FMCG

by Greg Thain

  · Products – mainly milled flour and animal feed – were hopelessly over-abundant, which put a downward pressure on prices. Today, apart from a small percentage of genuine ‘must-stock’ brands, many companies’ behave as though their high-price elasticity and low consumer loyalty products can easily be replaced, missed neither on retailers’ shelves nor in consumers’ homes.

  · The retail customer base was increasingly concentrated in the hands of new, powerful anti-manufacturer adversaries: chain stores such as A&P, which promoted its own private label brands at the expense of manufacturers.

  · Even its specialist customers – small bakers – were losing out to large and aggressive baking combines. Today, retailers have never been stronger: Wal-Mart’s private label business is larger than Procter & Gamble in its entirety.

  Increasing costs, combined with the above, were putting an unstoppable squeeze on margins. Manufacturers were finding that retailers and consumers were far from receptive to the passing-on of increased input costs at above-inflation price increases.

  Bell was very clear when he told the Washburn Crosby board that ‘the handwriting is on the wall. The process of concentration moves forward. The bargaining power of the buyer is steadily growing. There is no denying its effect on trade conditions. No legerdemain, no high-pressure sales method, no intensive merchandising practice can restore the old order. The question is how to deal with it.’ How indeed? A question confronting most managers in packaged goods companies today.

  Bell’s genius was to see that trying harder with the same business model wouldn’t cut it. Analysing the company’s five main sources of business, he could see nothing but trouble:

  · Export was a quarter of the company’s sales but was essentially used by the American wheat milling industry as an outlet for spare capacity, useful only in covering overheads.

  · Business with large bakers was substantial, 16% of sales in 1927, but even less profitable than export, as the large buyers played one milling company off against another, which Bell thought could only get worse.

  · Small baker business with was the largest component of company sales at 30%, but small bakers were losing out to the large baking companies, another trend Bell was convinced would worsen.

  · Household flour sales might make up 25% and might also look very promising for the future, but it could only be reached through the chain retailers.

  Not a promising outlook overall. And Bell forcefully concluded: ‘The methods of the past are not applicable to the present and any attempt to fit them into a modern setting would be suicidal.’ Bell was clearly not a man who hedged his bets. Today, in the same way, the days when brand manufacturer was king and a 20% ad spend increase in ad spend for a new campaign automatically meant extra listings and display are equally dead.

  The answer, Bell proposed, was radical action to address the power imbalance between wheat miller and retailer: a full-blown merger of like-minded millers, not locally in the Minneapolis area - antitrust legislation but stop that one - , but spread across the country, leap-frogging the concentration of retailers that was still mostly at the regional level. It would also leverage the industry trend towards large mills – the only ones Bell was interested in joining forces with – which were growing in number: the overall number of flourmills had halved in just over a decade. The modern analogy would be the trend towards mergers and acquisitions in packaged goods: P&G bought Gillette not because it wanted to get into shaving but because Gillette was so big already. In a battle of strength, size matters.

  Bell’s original and apparently genial proposal was the setting-up of a new company that would purchase the assets of the selected mills for ten times their average earnings over the previous five years and allowed each to keep its own board and operate with a large degree of independence. But that was just a smokescreen. Bell knew that the plan would only succeed if the new company became a truly new company, with a truly new way of operating. He was determined that his own company would take the lead.

  However, it soon became obvious to Bell that four companies weren’t enough: spread nationally they may have been, but they were not national. General Mills’ competitors were surely disadvantaged by their smaller scale, but those in the winter wheat-growing areas had the local advantage of much lower distribution costs. General Mills needed such local members too, particularly in the southwest, so, only six months after the company had been formed, it was adding mills in Wichita Falls, Amarillo, Vernon, Waco and El Reno. Sights shifted to California, then beyond. Before long, General Mills had 27 associated operating companies in sixteen states and had become the largest miller in the world.

  How Did It Evolve?

  The original General Mills can be likened to a decentralised multi-national in the 1970s. It handled the group financial transactions, paid government taxes and arranged appropriate insurance for the company’s physical assets. It also acted as central banker to the satellite companies, able to borrow at lower rates than any of its components. And, when group-wide activities made sense, it would coordinate them. Thus, basic research, nutrition programmes on the benefits of wheat, sales assistance to bakers and the like were head office programmes from the beginning. Head office also took care of booking and placing advertising: booking space nationally was cheaper. And each operating company still bought its own wheat, ran its own sales force and was responsible for its own profit and loss. So far, so good, although hardly revolutionary. But - somewhat unusually for a group of managers in a commodity business - Bell and his head office colleagues had a very consumer-centric view of their industry and it would be the implementation of this view that transformed General Mills from a loose association of flour millers into a consumer goods powerhouse to rival anything in America.

  At the time of the company’s formation, nearly all of its sales had been flour in one guise or another. Back in 1880, Washburn Crosby had entered its best flours in the first International Millers’ Exhibition in Cincinnati and had won gold, silver and bronze medals, with the winning flour re-christened Gold Medal flour. Post the merger, it made clear sense for those millers who didn’t their own branded flour to adopt into their product ranges, which they did. Gold Medal is still the best-selling brand of flour in America today.

