Engines for Growth: Pillsbury Brings Potential

April 22, 2003

Stacy Kend Eric Aispuro Edwin Liang

Prepared For: General Mills

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Table of Contents

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Company History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Financial Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Internal Rivalry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Substitutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Complements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Buyer Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Supplier Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Strategic Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

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Executive Summary

General Mills has traditionally maintained a leading position in the ready-to-eat cereal and flour markets. However, these markets, especially cereal, seem to be showing declining growth in recent years. In 2002, cereals only grew by 2 percent. Changing consumer trends and increased competition in the industry have presented new challenges. In recent years, the ready-to-eat cereal industry has been hit by the increasing demand for more convenient and mobile breakfast options. Similarly, private, household brand cereal has begun to take market share away from the “Big Three” brands, creating added competition within the industry. In the face of the plateauing cereal industry, General Mills must look outside of this core competency to find new growth opportunities. Blaisdell Consulting recommends that General Mills aggressively exploit its acquisition of Pillsbury. In contrast to the growth patterns in the ready-to-eat cereal industry, frozen baked goods are growing at 21 percent. With new improvements in this category, General Mills has the potential to solidify itself as the number one ranked company in this market. Also, there is growth potential in the soup industry, with Progresso. By creating more on-the-go soups, Progresso may become a stronger competitor to Campbell Soup. Moreover, with the increased channels of distribution gained in the Pillsbury acquisition, Blaisdell Consulting feels it is time to expand product offerings in the frozen and refrigerated sectors. One market that is currently not included in General Mills’ domestic portfolio is ice cream. With vertical integration and ice cream experience abroad, General Mills should incorporate this high growth market into its business. With continued concentrations in product innovation and expansion into new markets, General Mills will be able to compete as a leading food company in the years to come.

Company History

General Mills started with Cadwallader C. Washburn and his Minneapolis Milling Company in 1856. The Company’s sole purpose at the time was to lease power rights to mill operators. Finally, ten years later, in 1866, Washburn built his first flourmill near the falls of St. Anthony on the Mississippi River in Minneapolis. It was officially named the Washburn “B” Mill, though critics dubbed it “Washburn’s Folly.” No one expected the flour from the midwestern spring wheat to acquire enough demand to make it economically viable. To the surprise of many, the Company did well enough to open a second, larger mill “A” in 1874. In 1877, John Crosby joined Washburn as a partner in the newly named Washburn Crosby Company. The two began entering their flour in competitions, where they quickly established their flour as the finest in the world. In 1980 Washburn and Crosby

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changed the name of their premier flour to Gold Medal, which is still considered the number one flour brand in the U.S. today. Meanwhile, Charles Pillsbury became one of Washburn Crosby Company’s biggest competitors. Pillsbury’s mill was established in 1869 just across the river from the Washburn Crosby mill. In 1882, Pillsbury’s “A” mill became the largest in the world, breaking production records. In 1927, Pillsbury began trading on the New York Stock Exchange. James Stroud Bell took over the Washburn Crosby Company in 1888, and led the Company to extraordinary growth until his son, James Ford Bell, assumed leadership in 1928. Bell Jr. merged the Company with several other regional mills, creating General Mills, Inc. Only five months after the merger, General Mills became the largest mill in the world.i Today, the Company has expanded by adding several food categories including Big G cereals, yogurt, snacks, meals, baking products, bakeries and foodservice. General Mills acquired Pillsbury in October 2002, even further expanding its penetration into the packaged foods industry. General Mills markets its products in over 100 countries worldwide. As a company with $10.8 billion in net sales, General Mills is considered one of the most trusted consumer companies in food. Some of General Mills’ leading brands include Wheaties, Cheerios, Cinnamon Toast Crunch, Pillsbury Doughboy, Progresso, Totino’s, Yoplait, Green Giant, and Old Paso. It is clear from these brands that General Mills has diversified to nearly every aisle of the grocery store.

