General Mills Credits Ad-Spending Hike for Increased Sales

Also Cites Pricing Initiative as Having Helped Face Commodities Costs

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CHICAGO ( -- General Mills reported impressive fourth-quarter and full-year earnings this morning, citing increased marketing spending and the company's "right size, right price" initiative. Net sales and net earnings for the full year were up double digits.
Led by Cheerios, Big G cereal sales grew faster than the ready-to-eat cereal market as a whole.
Led by Cheerios, Big G cereal sales grew faster than the ready-to-eat cereal market as a whole.

Fourth-quarter marketing spending grew 20% over the year-earlier period, up 13% for the full fiscal year. General Mills credited its higher marketing outlay for its impressive third quarter, reported in March, saying at the time that spending during the period grew 13% over the year-earlier quarter.

For the fiscal year ended May 25, General Mills' net sales were up 10 % to $13.7 billion. Net earnings jumped 13% to $1.3 billion.

In terms of measured media, General Mills spent $564 million in 2007, according to TNS Media Intelligence. Spending was up in the first three months of 2008, to $150 million, from $130 million over the same period in 2007. The company's agencies are Publicis Groupe's Saatchi & Saatchi, New York, and Interpublic Group of Cos.' Campbell Mithun, Minneapolis.

Rivals take note
General Mills' competition has also vowed to increase what they spend on marketing, though not as aggresively. Kellogg is expected to hike ad spending by double digits, from 12% of sales last year, and Kraft's marketing budget is expected to approach 9% of total sales.

In an attempt to circumvent steep pricing actions in a challenging commodity environment, the marketer also introduced the "right size, right price" initiative a year ago. Through the program, package sizes were reduced but prices either stayed the same or fell slightly. Kellogg recently announced a similar program.

"We believe our opportunities to generate continuing growth and increasing returns are excellent," General Mills CEO Ken Powell said during a conference with analysts. "We compete in growing categories that are on trend with consumer demand for healthy convenience foods." Some of the brands performing well for General Mills include Cheerios, Yoplait, Fiber One and Nature Valley.

In a research note, UBS analyst David Palmer praised the company's "solid performance in every division" and "solid earnings" in spite of restructuring charges and steep marketing increases.

Key sales driver
"We believe that strong brand support is a key driver of net sales growth overall," said Ian Friendly, chief operating officer of U.S. retail at General Mills. He added that Big G cereal sales grew faster than the ready-to-eat cereal market as a whole, led by Cheerios, which as a whole grew 8% in sales over the previous year. While Cheerios sales were up 7% for the year, Honey Nut Cheerios sales grew 12% and MultiGrain Cheerios jumped 14%.

Mr. Friendly said a successful ad campaign for MultiGrain Cheerios in Canada highlighting its weight-management potential inspired the company to put similar spots on air in the U.S. in January. The commercials boosted sales, Mr. Friendly said, and a bigger push is in the works for fiscal 2009.

General Mills has also been successful with a line of Progresso diet or "zero-point" soups for the weight-loss crowd, with just 80 calories per serving. Rolled out last summer, Mr. Friendly said the soups are expected to surpass the supreme $100 million first-year sales benchmark.

Some of the company's new products include indulgent Chex chocolate chunk snack bars and the counterintuitive Fiber One toaster pastries. Mr. Friendly said General Mills research uncovered that 45% of toaster pastries are eaten by adults and two-thirds of those households don't have children.

"We thought we could help them with a healthier pastry," he said, adding that the product has 15 grams of whole grain and 5 grams of fiber.

Another market force working in General Mills' favor: consumers trading down from restaurants to the grocery store. "There are signals that there is a shift away from food away from home to grocery stores," Mr. Powell said, noting that restaurant chains are down while Wal-Mart and Kroger sales are up. He added that groceries generally benefit from a softened economy.
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