  However, Bell was thinking beyond branded bags of flour. ‘Our associates,’ said Bell, ‘ can be trusted for products; we in General Mills are selling results rather than products … Our job isn’t finished when flour is sold but rather only when it is consumed; consequently, we maintain a continuous drive to get the flour out of the grocer’s stock and the baker’s bins and off the kitchen shelves to the table in forms appealing to the appetite’.This view, expressed in the early 1930s, was revolutionary in its day and even now might well put many modern companies to shame. The logical consequence, and the making of General Foods, was clear: selling flour and then watching everyone else turn it into something delicious was ridiculous.

  In addition to Gold Medal flour, Washburn Crosby also had in its locker a wheat-based product developed in the early 1920s selling as a value-added offering. But it was struggling; its sales had declined by half between 1927 and 1929 and the new company was far from sure that it should keep persevering with a product that by then had been on the market for five years but it was still shifting pitifully small volumes compared to the mountains of Gold Medal flour being sold nationally.

  The idea for the product had fallen into Bell’s lap in 1921 when he had been buttonholed by the lawyer of a Minneapolis diet crank who was obsessed with the benefits of bran. The lawyer came to the meeting clutching a patent for a process for manufacturing bran flakes, which had been discovered entirely accidentally by his client. The lawyer was looking for a company to commercialise the product and Bell was looking for something he could sell besides bags of flour. Bell signed him up and allocated him space to work up his process, which turned out to be completely useless; his bran flakes crumbled to dust when tumbled around in a packag
e. The crank was politely ushered out of the door and the project forgotten about until picked up again in 1924 by a Washburn Crosby technical expert who tested every strain of commercially available wheat and re-engineered the production process. The result, served up to a delighted Washburn Crosby board, was launched onto the market in late 1924 under a name coined by the wife of the company’s New York-based export manager: Wheaties.

  Perhaps unsurprisingly for a company more used to the commodity game, the results of competing against cereal goliaths like Kellogg’s and Post were uninspiring. Washburn Crosby was only a small, regional company at the time and had little idea how to promote the line. Indeed, its main marketing effort was serendipitous: one of its sales managers had been instrumental in saving Minneapolis’s first commercial radio station from going under and had idly suggested to the station manager that it and he could help sell Wheaties. The enterprising manager came up with a brainwave, a commercial based on the tune of a popular hit ‘She’s a Jazz Baby’, but with suitably transformed lyrics:

  Have you tried Wheaties?

  They’re whole wheat with all the bran.

  Won’t you try Wheaties?

  For wheat is the best food of man.

  And then the General Mills board met to decide whether Wheaties was really for them. The company’s advertising manager pointed out that of the 53,000 cases sold in the past year, , 30,000 had been to the twin cities of Minneapolis and St. Paul, where the ad had been airing for the previous three years. If the ad were extended to more radio stations, he argued, might not these sales be duplicated?

  Six weeks later, the company had set up a Packaged Foods division to concentrate on driving national sales of the only two brands the company really possessed: Gold Medal and Wheaties. The male quartet who had sung the ditty, rechristened the Gold Medal Fast Freight, was soon belting the number out coast-to-coast on the newly constituted Columbia Broadcasting System. Wheaties then inaugurated its sponsorship of baseball broadcasting and an ad agency-inspired tagline to go with it: The Breakfast of Champions. In ten years, 1929’s 53,000 cases a year had turned into a whopping 4.5 million and Wheaties was the best-selling cereal in the country.

  The Packaged Foods division soon latched onto another property that had been languishing within Washburn Crosby since 1921. The company had run a very easy mail-in competition on Gold Medal and over 30,000 responses had flooded into head office, many with additional questions on baking techniques. Here then was an opportunity to build a direct bond with its end-user customers; the company decided that everyone would receive a personalised reply, still better appreciated if signed in a woman’s name. The surname of this mythical employee was chosen in honour of a recently deceased company director, William G. Crocker; and the forename Betty for its homely feel. Her signature (still used today) was chosen from examples all female employees had been asked to submit. In 1924, Washburn’s infatuation with radio resulted in a half-hour cooking show, The Betty Crocker Cooking School of the Air, which by 1926 was on NBC. Thirteen Betty Crockers gave live cooking demonstrations across the country. In 1930, the company produced the first Betty Crocker cookbook. By 1945, Betty was the second-most-popular woman in America after Eleanor Roosevelt.

  All this, of course, was an excellent way to encourage more home-baking, specifically, the company hoped, with Gold Medal flour. But for the company to guarantee its flour was used, Betty had to take a larger role: not just a mouthpiece but also a brand. The chance came with a new idea from another part of the General Mills Empire, the Sperry Company. Carl Smith, a Sperry sales executive, was travelling home to San Francisco on the train one day in November 1930 when, in the dining car, he was delighted to find himself face-to-face with a plate of steaming hot cookies. How on earth could such things have appeared on a train? Smith ventured into the galley where the chef gladly explained how he had blended together a mixture of lard, flour, baking powder and salt before the train left Portland and stored it in an icebox. Now he could take out a portion at a time and make cookies to order. This was a completely novel idea. Housewives everywhere baked everything from scratch. There were no shortcuts. If they didn’t have the time, they didn’t bake.

