Two years ago, large investors salivated over takeovers in Big Food — and Minnesota's giant, General Mills, appeared to be on the menu.
Today, the narrative of the food industry is being reset. Big food makers need to compete with small innovators who are racing to satisfy consumer tastes and habits that are expanding in new directions. Takeover artists who merged firms such as Kraft and Heinz and mined them for excess costs have fallen from Wall Street darlings to cautionary tales.
The owner of Kraft Heinz cut too deep, making it much tougher for that food maker to compete. Meanwhile, companies such as General Mills, once considered vulnerable, are now preferred by many investors.
If the industry's last era was all about slash-and-burn cost savings, the new one is about growing sales and reinvesting in its brands.
"Everyone forgot about the sacred innovation that consumers care about," said Phil Kafarakis, president of the Specialty Food Association. "Nobody cared what the retail and customer base was saying."
Executives at Golden Valley-based General Mills started refocusing on growth about two years ago. In the second half of 2017, they produced the first quarterly increase in sales in two years. Organic sales growth — a term that doesn't refer to organic food but to increases from existing business rather than acquisitions — have been flat to higher in most quarters since.
"There was a period of time in the whole industry where sales growth wasn't always appreciated. It's more than pretty clear: that absolutely doesn't work for the long-term," Jeff Harmening, General Mills chief executive, said in an interview last month. "The biggest driver for long-term sustainability of a food company is organic sales growth."
By contrast, the poster child of the buy-and-slash-cost era, Kraft Heinz Co., has suffered. Put together in 2015 by Brazilian-run 3G Capital in a $50 billion deal, the company has endured so many cost cuts that it was unable to quickly adapt products to consumers demanding more organic and other natural foods. Earlier this year, 3G wrote off $15 billion, or 30%, of the deal's value.
Less attractive target
Before its turn in strategy, General Mills and its peers mimicked that stringent approach to savings, partly as an effort to remain independent by making itself a less attractive takeover target.
Today, executives at General Mills are aiming to consistently grow organic sales by low single digits over the long term. That may not sound like much, but for a firm with $16 billion in annual sales, it means adding $160 million to $300 million a year. That's like creating a dozen or more startup companies.
"We think management deserves a lot of credit for making growth a bigger priority and allocating more resources to make it happen." Robert Moskow, food industry analyst at Credit Suisse, said following General Mills' latest results last month.
For a time several years ago, every food company was being compared to Kraft Heinz, which was posting operating profit margins of around 23% to 25%. The only way to keep up was by making deep cuts and reining in spending. Those who didn't immediately became the subject of takeover gossip. Moskow at the time thought General Mills might be 3G's next target.
General Mills executives back then were trying to get the company's operating profit margin to around 18%.
"When everyone else had to compare themselves to 3G, and you have to put up on the margin slide next to them, it was like a kiss of death," said Kafarakis, the food association president and a former executive at Oscar Mayer, Kraft and McCormick & Co.
Innovation and investment in brands took a back seat as leaders frantically tried to make their businesses more efficient.
But in the summer of 2017, around the time Harmening became CEO, General Mills changed its message from reactionary to proactive, getting back to its roots as a food marketer and making investments in hopes of jump-starting sales.
The company started small. First came new yogurt products, a segment that was hemorrhaging sales. General Mills launched Oui by Yoplait and YQ by Yoplait, both of which helped buoy the floundering business.
Then came cereal, its signature product category. The company produced more of what it does best: sugary, indulgent cereals. There was the launch of unicorn marshmallows in Lucky Charms, the return of artificial colors to Trix and extra cinnamon on its Cinnamon Toast Crunch cereals.
Meanwhile, it was investing in its more wholesome acquisitions, such as Epic Provisions and Annie's, that put it in the carts of shoppers seeking organic and natural foods.
Last year, the company went big. Really big. In April 2018, General Mills made a return into pet food, buying Blue Buffalo Pet Products for $8 billion. It was the company's second-largest acquisition after its purchase of Pillsbury Co. in 2000. Many analysts were initially skeptical of the deal, but now see it as a way to grow organic sales.
"We are looking to stay in the middle of the boat," Harmening said, referring to a desire to balance sales and profits. "That's what you see in our guidance and that's why we acquired Blue Buffalo."
Meanwhile, 3G leaders, including co-founder Jorge Paulo Lemann, have acknowledged their model didn't work for an industry being reshaped by consumers.
"We are scrambling," Lemann said at a Milken Institute conference this spring. "We bought brands and we thought they would last forever … We simply managed what was there a little bit more efficiently and now we have to totally adjust to new demands."
He added that Kraft Heinz must now recruit people with fresh ideas and new skills.
Kafarakis said General Mills may have caught the change sooner but cannot be complacent.
"The years of just tacking on a few more flavors, or shortening the packaging for a better price point are over," he said. "You seriously have to make a leap of faith and do something crazy."
Kristen Leigh Painter • 612-673-4767