Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Ever since 3G Capital created the cost-cutting machine that is Kraft Heinz Co., the company's biggest foodmaking rivals have tried to emulate it -- not least to keep pesky activist investors and unwanted takeover offers at bay. At General Mills Inc., though, the copycat strategy is showing strains. 

On Tuesday morning, cereal giant General Mills reported its seventh consecutive year-over-year drop in revenue and forecast a 4 percent decline in sales for fiscal 2017, which ends in May. While management largely blamed this on price competitiveness and promotional misses, it's likely that the big organizational changes the $35 billion company has undergone are also having a negative effect.

Double Duty
General Mills is struggling to stem declining sales while trying to keep up with Kraft Heinz's drastic cost-cutting
Source: Bloomberg

Has General Mills bitten off more than it can chew? CEO Ken Powell and his team were grilled about this on Tuesday's earnings call. First was David Driscoll of Citigroup Inc.:

Do you believe that the cost reductions in these programs are in whole or in part to blame for the significant revenue problems that the company is having?...Does it make you fundamentally more nervous or wanting to move in a slower fashion on future cost reductions?

Bank of Montreal's Ken Zaslow later added this troubling remark:

I agree that your history has been there, but I just can't figure out exactly what went wrong and why it won't happen again.

Because of the packaged-food industry's broadly weak growth prospects in categories from cereal to soup, investors in manufacturers such as General Mills have turned their attention to the bottom line. Kraft Heinz -- thanks to private equity part-owner and manager 3G Capital -- has led the way (and begun seeking out other targets). This has distracted from a top line still marred by minus signs. Kraft Heinz shares have thus outperformed, inspiring peers to make similar changes. 

Soggy Cereal
As fresh foods and healthier options become more popular, traditional packaged-food giants such as General Mills are feeling the pain
Source: Bloomberg

For its part, General Mills has taken a "holistic margin management" approach, with a goal of slashing $4 billion of expenses by the end of 2020 and achieving a 20 percent adjusted operating profit margin. That figure was 16.9 percent for the latest quarter, but a shrinking revenue pool works against these cost-containment efforts, which in turn can also distract from or inhibit growth initiatives.

Even at Kraft Heinz the method has a breaking point. But in the case of General Mills, an inability to keep pace makes it increasingly vulnerable. The maker of Cheerios and Rice Chex has long topped the list of potential takeover candidates in the industry -- whether for 3G/Kraft Heinz, Nestle SA (with whom it has a cereal joint venture), or another suitor. And after Kraft Heinz was spurned by Unilever, it's possible that the 3G folks could look at General Mills' struggles and think, "We can do it better."

General Mills tried to reassure shareholders and analysts Tuesday with a slide deck and commentary repeatedly stating that third-quarter results were in line with updated expectations. It also said that most of the big supply-chain restructuring and other big changes are behind it. Still, the stock slid and has been in the red for most of March. What's the point of all this attention to costs if it's not creating a stronger company and may, in fact, be backfiring a bit?

Falling Behind
General Mills' stock is one of the worst performers in its peer group so far in 2017:
Source: Bloomberg

General Mills, with its indelible big G logo, may be a household staple -- but as an operator, it's no 3G. Attempts to borrow from 3G's playbook could just move General Mills further up the dealmaker's list of targets. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net