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Financial Overview

Financial Highlightsii In Millions, Except per Share Data; Fiscal Year Ended 5/26/02 5/27/01 Change

Net Sales $7,949 $5,450 46%

Earnings Before Interest, Taxes and Unusual Items (EBIT) 1273 1169 9

Earnings Before Interest, Taxes, Depreciation, Amortization and Unusual Items 1569 1392 13

Net Earnings Before Unusual Items and Accounting Change 581 643 -10

Net Earnings 458 665 -31

Earnings per Share:

Diluted, before unusual items, accounting change and goodwill amortization 1.70 2.28 -25

Basic 1.38 2.34 -41

Diluted 1.34 2.28 -41

Average Common Shares Outstanding:

Basic 331 284 17

Diluted 342 292 17

Dividends per Share $1.10 $1.10 --

Cash Flow from Operations $916 $740 24

The acquisition of The Pillsbury Company on October 31, 2001 has strongly affected the financial comparisons between fiscal years 2001 and 2002. Net sales rose 46 percent from $5.45 billion to $7.95 billion. Also, worldwide unit volume rose 49 percent from last year. However, the pro forma results (as if General Mills had owned Pillsbury) over the fiscal years 2001 and 2002 showed minimal growth in worldwide unit volume. Therefore, the acquisition of Pillsbury resulted in reduced earnings and numbers significantly below General Mills’ historical trends in fiscal 2002.iii Combining General Mills and Pillsbury caused an increase in cost of goods sold as a percent of sales. This percentage rose from 53 percent in fiscal 2001 to 60 percent in 2002. The increase was also partly due to weaker than usual unit volume trends that reduced operating leverage. The benefit of administrative cost synergies, and the lower marketing spending in the Bakeries and Foodservice created a decrease in selling, general, and administrative costs from 26 percent in fiscal 2001 to 24 percent in fiscal 2002 and International segments of General Mills.

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Earnings before interest and taxes (EBIT) grew 9 percent from $1.17 billion to $1.27 billion. Earnings after tax, however, decreased by 10 percent, showing the effects of the additional interest expense associated with the acquisition. In addition, average diluted shares were affected by the acquisition. In 2002, average diluted shares were 343 million compared to 292 million in fiscal 2001. Diluted earnings per share excluding unusual items dropped 25 percent from $2.28 in 2001 to $1.70 in 2002. This twenty percent is comparable to the new rule eliminating goodwill amortization in accounting. Obviously, with the acquisition of Pillsbury, the unusual items expense for fiscal 2002 was quite large, adding to $120 million after tax. When including unusual items, General Mills’ net diluted EPS was $1.34. This compared to $2.28 in fiscal 2001. The Pillsbury acquisition divided the Company into three reportable segments. The first is U.S. Retail, which accounts for 77 percent of fiscal 2002 sales and 85 percent of operating income. The second is Bakeries and Food Service, making up 13 percent of fiscal 2002 sales and 12 percent of operating income. Ten percent of fiscal 2002 sales and 3 percent of operating income came from the International segment.

Fiscal 2002 Operating Profit By Segment iv

85%

12% 3%U.S. Retail

Bakeries andFoodserviceInternational

The U.S. Retail segment includes Big G cereals, Pillsbury USA, Meals, Baking Products, Snacks, Yoplait-Colombo, and Small Planet Foods. Net sales increased from $4.79 billion in fiscal 2001 to $6.14 billion in fiscal 2002. Operating profits before unusual items were up 1 percent from 2001, totaling $1.07 billion. On the other hand, unit volume declined 1 percent from the prior year, caused by the interruption of the acquisition, and decreased levels of promotional activity during the integration period. Interestingly, volume growth in Yoplait-Colombo, Snacks, and Pillsbury USA were counteracted by the declines in Big G cereals, Meals, and Baking Products. Net sales for the Bakeries and Foodservice segment totaled $1.03 billion in 2002, compared to $397 million in fiscal 2001. Operating profits before unusual items grew to $146 million, an increase of 60 percent from the previous year. These results reflect the contribution of Pillsbury’s operations and the positive growth in General Mills’

