General Mills is leaning into pet food

General Mills, known for Cheerios, Trix and Yoplait, is hoping pet food will help it fight lagging cereal an...

Posted: Dec 20, 2018 6:08 AM
Updated: Dec 20, 2018 6:08 AM

General Mills, known for Cheerios, Trix and Yoplait, is hoping pet food will help it fight lagging cereal and snack sales.

The company said on Wednesday that it plans to double distribution of Blue Buffalo pet food items in the food, drug and mass market channel, which includes grocery, drug stores and big box retailers like Target. It also plans to make more of its products available in more stores.

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The efforts will lead to double digit growth in Blue Buffalo sales for the year, the company said.

In the next six months, the biggest improvement investors will see will be with Blue Buffalo, said CEO Jeff Harmening during a call discussing the company's second-quarter earnings.

Blue Buffalo's sales fell by about 7% the three months ending in November compared to the same period last year. General Mills said the loss is relative and that Blue Buffalo sales surged by 25% in the fall of last year after products were sold in mass retailers for the first time. Blue Buffalo was an independent company at the time.

In addition to increasing distribution, General Mills wants to develop more Blue Buffalo wet food and pet treats. "I think it's a huge opportunity for us," said Harmening.

General Mills (GIS) bought Blue Buffalo for $8 billion earlier this year. Harmening referred to the purchase as a "portfolio reshaping strategy" at the time. "We know that pets are family members," he said. "We want to continue to do better for all family members."

Pet food is growing faster than the broader packaged food industry. Americans spent $32 billion on it last year, according to AllianceBernstein.

The company sees similarities between its pet and human food businesses, especially when it comes to consumer trends.

In pet food "we see the same kind of trends that we do in human food," said Harmening on Wednesday, calling the phenomenon a "humanization of pet food." Consumers are increasingly interested in natural and organic foods for themselves and for their pets, he noted.

General Mills is also optimistic about its human food, even as sales have lagged for the 90-year-old company.

Cereal and yogurt sales have been a particular pain point for General Mills in recent years.

In the second quarter, North American sales of yogurt and snacks fell by 4% and US cereal sales slumped 5%. Greek and light yogurts led the yogurt decline, but Yoplait's French-style Oui and high-protein, low-sugar YQ helped offset the drive. On the snack side, Annie's fruit snacks, fruit and nut Larabar and animal-based protein EPIC bars performed relatively well.

The company attributed the drag in cereal to poor merchandising, but said that it saw improvement in November and early December and that it expects that momentum to continue next year.

So far, investors seem to be sold on General Mills' plan. Shares of the company popped nearly 7% after the report. But Alexia Howard, an analyst at AllianceBernstein, warned that outside factors could affect General Mills' plans.

"If Kellogg, Post, or private label competitors become more aggressive on price within the sector, this could create a substantial top line and/or margin headwind for General Mills," she wrote in a note.

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