  Carl took this news to the Sperry head chemist, who immediately set about solving the problems the train chef didn’t have to worry about, the biggest of which was shelf life. Any product made commercially would have to stay fresh, in ambient conditions, for weeks rather than for just one frozen train ride. It was not an easy problem to solve. But solution there was: use the then quite rare sesame oil as the fat component, then laminate: layers of fat could be sandwiched between layers of flour, which would keep fat away from the surface and so stop it from turning rancid. .

  This was too good an idea for the Sperry Company to keep to itself, especially as it had little experience in, or resources for, brand-building; the General Mills family claimed it, and the Gold Medal and Betty Crocker brand names lent instant credibility to the newly named Bisquick. The appetite of American women to be perfect moms whipping up freshly baked cookies for their kids in the blink of an eye knew no bounds. Within seven months of launch the company had sold half a million cases and made Betty Crocker the perfect vehicle for a whole range of quick-bake mixes made with 100% Gold Medal flour.

  General Mills, although still primarily a flour merchant, now had the bit between its teeth. Its next blockbusters would be more breakfast cereal products to hitch to the success of the Wheaties bandwagon. But the cereal, or cereals, had to be different, from Wheaties and from the products of competitors, so the company was naturally interested by the potential of a technology invented by the curator of the herbarium at Columbia University, Professor Alexander Pierce Anderson. The professor had discovered that cornstarch, if placed in a tube and subjected to intense heat, would explosively expand to ten times its original volume. One wonders how many obscure things he did to cornstarch before this particular eureka moment. Whatever, he had conspicuously failed to get rich, having been unable to find a commercial application for his gadget, the ‘puffing gun’.

  But once the patent on the puffing gun ran out, General Mills was all over it, now using not raw grains but a mixture of cooked grains, pre-seasoned and fortified. The results, after years of refining both recipe and process, were two new breakfast cereals, one of which would become the bedrock of General Mills to this day. The first, Kix, was a corn-based offering and the original sponsor of The Lone Ranger radio serial, but the real winner was made from oats – not a grain readily compatible with more established breakfast cereal production methods – and was christened Cheerioats for its 1941 launch, on the back the snigger-inducing tagline He’s Feeling His Cheerioats. Three years later, a writ-wielding competitor claimed sole rights to use of the word ‘oats’. OK, the company said, we’ll call it Cheerios.

  By 1932, sales of flour as a share of business had fallen to 72% and - although actual volume sales were increasing - would continue to decline, down to 55% twenty years later, when packaged foods had become the major focus of growth in the company. General Mills’ original role of providing demand for its flourmills was now firmly in the back seat; it had become a fully-fledged and highly effective packaged goods company with some of the strongest and most enduring brand names in America.

  How International Is It?

  There can be no doubt that General Mills came late to the international game, understandable in view of the company’s origins; after all, its original job was simply to create demand for what came out of flourmills, a mindset kept local because flour milling itself was then a local industry. General Mills’ unadventurous first move was to set up abroad, in 1953, a Canadian subsidiary, which was nearer to its Minneapolis headquarters than a large chunk of its US market. True, the conglomerate years had included a handful of overseas purchases - UK’s Smith’s Crisps, for example - but none of them was of lasting significance.

  The company began to take the international opportunity seriously in the post-co
nglomerate phase, when it was essentially a packaged goods business. In an innovative move, Nestlé and General Mills became joint partners in Cereal Partners Worldwide (CPW), a new venture established in 1990. The idea was to combine into a single cereal company General Mills’ expertise in the cereal market and Nestlé’s global reach and local market infrastructures, to form a competitor with enough critical mass to take a run at the markets dominated by Kellogg’s.

  The operation began operations in the UK and southern Europe on 1st June 1990, with a product range soon improved by the purchase of the UK’s Shredded Wheat brand, an already successful and established brand that would lead the charge. Overall branding has always been Nestlé domain, a much stronger name outside North America than General Mills. In 1991, the Nesquik brand was added. In 1992, the company expanded into Mexico and Italy, closely followed by Poland, South America and Russia. In 1998, the venture moved into became profit, with equal shares going to the two partners, an arrangement that has continued ever since. By 2008, CPW had become colossal: sales in more than 130 countries topped $3 billion, on the back of more than 50 brands produced in fourteen factories garnering a market share of more than 20%. And perhaps General Mills has the better half of the deal: 50% of an ever-increasing profit – nearly $200 million after tax in 2001 – while Nestlé does most of the work.

  Similarly, General Mills partnered with PepsiCo to set up Snack Ventures Europe in 1992, combining PepsiCo brands such as Doritos and Cheetos with General Mills’ Bugles and Grainos and then adding to the mix with Snack Ventures’ own new products. By 2004, it was Continental Europe’s leading snack company, generating sales close to $1 billion. PepsiCo liked this so much, it bought General Mills’ share.