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Andrew Willis: Consumer staples aren’t always moat-worthy businesses, but with General Mills (GIS), we’re far from the founding flour mills of the 1800s.
From Cheerios to Lucky Charms, Pillsbury, and Haagen-Dazs, General Mills has earned itself a narrow moat with strong brands. Not to mention a cost edge and strong relationships developed over decades. Senior equity analyst Erin Lash says the firm is able to secure valuable shelf space – and it’s looking to make the most of that opportunity.
General Mills has made dramatic cuts to the time it takes to bring a new product to market – from years to months. Consumers are moving away from processed fare and General Mills is pivoting and reformulating your favourite age-old brands with simple ingredients and the elimination of artificial colours and flavours.
We do believe investors in the consumer staples space should keep in mind that high-margin organic products are great, but don’t guarantee a moat. There are other ingredients in a recipe for a competitive advantage which include research and maintained customer awareness of compelling product benefits.
A great product to educate on benefits is the food we give our beloved pets – take Blue Buffalo for example. That’s a lasting bond with consumers and likely a point of pride for General Mills since they’re number one in pet food now.
For Morningstar, I’m Andrew Willis.
Bulls Say
- General Mills’ pet food business should benefit from the high-single-digit increase in pet adoptions during the pandemic. Its BLUE brand had been growing rapidly, as on-trend innovations are resonating with consumers.
- The firm is modernizing its brand-building capabilities, with shortened lead times for new product launches and advertising budgets that are shifting to digital formats where consumers are spending more time.
- General Mills' well-developed Strategic Revenue Management and Holistic Margin Management programs should help the firm offset steep cost inflation.
Bears Say
- Consumers are increasingly health-conscious, moving away from General Mills' categories (both its conventional fare and its high-sugar, high-carbohydrate organic offerings), which resulted in flat organic sales the five years preceding the pandemic.
- The firm has been increasingly reliant on acquisitions for growth, which adds integration risk and is generally costly, as evidenced by diluting ROICs including goodwill.
- E-commerce and an increase in digital marketing have lowered competitive barriers to entry for categories General Mills plays in.
Editor's Note: All images are courtesy of Unsplash.com and AP Images.