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foodservice segment. However, overall weak foodservice industry trends and poor outcomes in the retail bakery segment were seen in the unchanged unit volume between years. The International segment of General Mills reaches Canada, Europe, Asia, and Latin America. Fortunately, this segment, with the help of Pillsbury witnessed incredible growth. Net sales increased from $263 million in fiscal 2001 to $778 million in fiscal 2002. Operating profits before unusual items more than doubled the previous year’s $17 million total, reaching $45 million. Also, due to growth in Canada, Europe, and Asia, comparable unit volume rose 4 percent from fiscal 2001. Joint ventures net sales increased to $777 million, compared to $666 million in 2001. After-tax earnings from joint ventures increased about 94 percent to $33 million in fiscal 2002, compared to $17 million a year earlier. Joint ventures from Nestle, PepsiCo, and Haagen-Dazs (established by Pillsbury) all contributed significantly to this increase in earnings. As can be seen from the graph below, General Mills’ stock price has been increasing since its fiscal year end in May 2002. The Company seems to be adjusting well to its acquisition of Pillsbury. The acquisition from Diageo plc totaled $9.7 billion. The transaction included 134 shares of General Mills’ common stock, plus cash paid and assumed debt equaling $3.8 billion. Also, on April 30, 2003, General Mills may be required to pay Diageo $395 million depending on the GIS stock price and number of shares held at that date. Diageo will not receive this additional payment if the average GIS stock price over the period exceeds $49 a share, which looks unlikely based on the graph below. v

Stock Price Historyvi

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Also of importance are the predictions for fiscal 2003. According to Standard & Poor’s General Mills stock report, sales should increase between 27 and 29 percent in 2003. In addition, volume growth is expected along with slightly higher prices. They predict that operating margins will widen due to the synergies between Pillsbury and General Mills. However, increased spending on promotional activity will restrict margin growth. The EPS before unusual items is predicted to reach $2.61 in fiscal 2003, compared to $1.70 in fiscal 2002. In the long run, EPS growth of 11 to 13 percent is expected.vii The chart below emphasizes analysts’ positive opinions of General Mills. Thirty-five percent of the 17 analysts advise the public to buy GIS. In fact, Standard & Poor’s analysts recently upgraded their recommendation from hold to accumulate. This reflects the improved earnings visibility and volume growth trends seen in the Company. The majority of analysts agree that the acquisition of Pillsbury has benefited General Mills in its ability to stay in line with faster growing categories, while simultaneously taking emphasis away from its cereals. For this reason, 82 percent of analysts agree that GIS is worthy of either buying or holding.

Analysts’ Opinionsviii

No. of % of 1 Mo. 3 Mo. Nat'l Reg'l Non- Ratings Total Prior Prior Broker Buy 6 35 5 5 2 3 0 Buy/Hold 3 18 4 5 2 1 0 Hold 5 29 5 4 4 1 0 Weak Hold 1 6 1 1 1 0 0 Sell 0 0 0 0 0 0 0 No Opinion 2 12 0 1 1 1 0 Total 17 100 15 16 10 6 0

Lastly, it is important to note that General Mills remains a competitive company among its peer group of large food manufacturers. Included in the comparable companies are Campbell Soup, Heinz, Hershey Foods, Kellogg Co., and Wrigley Jr. General Mills’ stock market capitalization reaches $17,535 million, higher than any of the other five companies. However, Hershey Foods and Wrigley Jr. appear to have a slightly higher stock prices, P/E ratios, and quality rankings than General Mills. Both near- and long-term outlooks for this industry remain modestly positive.

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Peer Group Comparables ix

Stock Recent P/E 12-

Mth. 30-day 1-year Beta Yield Quality Stk.

Mkt. Ret. on Pretax LTD

to Symbol Stock Ratio Trail. Price Price % Ranking Cap. Equity Margin Cap.

Peer Group Price EPS Chg. % Chg.

