400 fewer products: General Mills to pare its portfolio

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General Mills is the latest in a rash of desperate, growth-seeking food companies to announce a major reduction in its product portfolio. While industry observers see the resultant cost savings as a potential boon to marketing budgets, more likely General Mills and others will be putting the dollars toward their sagging bottom lines. Ultimately, fewer items could mean far less in marketing.

General Mills last week said it would eliminate 20% of its overall product line, cutting out roughly 400 "small and less profitable [stock-keeping units]," according to General Mills Chairman-CEO Steve Sanger. He unveiled the cost-savings effort during the company's fourth-quarter earnings call, in which he lowered sales and earnings forecasts for 2005 and 2006.

The move mirrors similar initiatives by Hershey Foods Corp. and H.J. Heinz Co., both of which of have eliminated 30%-40% of their portfolios over the last three years and in the process trimmed spending on measured media significantly. And as other food companies such as Kellogg Co. and Kraft Foods look to pare down their portfolios in similar attempts to drive efficiencies, marketing cuts might also be in the offing.

more marketing money

Although General Mills declined to mention specific items it plans to cut or to say whether or not those items are currently being supported with marketing, a company spokesman said that in general "selling more profitable items at higher margins allows for more marketing dollars." Some industry analysts and retailers also believe that the greater efficiencies gained from producing fewer items should in fact free up more money for marketing, or at least help reallocate money to better-performing products.

But since Hershey began its "SKU rationalization" process in 2001, the company's spending in measured media has dropped from $178 million to $142 million in 2003, according to TNS Media Intelligence/CMR. Heinz, too, has spent far less on its winnowed portfolio, with its media spending dropping from $39 million in 2001 to $15 million in 2003.

As struggling food companies look more closely at their product lines, they are becoming more prudent both in terms of cutting unprofitable items and about introducing new items, which are generally not profitable at the outset because of the great expense of introductory marketing. General Mills in 2002 proudly announced it would unleash a record 100 new items, calling product innovation a key growth driver, but clearly that strategy didn't pay the dividends it had hoped. "Existing items are more profitable," an executive close to General Mills said.

grocery fears

One East Coast grocery executive said he has seen far fewer new items over the last year, largely because mass merchants are demanding that food companies shift from "just hoping they'll succeed to offering sales and profit projections of just how [a new item] would be incremental to the category."

In addition, though General Mills and others talk of replacing the less-profitable flavors and sizes with more-profitable existing items, the executive said, "you can't go down 20% and replace everything." Such a reality is sparking fear in the grocery channel, which has long depended on the slotting fees paid by manufacturers to shelve their items and is now threatened with lost income from even underperforming units.

Analysts offer varying opinions as to whether the new portfolio-reduction trend will help the flailing food industry grow. Although one analyst believes new technology has helped companies see profits, and the renovations are "a definite positive for productivity and profits," Bill Leach from Neuberger Berman offered a more glum outlook: "It's like moving deck chairs around the Titanic to make it look like something's happening," he said. "The industry is stuck."

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