A conversation with General Mills CEO Ken Powell

Star Tribune food industry reporter Mike Hughlett recently interviewed General Mills CEO Ken Powell. The veteran General Mills executive touched on several facets of the big food company's business.

He talked, too, about General Mills' stance against a constitutional amendment that would have banned same-sex marriages in Minnesota. Voters agreed and shot it down in November.

And he touched on a Californa referendum -- Proposition 37 -- that would have forced the labeling of foods made with genetically modified ingredients. General Mills and other food makers successfully fended it off, to the chagrin of consumers of their organic products.

Q: The last year, it's not been the greatest. General Mills stock has lagged peers and the company had layoffs, which is very unusual here. Is this primarily due to higher input costs? Have things turned for the better?

A: Last year was very difficult for our company and the industry because inflation was so high. For us, it was about 11 percent, which is the highest inflation I've seen since I've been at the company, which is 33 years. What that meant is most companies had to take price increase and in some cases pretty significant price increases. I think we saw the consumer respond by buying less. Prices went up and there was a little bit of sticker shock and so we saw volumes erode in many categories across the industry. As we've come into this year, we've seen inflation return to normal levels or maybe even a bit below normal. For us, I think we've said it will be 2 to 3 percent and the average has been mid-single digits. We've seen stable prices across most categories. And as consumers have seen price stability, the volumes have started to recover. I will say it's a little slower than we thought it would be, but we expected to see volume stability and volume recovery, and in general that's what we are seeing, which is encouraging. The other thing I would say is that incomes in the U.S have been relatively stagnant so it's not been an easy time for the consumer either. We know, for instance, that consumers are using more coupons than they would have used, say, five years ago. We know that they are planning their shopping trips very carefully.

Q: General Mills over the past year or so has become even more of an international company with the acquisition of Yoki (a Brazilian food maker) and a controlling stake in Yoplait (the Paris-based yogurt company). Where do you see the biggest growth opportunities in international. Is it Yoplait? And are you planning more acquisitions like Yoki, where you go big into a market through the buyout route?

A: Let me give you two ways to think about it — platforms and developing markets. For the past 10 years, we have become more and more focused on five core platforms. The first one, of course, is breakfast cereal, where we are competing in over 140 countries now. It's a great global category — people like it everywhere. The second one is yogurt. With the acquisition of Yoplait international, the yogurt business is our second largest business as a company and the yogurt category is huge and very global. It's adaptable to all types of consumers and cultures. And its growth rate is in the mid-single digits.

The third global category is super premium ice cream with Haagen-Dazs. It is the largest single brand of ice cream in the world. That's a unique and terrific high-growth business. We sell it through shops and restaurants, but we also sell it in regular retail outlets around the world. Then there is our convenient meal businesses, things like Old El Paso Mexican food. We sell more of that outside the U.S. than inside. The last one, which is still small but growing fast, is the healthy snacking area.

We continue to do well in developed markets, and as for developing markets, we've talked about China as high growth for us. It is very high growth, double digit growth. Now with the acquisition of Yoki in Brazil, we have a way to accelerate our growth in that important emerging market. In cereal, our largest group of markets today is western Europe. Five years from now the largest markets for our international cereal joint venture (with Nestle) will be eastern Europe, Asia, and Latin America. We are interested in getting scale in a few other places. In India, we've got a business there now built around Pillsbury flour products and we just acquired a very small company called Parampara (which makes spice and sauce mixes). We like that business and we can grow it. But we'd like to be bigger in India, which is such a huge market and is going to be so important. So we continue to look at that, but there's nothing to announce right now. I should say you can never really predict how merger and acquisition activity will unfold.

Q: Western Europe, with its troubled economy, has been a problem for packaged food makers.

A: We've done pretty well there. But it is clearly slowing. If you look at the economic forecasts for western Europe I think they are between zero and a half percent over the next couple of years, so those are slow growing economies or potentially close to or in recession. And that's challenging the consumer. Still our business has been above trend. Ice cream has continued to grow well. Old El Paso has continued to grow well. Yogurt has done well. For some of those businesses, I think the reason is that they are in relatively low-penetration categories. While some European food categories might have 50 to 60 percent household penetration, our categories are in the teens and low 20s. So there is a lot of upside.

Q: Your U.S. snack business has been doing great. What particularly has driven that?

A: First of all and generally speaking, snacking is a growing behavior. Americans are eating more meals -- smaller meals -- and snacking more frequently throughout the day. And as they do that, they are looking for healthier snack options. So there is this underlying consumer trend. Our success has been driven by innovation. We started with Nature Valley granola bars. People love the way they taste. They also like the fact that you can look at it and see what's in the product. It's very natural, containing primarily oats. We've been able to proliferate that in all kinds of forms and flavors, and extend it to different occasions from breakfast to lunch to an afternoon snack. Then we brought in the Fiber One products and we know that Americans are looking for fiber — fiber products that taste good. We launched Fiber One bars in 2007, and the business is over $300 million now. So that's been very successful for us.

Q: Small Planet Foods (home to General Mills' organic and natural brands) is relatively small — about $250 million in sales last year — but fast growing, your highest growth business. Should we see it as a half billion dollar business soon?

A: I'd like it to be very soon. It's going to keep growing fast. Small Planet Foods started with two organic brands, Cascadian Farms, which is now primarily cereal and granola products, and Muir Glen, which is soups and fabulous tomatoes, culinary products. And we've added to that. Small Planet is growing through natural food channels, but is also extending out to more traditional grocers now. The categories that recovered earliest and fastest from the crisis of 2008 were the organic food categories. There's real commitment to those categories by consumers.