% (mil. $) % % %

General Mills GIS 47.55 32 1.50 3% -4% 0.02 2.3 B+ 17,535 25.4 8.8 57.5

Campbell Soup

CPB 24.33 18 1.33 3% -16% 0.37 2.6 B+ 9,985 383.9 13.0 104.9

Heinz (H.J.) HNZ 34.32 15 2.3 -3% -17% 0.27 4.7 B+ 12,059 53.9 13.6 64.5 Hershey Foods

HSY 68.33 41 1.65 2% -1% -0.36 1.9 A- 7,224 17.8 7.5 38.5

Kellogg Co. K 34.63 22 1.59 1% 14% -0.02 2.9 B 14,138 54.5 9.1 86.6 Wrigley (Wm.) Jr.

WWY 57.04 34 1.70 5% 11% 0.34 1.4 A+ 10,449 30.1 21.7 Nil

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Porter’s Five Forces Analysis

Summary of Five Forces Analysis of the Ready-to-Eat Cereal Industry

Force Threats to Profit Internal Rivalry Medium to High Entry Low to Medium Substitutes and Complements High Supplier Power Low Buyer Power Medium

Internal Rivalry General Mills, Inc. is a leading producer of packaged consumer foods that operates exclusively in the consumer foods industry. The Company possesses strong positions in its three business segments: U.S. Retail, Bakeries and Foodservice, and International. As can be seen in the chart below, General Mills currently ranked first in refrigerated yogurt, refrigerated dough, dessert mixes, frozen baked goods, frozen hot snacks, dinner mixes, fruit snacks, and Mexican dinner kits/shells. It is ranked second in ready-to-eat cereals, frozen vegetable/meal starters, ready-to-serve soup, frozen breakfast foods, and microwave popcorn.

Leading Market Positionsx Category Category Our Dollar Rank Dollars in Millions, Fiscal 2002 Size Dollar Growth Share Ready-to-eat Cereals $7,570 2% 32% 2 Refrigerated Yogurt 2570 12 37 1 Frozen Vegetables/Meal Starters 2450 0 20 2 Refrigerated Dough 1570 3 72 1 Ready-to-serve Soup 1480 9 26 2 Dessert Mixes 1450 2 39 1 Frozen Breakfast Foods 880 3 31 2 Frozen Baked Goods 820 21 18 1 Frozen Hot Snacks 820 12 22 1 Microwave Popcorn 800 9 21 2 Dinner Mixes 650 23 58 1 Fruit Snacks 550 9 65 1 Mexican Dinner Kits/Shells 280 8 51 1

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General Mills belongs to the packaged foods and meats sub- industry. According to Hoovers, the Company can be classified by four distinct SIC codes: 2023 – dry, condensed, and evaporated products, 2037 – frozen fruits and vegetables, 2041 – flour and other grain mill products, and 2043 – cereal breakfast products. From December 19, 2001 to December 19, 2002, the S&P Packaged Foods and Meats Index declined 2.7 percent. During that same time period, the S&P 1500 declined 22.2 percent. Therefore, the sub- industry appeared to be performing comparatively well. Despite this out performance in the market, continued success will be more selective based on changing food consumption trends and the firm’s defensive appeal in a slow economy.xi Although General Mills is obviously a leading firm in the packaged food industry in the U.S., it is also a strong international competitor. The acquisition of Pillsbury doubled the size of the Company in Canada, while also gaining established businesses in the European, Latin American, and Asian markets. Pillsbury created several joint ventures in Asia for Haagen-Dazs ice cream. The cereal joint venture with Nestle (Cereal Partners Worldwide) aligned General Mills with the number two cereal company in the world. Similarly, Snack Ventures Europe joint venture with PepsiCo is the number one snack company in continental Europe. At present, General Mills markets brands in more than 100 countries.xii Some of General Mills’ top competitors include Campbell Soup, Danone, Heinz, Hershey Foods, Kellogg Co., Wrigley Jr., and Kraft. Many of these firms compete with General Mills in only one or two product segments of the Company. xiii Substitutes Substitutes pose a substantial threat in the packaged foods industry. In recent years, General Mills has been experiencing weakened demand, particularly in its cereal products. This diminished interest in cereal and other sit-down breakfast items is due to Americans’ more mobile lifestyle. Common on-the-go alternatives include toaster pastries, regular pastries, bagels, health drinks, and health bars. The substitutes in the mobile foods category are generally competitively priced relative to cereal. For this reason, cereal versus the on-the-go alternative consumption is merely a result of consumer preference. Therefore, if the trend towards a mobile lifestyle continues, General Mills’ cereal in the U.S. may also continue in a downward trend. Similarly, refrigerated dough products and soup face strong competition. Private- label products seem to be refrigerated dough’s main competitor, while Campbell Soup appears to be the dominating the soup market. Because all these products seem to be easily

