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Cheerios Maker Ain’t So Cheery


Image source: Sheila Fitzgerald / Shutterstock.com

What's going on?

General Mills, the maker of packaged foods like Cheerios and Yoplait yogurt, said its revenue in its previous quarter declined 3% versus last year, as many people continue to shift to healthier, fresher options.

What does this mean?

General Mills’ stock actually rose almost 2% on Wednesday, but that was likely because investors were expecting an even bigger sales decline. Nevertheless, its revenue fell for the eighth straight quarter as it remains heavily reliant on our eating habits of yesteryear, like breakfast cereal and flavored yogurt.

General Mills has tried to shift its product range, including offering gluten-free Cheerios, but it’s been like turning around a super tanker – change hasn’t happened quickly. General Mills’ new CEO says he will be plowing more resources into healthier, more natural products with the aim of returning the company to revenue growth.

Why should I care?

For markets: Companies like this are at risk of being “value traps”.

General Mills’ stock price is “cheaper” than the average US stock (based on the company’s valuation versus its profit). It also pays investors a significant annual cash payment (a.k.a. dividend). That sort of profile tends to attract investors seeking “value”, as opposed to, say, the “growth” that Facebook or Amazon offer. However, the risk is that General Mills never does figure out how to turn around its flagging sales – and the company’s value declines along with its revenue.

The bigger picture: Cost cutting is not a long-term strategy.

General Mills has been able to protect its profit somewhat in recent years by cutting its costs. That works for a few years: as long as costs are cut faster than revenue declines, a company can still increase profits. But, a company can’t cut costs forever. Eventually, as General Mills is now doing, it must invest in new products for the future – and, for investors, it then becomes a question of whether the company can execute on its investment strategy.

Originally posted as part of the Finimize daily email.

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