO remains positive 

Ken Powell, CEO of General Mills, remained positive despite the full-year results. “We are in changing times. We are a marketing company. So, our job is to understand the change and capitalize on it; find opportunity there,” he said.

Powell said there were “plenty of growth opportunities” for business, particularly when looking to targeting specific consumer groups, namely the growing middle-class in emerging markets, US multicultural families, Millennials and consumers over age 55.

Overall, the company would continue to invest in its US cereal business, he said, and work to accelerate better-for-you snacking.

“General Mills fiscal 2015 plans are centered on the objective of faster top line growth fueled by sharper consumer focus news and innovation. We have a very robust slate of product news, renovation and innovation that we’re bringing across each of our business segments,” he said.

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