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substitutable for one another and pricing is generally competitive, product superiority needs to be established by General Mills in order to claim large market shares. Complements Because ready-to-eat cereal remains General Mills’ largest category size within its company, most complements that have effects on General Mills stem from complements of cereal. Therefore, the milk industry has the greatest impact on General Mills. Few people consume cereal without milk. For that reason, most consumers factor in the price of milk when purchasing cereal. Although to a lesser degree than milk, juice is also considered a complement to cereal. Because consumers often drink juice along with their breakfasts, a low price in orange juice, for example, may induce the consumer to purchase a box of cereal for a healthy, sit down breakfast. Entry Post, Kellogg, and General Mills dominate the $7.6 billion ready-to-eat cereal industry. In 2002, General Mills’ dollar market share constituted 32 percent of this market. Due to this high level of market concentration in the hands of only three firms, entry by newcomers has remained fairly low. xiv The largest barrier to entry appears to be the high initial costs of creating cereal companies. Both building a manufacturing plant and establishing channels of distribution can create large start up costs. These costly initial fees discourage other cereal companies from being created, regardless of the economic profits that could be gained by selling cereal below the branded cereals’ prices, which are generally above marginal cost. Moreover, brand loyalty dissuades entry. Most consumers appear to have an inelastic demand for the established brand cereals. This is especially true amongst children, who watch television commercials portraying these premium brands. Children are the least likely consumers to settle for generic brands. This trend from childhood continues through to adulthood. Like their youthful counterparts, adults tend to be loyal to the big named ready-to-eat cereals as well. In addition, marketing and advertising costs pose a threat to potential entrants. On average, new products by General Mills and Kellogg amount to $20 million in advertising costs the first year of their introduction into the market.xv In 2002 alone, General Mills spent $489 million on advertising costs.xvi Also, larger companies can purchase larger amounts of advertising space for their various products, resulting in discounted costs. Unfortunately, smaller entrants will not gain these benefits. Also, larger companies pay premiums to supermarkets to have their products placed in better locations. For example, cereals at the front isle displays and in the center isle

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positions tend to be the best sellers. Bigger companies can afford to pay these premiums. However, private label companies, like those owned by the supermarkets, do not have to pay such premiums for the coveted positions. Because of the lower costs and lower prices coming from supermarket brands, they seem to pose the highest threat to the already established brands. However, with years of marketing, advertising, and brand loyalty already behind these big cereal brands, the supermarket brands have not been able to take any substantial market share. Buyer Power Discount retailers, such as Wal-Mart, have been gaining market share in recent years. Because these discounters often have their own large warehouses in order to cut costs, they are able to buy products, like ready-to-eat cereals, in very large quantities. As is normal procedure, large quantities usually result in discounted prices. In fact, these discounters are able to demand lowered prices since they order such a large volume of the product.xvii Similarly, grocery stores are ordering larger quantities as well. Because many supermarkets have engaged in merger activity, fewer amounts of stores are ordering increased amounts of products. Again, the larger volumes are creating discounted prices. Also, as already mentioned, many of the supermarkets are creating their own brands of products. This also helps the supermarkets in their pricing position with the premium branded ready-to-eat cereals. Supplier Power Unlike buyer power, the power of the suppliers to General Mills has little affect on the Company. Items like grain and wheat used in cereals are available by countless distributors. Likewise, the amount of distributors of packaging supplies is numerous. If one distributor raises its price, General Mills can easily switch to another supplier. In other words, the suppliers pose very low risk to profits. Although General Mills has current agreements with Columbia Grain as a main supplier of bulk grain, General Mill’s production of flour is already incorporated into its production process. Beginning as a group of flourmills more than 130 ago, General Mills produces for its own flour demands. By incorporating up-stream production processes into business operation, General Mills increases financial efficiency by internalizing pricing externalities.

