AA: What was it about the integration of Pillsbury that slowed you down more than expected?
Mr. Sanger: We knew that the integration was going to be a big effort ... and we also knew we were going to have to cut back on some of the normal activities to focus on the integration and get it done quickly. The only thing that surprised us was that, while we expected our cutting back on innovation in this competitive environment to have some impact on our sales, it was just bigger than we expected in the short term. But we snapped back quickly once we revved up the engine again.
AA: What exactly does revving up the engine entail?
Mr. Sanger: I told analysts we were going to introduce in excess of 80 new items between the start of the fiscal year in June and September to indicate that we were going to have a lot of innovation across our product lines. And in terms of total new items for the fiscal year, that number is well beyond 100. What we need to do though, really, is innovate in our categories consistently and bring consumers things that add value for them that they didn't have before ... that's the way we grow. And, actually, new products are really not the first place we start with that. We start with keeping our established brands healthy and growing-keeping Cheerios, Honey Nut Cheerios and Hamburger Helper growing-because that's really the key to overall profitability. If you introduce a bunch of new products and established brands are tapering off, you end up not being ahead of the game. ... Totally new brands have the lowest odds of success and are the least frequent means of innovation for us and every other food manufacturer.
AA: How do you grow existing brands?
Mr. Sanger: We start with [asking] what kind of product news can we bring to established brands. Things like Honey Nut Cheerios now reduces your cholesterol because we've added soluble fiber, that Betty Crocker potatoes only take 20 minutes to prepare when they used to take 30 or 40 minutes. Anything that adds value to existing brands is a real important innovation for us. And because consumers like variety, we're constantly extending flavors on existing brands. Beyond that, we seek new items that build on existing brand names, for example Berry Burst Cheerios is a new product, but it builds on the Cheerios franchise. Yoplait Nourishe [which rolls nationally this year] likewise builds on the Yoplait name, capitalizing on the strong brand loyalty consumers have for these lines.
AA: Do retailers complain they're not seeing enough new products to tout to their customers in advertising?
Mr. Sanger: Retailers are looking for growth, and the best way to get growth is to focus on what the manufacturers will focus on. The consumer seems to respond best to a combination of newness and familiarity-a great example is Berry Burst Cheerios, which we started shipping a month ago. Advertising hasn't even started yet, and won't start for another week or two, and yet the displays for Berry Burst Cheerios sell down as soon as they go up. ... It is that combination of new and familiar that's crucial in this day and age when you don't have most consumers sitting and watching 60-second TV commercials that explain this stuff. They have to be able to make quick connections, and that's why the power of existing brands provides such a great platform for innovation. You don't have to explain the brand to consumers. You merely have to communicate what's new about it.
AA: Have budgets that used to be channeled to totally new brands been funneled to your core trademarks?
Mr. Sanger: We certainly spend a lot of money on existing brands and core trademarks. That is the thing that has distinguished General Mills over the years. We get good marks for innovation, but if you look, really the thing that we have done most successfully is keep our big, established core brands growing. New products get a lot of attention. Everybody wrote stories about Go-Gurt, and Go-Gurt has done great and contributed a lot. But the thing that has made the total franchise grow is that our core [yogurt] cup business was growing that whole time, so Go-Gurt is truly incremental as opposed to making up for declines in the brand. And we keep the core brands growing because of the strong commitment to advertising. That is fundamental to us.
AA: How big a threat is private label?
Mr. Sanger: Retailers certainly like to promote their private label because it's their brand. But virtually all private label in the U.S. tend to compete on a price basis, therefore competing with other brands on the price end of their categories. General Mills always competes on the premium end of our categories, so we compete on the basis of value-added features and product quality superiority....So there is a clear differentiation between our products and private label in virtually every case and that's why we've been able to keep our market shares growing pretty consistently even at the same time private label is growing. They're growing at the bottom end of the category, and we're gaining at the top end and it's the middle that gets squeezed.
AA: How do you keep ahead in the competitive cereal category?
Mr. Sanger: The most important thing for us is to keep our volume growing through innovation.... Both we and Kellogg have about a third of the category, and in time, they may have a point more than we do or we may have a point more than they do and that really isn't very important. Right now, the category is up 2% to 3% for our fiscal year to date, which is the strongest showing in some time. And I think that reflects the fact that Kellogg has been successful with their Special K Red Berries, and some of their other new items. Our success-so far-has been more built around the fact that our top established brands are growing (Cheerios, Honey Nut Cheerios and Total, for example) although we have a brand new item in Berry Burst Cheerios that we think is going to be very successful.
AA: Has the Pillsbury integration changed the way you go to market?
Mr. Sanger: The new categories that are added to our portfolio really do present a lot of opportunities for more convenience and more variety and all the things that we do well. We have more categories and we also have more resources, more people, so I think the pace of innovation is as great or greater than it was before we put the companies together. I do observe that we are a presence in a wider swath of the grocery store than we ever were before. Virtually every aisle of the store, we're somewhere. And for retailers, that means that a General Mills' storewide promotion really has more impact.
AA: Have you brought a different perspective to advertising Pillsbury brands?
Mr. Sanger: We have sustained advertising for Pillsbury and in specific cases have added some advertising. Pillsbury refrigerated dough and Progresso soup are two of our most-heavily advertised brands, though, and they were when they came from Pillsbury. But we're probably getting more weight with the same amount of dollars because of media efficiencies.
AA: With the integration behind you, what is the biggest challenge you face going forward?
Mr. Sanger: For us and anyone else in the food industry, the challenge is that we're seeking to drive growth that is substantially greater in terms of dollar sales than the population and than calorie consumption in most developed markets. ... We have to outpace the overall food market and outpace our categories, and that all boils down to superior innovation. And if we can bring that consistently we will in fact grow faster than the markets, which we've done over time. That's the challenge that we face. We can't rely on the markets to simply take us there, we have to gain share in the macro sense to meet the growth goals that we have.