Marketing Helps General Mills Achieve Stellar Quarter

Earnings Surge 61% Despite Higher Costs, Sputtering Economy

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CHICAGO (AdAge.com) -- General Mills cited product innovation and increased consumer-marketing spending for third-quarter earnings that beat analyst expectations. The company's earnings shot up 61% for the period ended Feb. 24 despite higher ingredient costs and a slowing economy.
General Mills' yellow box Cheerios is the leader in U.S. ready-to-eat cereal sales.
General Mills' yellow box Cheerios is the leader in U.S. ready-to-eat cereal sales. Credit: AP

"Our product innovation and consumer marketing investments are driving strong growth on the top line, and cost-savings efforts, together with pricing actions, are offsetting significantly higher [ingredient] costs and protecting our margins," CEO Kendall Powell said in a press release.

Marketing Payback
General Mills said it increased consumer marketing spending, including sampling, media and contests, by 13% during the time period, but did not specify an actual amount. The company projects a double-digit increase in spending for the 2008 fiscal year.

"Across our worldwide food businesses, we have been steadily increasing our brand-building investments and improving the effectiveness of our advertising," Mr. Powell said. "We now expect to increase our consumer marketing investments at a double-digit rate in 2008 to position us for continuing growth for next year."

This marks a stepped-up increase for the company, which said it bumped consumer marketing spending 5% in fiscal 2006, and 8% in fiscal 2007.

According to TNS Media Intelligence, General Mills' ad spending alone increased 13% in calendar 2007 to $572 million, from $508 million in 2006. The company's agencies are Publicis Groupe's Saatchi & Saatchi, New York, and Interpublic Group of Cos.' Campbell Mithun, Minneapolis.

When the going gets tough ...
General Mills is contributing to a new common wisdom in the package-foods category: increased spending in the face of higher ingredients costs. Kraft and Kellogg both vowed to increase advertising or marketing spending when the companies reported earnings in January. Both of those companies, however, reported losses at the time.

Analysts were highly complimentary of General Mills' performance, but remained concerned about how long they can pass on rising food costs to the consumer. To do so, increases in marketing spending are needed, some said.

"At a certain point, it's just not in a food company's best interests to pass through more earnings to the bottom line," Wachovia analyst Jonathan Feeney wrote in a report. "Strong volume growth is driven by innovations, which cost marketing dollars -- we expect General Mills will prime the pump with more dollars as their clearly ahead-of-plan businesses hum along."

Small-box retailing
General Mills' Mr. Powell also credited the company's "right size, right price" initiative for helping Big G hold its own in cereals. Last year General Mills shrunk the size of its cereal boxes to avoid commensurate price increases. As a result, Mr. Powell said the company's U.S. cereal sales are up by box, but down slightly by tonnage.

The company's yellow box Cheerios is the leader in U.S. ready-to-eat cereal sales. With line extensions such as Honey Nut Cheerios taken into consideration, the brand accounts for 12% of U.S. cereal sales.

Mr. Powell also dismissed concerns about consumers trading down to private-label cereals, saying that private label share has been flat to decreasing slightly in recent months. He added that private-label has been forced to increase prices more on a percentage basis. That's led to a smaller gap between branded and private-label pricing.

"We're not seeing trade-down in our categories," he said. "[Private labels] need to take more pricing to cover cost increases, so we're seeing a little of the narrowing of the price gap."
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