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Strategy In a time when General Mills was beginning to slow in growth in areas of its core competencies, CEO Steve Sanger led the Company to the acquisition of Pillsbury. Although mergers are oftentimes risky, some drastic change needed to take place in order to maintain General Mills’ as a future leader. So far, the acquisition has proven to be a success. One extremely important element gained in the merger is channel distribution. New volume growth is made possible by selling General Mills product lines to established Pillsbury customers and vice versa. For example, General Mills has had established relationships at convenience stores. Through those relationships, Pillsbury was able to more than triple its distribution of items such as Totino’s pizza rolls at convenience stores. Conversely, Pillsbury has been a long-time supplier of bread dough to Subway restaurants, where General Mills was able to integrate its Lloyd’s Barbeque products into the chain. This type of cross-selling has led to additional sales of $140 million thus far, according to Sanger. General Mills needs to continue to develop the many existing relationships that it and Pillsbury have developed to attain further distributional growth. The acquisition of Pillsbury not only increased channels of distribution among sellers, but also within each individual store. With Pillsbury, General Mills has gained greater access to the refrigerated and frozen sections of grocery stores. The Company now owns an increased share of space within these areas of distribution. Due to this greater ownership, Blaisdell Consulting feels General Mills has acquired strong opportunity for expansion in the refrigerated and frozen foods section. Specifically, Blaisdell Consulting suggests as its primary strategy that General Mills expand into ice cream. Unlike Nestle and ConAgra, two leading food companies, General Mills is currently uninvolved in the ice cream sector of the American market. Perhaps this is one way the Company can begin to compete with the larger food companies overall (like Kraft), rather than competing with differing companies in each product line (like Kellogg). Ice cream is one route of expansion that appears to be particularly promising in the United States. Americans are notorious for their high consumption of ice cream. Moreover, the U.S. offers bigger margins and higher growth than most other food businesses.xviii These are two key ingredients for expansion into new product lines. Interestingly enough, General Mills is already involved with ice cream sales abroad. The Company owns and markets Haagen Dazs ice cream outside of the U.S. and Canada, while Nestle owns Haagen Dazs domestically.xix This partnership was gained through an already established joint venture between Pillsbury and Haagen Dazs before the acquisition.

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With General Mills’ current ownership of Haagen Dazs abroad, it can be assured that the Company is very familiar with the product. Because marketing and research and development (R&D) for ice cream is already instituted in the Company’s business abroad, this should facilitate marketing and R&D of ice cream in the U.S. In other words, General Mills already has the understanding and knowledge of ice cream production. The Company simply needs to expand its market to the country of highest growth, the U.S. In addition, the baked goods and cookie dough acquired with Pillsbury can easily be integrated into ice cream. For example, chocolate chip cookie dough ice cream is generally amongst the best selling flavors. Why not use the best selling cookie dough within a best selling flavor? By using products already produced by the Company in ice cream, costs will be decreased. General Mills could easily vertically integrate its number one selling dough products into its ice cream. Furthermore, with decreased costs due to vertical integration, there is potential of decreased pricing. This could prove invaluable in a time where monopolization is threatening the industry. In recent news, it has been reported that Nestle hopes to merge with Dreyer’s Grand Ice Cream Inc. in June 2003. If this merger gets authorization from the U.S. Federal Trade Commission, high-end ice cream rivals Dreamery and Starbucks will be under the same corporate roof as Haagen Dazs. In other words, the $4 billion merger of Nestle and Dreyers would create a combination holding nearly two-thirds of the American market for premium ice cream. xx If this merger gets approval, which currently proves doubtful unless some of the brands are spun off, General Mills faces two options. One is to potentially undercut these premium brand prices. If this proves to be impossible, General Mills may also take the option to focus on regular, lower-grade ice cream or frozen yogurt. With the downturn in the economy and the trend for healthier dessert choices, the second option appears viable. As an added benefit of developing a new ice cream brand in the U.S., Betty Crocker cake mixes would act as a complement. Because consumers traditionally serve ice cream with cake, one item would encourage the purchase of the other item. Also, the cake mixes could add a “tastes best with” message on the front of their boxes. Certain flavors of cake mix could recommend specific flavors of General Mills branded ice cream. Similarly, General Mills could offer special discounts on ice cream bought with the mixes. As a secondary strategy, Blaisdell Consulting recommends that General Mills further develop its product innovation within specific, already established product lines. In the food industry, the most important variable in growth is product innovation. General Mills has continued to remain a top competitor within its industry simply because it has followed the changing trends of consumers. Product improvements, new flavor varieties, and even the introduction of entirely new product lines have the power to drive unit volume growth and market share gains for the firm. However, one key factor in product

