CHICAGO (AdAge.com) -- General Mills confounded Wall Street this morning, with profits up 49%. Part of the food company's secret sauce is meaningful marketing increases, about 37% for the most recent quarter. Augmenting its well-worn strategy of supporting big-name brands, General Mills has focused ad dollars on "high ROI areas," such as multicultural consumers and the digital space.
Chris Growe, an analyst with Stifel Nicolaus Equity Research, estimated that the 37% increase translates to an additional $40 million on marketing during the quarter, and a 20% increase on year-to-date spend.
"Consumers are shopping our categories and appreciate the nutrition, the convenience and the value of our leading brands," CEO Ken Powell said during a call with analysts. "We continue to reinvest in our businesses at increasing levels. Advertising spending was already planned to be up by double digits and we're adding more."
General Mills' results are particularly impressive given the tough comparison of a year ago, when the company's U.S. business grew 11%. During the fiscal second quarter, U.S. retail sales grew 5%, with Big G cereal sales up 10%. Pillsbury and other baking sales increased 4%, as did Yoplait and other snacks.
During the fiscal second quarter ended Nov. 29, General Mills profits soared 49.5% to $565.5 million, from $378.2 million the year before.
Chief Financial Officer Donald Mulligan vowed to continue General Mills' reinvestment strategy. While media spending grew 37% in the quarter, he said General Mills is targeting at least a double-digit increase for the full fiscal year. That's a relatively conservative estimate given the rates of increase already on the books, but spending can vary dramatically by quarter. For instance, the holidays usually represent a tough comparison because that's when most consumers do the bulk of their serious cooking.
"We're focusing our spending on high ROI ideas with particular emphasis on multicultural consumers and digital marketing, and we're investing strongly in international markets to build our global brands," he said.
Among other initiatives, General Mills has been working hard to establish itself in the digital space, with projects such as blog aggregator Tablespoon.com, in addition to brand-specific work. General Mills spokeswoman Heidi Gellar pointed to Betty Crocker, which now has applications for iPhone and Windows 7, and 50,000 Facebook fans.
It will have to increase elsewhere as well. After four years of decreases, General Mills will have to modestly increase its in-store merchandising spending. Jeffrey Rotsch, exec VP-worldwide sales and channel development, said the company has worked hard to keep a lid on promotional spending. General Mills has leaned on its marketing to support necessary price increases, but the company's trade cost per case, related to retail promotions, has fallen in each of the last four years. Now, Mr. Rotsch said, there are areas where the company will have to gin up merchandising activity "in order to protect market share."
Mr. Rotsch also conceded that General Mills' advertising support for Progresso dropped off during the most-recent quarter, and sales slipped. He added that the company tried to spread its soup spending evenly throughout the year, rather than concentrating it more heavily into soup season. Less spending on a category that is down as a whole, he said, explains much of the difference." He also hinted that the brands' comparative ad battle with Campbell's Soup may still be weighing on sales.
"There may be also be some overhang from the negative advertising that we saw on the category last year and we expect that to recede over time," he said. "We view this as a big category and a great consumer category and so we're quite optimistic going forward." Shortly after the ad battle with rival Campbell's Soup Co., both marketers reported increasing soup sales. The increases were, however, driven primarily by price increases.
For the next two quarters, General Mills will be focusing on its "Biggest Loser" integration and supporting the movie sequel "Shrek Goes Fourth" in a variety of tie-ins with its cereals and snacks. In early 2010, the company will launch Wheaties Fuel, Chocolate Cheerios, Greek-style Yoplait yogurt and a Nature Valley Dark Chocolate granola bar. Mr. Powell said the company has not held launches back during the recession, when consumers are less likely to take chances on new products.