Q: As you mentioned, the organic consumer is dedicated, and they've put heat on the food industry for its stand against Proposition 37 in California last fall. I was looking at Cascadian Farms Facebook page the other day, and there are still a bunch of negative comments from consumers. Cheerios, as you know, has been sort of a target of Proposition 37 proponents, and there's been lots of comments on its Facebook page. Has the stance you took on 37 hurt sales? Could you have taken any other stance?

A: These are clearly people who disagreed with the stance that we took and we took that stance in large part because we strongly disagree with state-by-state labeling. So does the industry generally. If you can imagine 50 states with 50 different sets of labeling requirements — I mean people are going to be paying a lot for food. So we opposed it, and by the way, 29 out of 30 of the leading newspapers in California also opposed it on an editorial basis. We have been very public about what we did and why we did it. It hasn't hurt our sales.

Q: General Mills only has around 9 percent of the Greek yogurt market due to its late entry into the business. Given the development of this market, is it possible to really gain significant share? And how would you define significant share -- 15, 20 percent?

A: We want our fair share, which would certainly be 20 percent, and we're almost half way there. A little bit of context on the yogurt category. Part of the challenge there was inflation we saw last year. We took pricing on our core business, which frankly was not accepted by the consumer.

Q: So you raised prices, and this time it just didn't work.

A: It didn't work. So we basically returned those businesses to the pricing levels they were at recently. As we have done that, the core business, which would be Yoplait light, Yoplait original, has improved. As we've taken those prices down, we've seen the turns, the momentum kind of return to that business. We've got the value part of the equation fixed now. The other challenge has been — as you pointed out — that we were late into the Greek segment. Partly that's just because it's a product that's made in a different way, so the capacity and the technology that you have to have is different than what we use to make Yoplait light. It took a while to get that. As we've built capacity, we've started to launch products that are very, very good and that are very competitive — Yoplait Greek 100, for instance. It will be a winner for us. We'll keep innovating and launching new products in Greek as we go forward because it's a big segment now and it's a huge opportunity.

Q: Was Greek one of those deals where you kind of thought, "this is just going to be a fad?"

A: We didn't think it was a fad because we were monitoring it. Greek was running along at a relatively small level within the overall yogurt category and I think what happened is it reached a tipping point, and then it really took off in a way that we didn't expect. So then, we went from "this is an interesting category" to "wow, this thing is exploding, we've got to be in."

Q: Is yogurt more of a fragmented marked than it was a few years ago?

A: I think the first thing to say is that it continues to be a market that grows nicely. And the second thing is that it's a market our retail partners really like. o that means they are expanding shelf space for it. It's just a category that's very responsive to innovation. There's something for everybody. We started out with our traditional products, then the light segment came in. Then the industry developed a lot of products targeted for kids, which have been very successful -- all kinds of formats. Digestive health products. Products with fiber.

Now you have Greek products coming in. Yogurt continues to be for us -- globally and in the

U.S. – one of our highest growth categories. And we have got a lot of effort focused on how can we continue to innovate and get growth in this category.

Q: Let's turn to cereal. In the last two quarters, you've had declining U.S. sales

A: And share, yes.

Q: What's behind that, and how are you going to change it?

A: Primarily, it has to do with price and promotion. As we came into last summer, the promotional dynamics, the promotional intensity within the category just got higher among the competitive set. So the promotion level was going up. It takes a while to adjust to something like that. We don't want to over-adjust. We're not out there winning by having more promotion than the other guy, but we do need to be competitive. Several competitors increased and ours was a little bit lower than it needed to be. We have to adjust. So we will do that. We have great, strong brands.

Q: There's a Goldman Sachs analyst -- I'm sure you saw it -- who put a "sell" rating on your stock and I don't see "sells" on your stock very often. One of the things he mentioned about cereal, and these are his words, is "innovation is failing to drive growth and velocity declines are accelerating," and he was particularly looking at Cheerios and its various line extensions.

A: Cheerios has been by any measure over the last five or six years an incredible success for us. We've grown that brand from less than 10 percent market share to over 13. In response to core brand innovation, good messaging, good advertising, good new products, whether it's Multi-Grain Cheerios or Chocolate Cheerios, it's a very broad-shouldered franchise that's been very responsive to innovation. We're very confident we can continue to grow it. We're good at bringing flavor variety and proliferation that people like. We've been very successful at that throughout cereal, and we'll continue to do that, as well as bring out uniquely new products.

Q: With General Mills' opposition last fall to the marriage amendment to Minnesota's constitution (which would have banned gay marriage), the company was boldly out there making a public statement. Has that stance affected sales in any way, either positively or negatively? What's the fallout?

A: Clearly this was a divisive issue. We recognized it was something people have strong feelings about on both sides. And we heard from people on both sides, including, obviously, from within General Mills — people who disagreed with me and with us. We encouraged people to express their views on both sides, inside the company. But I will say we didn't get as many contacts as we thought we might.

Q: Contacts?

A: From outside the company, from either side.

Q: E-mails, calls?

A: Yes. It didn't affect sales. Things like that don't really have an impact on sales.

Q: Did you struggle a lot with the decision? You could have just done what most companies did, say nothing.

A: We thought about it a lot. At the end of the day, General Mills has spent at least the last 30 years building a very diverse company. We've included everybody and those are our values. We didn't think the amendment was in the best interest of the company and the state.

Mike Hughlett • 612-673-7003