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innovation is that it needs to be targeted in categories with growth potential in order for it to be successful. On February 2, 2003, General Mills unveiled its new Berry Burst Cheerios. The demand for higher priced products, like Berry Burst Cheerios, actually helped boost profit in the third quarter. Also noteworthy was the 16 percent volume increase in U.S. cereal sales, which accounted for a better year than the cereal industry has witnessed in some time.xxi However, it is unclear whether the sudden increase in sales actually signifies a turnaround in the cereal industry. Rather, sales increases could be due to the Kellogg price hike. Retailers bought more cereal than usual, anticipating General Mills would follow Kellogg’s higher pricing. Moreover, retailers started ordering Berry Burst Cheerios ahead of their introduction to consumers. In other words, it is difficult at this early stage to understand whether this new product is actually going to be profitable for General Mills in the future. Because the cereal industry remains unclear, Blaisdell Consulting suggests that General Mills focus more of its innovative efforts in the refrigerated dough and soup categories, areas with significantly higher growth potential than cereal. Currently, it appears from recent product releases that General Mills continues to focus on its old product line, rather than those products acquired with Pillsbury. General Mills needs to change its focus immediately if the Company wants to see increased market share and volume growth in the future. Although General Mills has undergone some product innova tion in refrigerated dough, such as resealable bags, increasing visibility of chocolate morsels, and quality improvements to pre-cut dough cubes, further potential remains. More specifically, we believe General Mills has the ability to increase dough volume sales during both non-seasonal and seasonal peak usage periods. As of now, dough sales typically increase during the holidays. In order to increase non-seasonal sales, General Mills has various options. For example, General Mills should consider enhancing non-seasonal sales through new products, higher quality, product tie- ins, and effective promotions. Similarly, Blaisdell Consulting believes that increased merchandising, increased retail visibility, and increased retail inventory levels could induce higher peak seasonal sales. Because General Mills currently holds only 19% of the market share in this $800 million frozen baked goods category, there is plenty of room for growth and opportunity. xxii Also worthy of notice is General Mills’ Progresso soup brand, which was acquired along with Pillsbury. It is ranked second to Campbell in the soup category. While General Mills has been under the pressure of keeping its stock price up in order to avoid making additional payments to Diageo, Campbell is launching one of its largest marketing initiatives in existence. Campbell’s aim is to introduce 21 new products, making soup more convenient and portable.xxiii Although convenience seems to be the future with food, General Mills has decided to focus boosting productivity savings rather than engage in a new marketing war with Campbell.

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Blaisdell Consulting is concerned that General Mills’ decision will make the firm vulnerable. At a time when cereal sales could potentially be plateauing in sales growth, it is invaluable that General Mills look to new opportunities with growth potential. Ready-to-serve soup could easily be a critical factor in the firm’s overall portfolio. Progresso accounts for more than $400 million in sales annually, and has served as an important area for sales growth at General Mills. However, Progresso’s growth rate has slowed since changing hands from Pillsbury to General Mills. The brand posted a 22.6 percent gain in 2000, but, since that point, Progresso’s growth rate has dropped to the single digits. With a 24 percent market share, compared to Campbell’s 57 percent, Progresso has plenty of room for growth and certainly should not remain complacent in the face of its competition. xxiv In addition to the Progresso on-the-go dilemma, grocers are also noting trouble at the stores. According to Paul McCaffrey, a director of procurement for four upscale grocery stores in New Jersey and Pennsylvania, grocers have lost allocation of promotional dollars for Progresso to other soup brands. These promotional dollars are usually used for end-aisle displays, advertising, and two-for-one deals. Before Progresso joined with General Mills, McCaffrey would earn $4.80 from Progresso for every case sold. Rather than basing allocation on a combination of incremental and base sales, now allocation is based solely on incremental sales. This seemingly minor change has resulted in a 70 percent decline in the money received for supporting Progresso.xxv Naturally, McCaffrey and other grocers will be more likely to increase partnership with Campbell at the expense of Progresso. Frankly speaking, General Mills needs to update its position in the $6 billion on-the-go market, which is presently growing at a 15 percent annual rate.

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Conclusion

As a market with high margins and strong growth, Blaisdell Consulting offers as its primary strategy the entrance of General Mills into the U.S. ice cream industry. Overall, this recommendation seems reasonably feasible given General Mills’ expanded share of the frozen foods section, prior experience abroad, vertical integration, and potential for complements between products. As a secondary strategy, we suggest further product innovation particularly in the high growth markets for frozen baked goods and soup. While current eating trends are changing, General Mills must change as well. The Company has started this effort with the acquisition of Pillsbury. General Mills must continue in this direction. While cereal and flour, two products among General Mills’ old set of core competencies, appear to be at a standstill, the Company needs to reinvest its concentrations in more growth-worthy ventures. As already mentioned, the frozen baked goods category has high potential for growth through increased merchandising, visibility, and inventory. The soup category must update itself to match consumer trends. While expanding its branches into new markets like ice cream and maintaining strong product innovation in high growth categories, General Mills will thrive for many years in the future.

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i http://www.generalmills.com/corporate/about/history/hist_roots.pdf ii General Mills 2002 Annual Report, p. i iii General Mills 2002 Annual Report, p. 13 iv ibid. v Standard & Poor’s Stock Report: General Mills Jan. 18, 2003. vi http://finance.yahoo.com/q?s=gis&d=1y vii Standard & Poor’s Stock Report: General Mills Jan. 18, 2003. viii ibid. ix ibid. x General Mills 2002 Annual Report, p. 2 xi http://www.hoovers.com/co/industry/9/0,2662,10639,00.html xii http://www.generalmills.com/corporate/businesses/international/ xiii http://www-2.hoovers.com/co/capsule/9/0,2163,10639,00.html#COMPETITORS xiv Price, Gregory K. “Cereal Sales Soggy Despite Price Cuts and Reduced Couponing.” xv Corts, Kenneth. “The Ready to Eat Breakfast Cereal Industry in 1994.” xvi General Mills 2002 Annual Report, p. 24. xvii Folta, Tim. “Analysis of the Ready-to-Eat Cereal Industry in 1994.” xviii Wilke, John. “Nestle is Offering New Concessions.” xix Phillips, David. “Ice Cream Gives Cold Comfort.” xx Wilke, John. “Nestle is Offering New Concessions.” xxi Schlis serman, Courtney. “General Mills Q3 profit almost triples: Annual earnings to rise: Boosted by 2001 acquisition of Pillsbury dough unit.” xxii Morgan Stanley Equity Research: General Mills Dec. 30, 2002. xxiii Forster, Julie. “Gunning for Progresso” p. 1. xxiv Forster, Julie. “Gunning for Progresso” p. 2. xxv Forster, Julie. “Gunning for Progresso” p. 3.