GENERAL MILLS, INCORPORATED
A Cost Accounting Analysis

COMPANY BACKGROUND
General Mills (GSI) is the sixth largest food company in the world. The company currently operates in more than 100 foreign countries and employs over 35,000 people. . GSI manufactures and markets branded consumer foods worldwide and supplies branded and unbranded food products to the foodservice and commercial baking industries. The company manufactures cereals, yogurt, ready-to-serve soup, dry dinners, frozen vegetables, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza, flour, fruit and snacks; and organic products, including soup, granola bars, and cereals; and ice cream and frozen desserts, and high fiber snacks. Its best knows product brands are Betty Crocker, Green Giant, Pillsbury, Old El Paso, Cheerios and Haagen-Dazs. It markets its products through its direct sales, broker and distribution a to grocery stores, mass merchandisers, membership stores, natural food chains, drug, dollar and discount chains, commercial and noncommercial foodservice distributors and operators, restaurants, and convenience stores. The company was founded in 1928 and is based in Minneapolis, Minnesota.

GSI’s businesses are organized into three operating segments: U.S. Retail, International, and Bakeries and Foodservice. The U.S. Retail segment includes sales to grocery stores, mass merchandising, and membership stores such as BJ’s, Sam’s and Costco, natural food chains, drug, dollar and discount chains in the United States. The International segment includes products manufactured in Canada and products manufactured in the US that are exported to Caribbean and Latin American markets and products manufactured for sale in the company’s international joint ventures. These products include ready-to-eat cereals, shelf stable and frozen vegetables, dry dinners, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza snacks, and grain and fruit snacks. The Bakeries and Foodservice segment includes cereals, snacks, yogurt, unbaked and fully baked frozen dough products, baking mixes, and flour. These products are branded to the customers (stores). These are the store brand products seen on the shelf of almost every grocery and convenience store. An example of such a product would be “Giant Food” brand chocolate chip cookie dough.

COMPETITORS – Kellogg and Kraft
Kraft is one of the largest food manufacturing companies in the world-manufacturing brand. Eleven of the brands Cadbury, Jacobs, Kraft, LU, Maxwell House, Milka, Nabisco, Oreo, Oscar Mayer, Philadelphia and Trident, generate more than $1 billion dollars of revenue annually.

Kellogg Company, also one of the largest food manufacturing companies in the world manufactures a variety of cereals and snacks to include Kashi go lean, Rice Crispies, Fruit Loops and Special K, Keebler brand cookies and Pop-Tarts to name a few. That is just a small sampling of their vast products. Kellogg’s sales for 2011 were more than $13 billion.

INCREASE IN TOTAL NET SALES

In fiscal year 2011 The US Retail segment of GSI had net sales decreased by less than a percentage point compared the sectors net sales in 2010 though the overall company net sales increased from 2010 by 2%. The reason for the flat net sales in the US Retail segment was explained to be the result of a cautious consumer market in uncertain economic times. To offset this the company increased the price of several of their brands to include Natures Valley, Fiber One snacks, and Progresso soups, Old El Paso, and Small Planet natural food products. The increased pricing on these items helped to offset the decline of other product lines such as Big G ready to eat cereals and the overall cereal category.

The Bakeries and Foodservice segment’s net sales increased 6% compared the sectors net sales in 2010. This includes a 3% growth in sales to foodservice distributors and 11% increase in sales to convenience stores customers. The reason for the increase was due to net price realization and prices indexed to commodity markets.

The International segment’s net sales increased 7% compared the sectors net sales in 2010. The increased sales in this sector were a result of a 5% growth in the European market, driven by increased sales in Häagen Dazs and Nature Valley in the United Kingdom, and Old El Paso in France and Switzerland. There was also an increase in the Asian/Pacific region with a 14% growth in sales driven by sales of Häagen -Dazs and Wanchai Ferry brands in China. Although 45% of Haagen-Dazs is sold in the US GSI does not control the product in the US. Nestle company retains rites to operate and sale in the United States, therefore GSI only profits from foreign sales of Haagen-Dazs.

Looking towards 2012 GSI plans to continue to expand upon their health and nutrition products hoping to boost sales as the US consumer continues to focus on issues like childhood obesity and diabetes. Products to be released in FY12 include Fiber one 80 Calorie Cereal which is 80 calories per serving, provides 40 percent of he daily fiber value and 25 percent of the daily value of vitamins and minerals. In the first quarter of FY12 GSI also launched Yoplait light with Granola, which is yogurt with fruit on the bottom and a lid filled granola. As of 2010, GSI was number one is the US yogurt market with products such as the various Yoplait products, Trix, Go-Gurt, and Fiber one. Yoplait remains the most popular and has helped the company achieved maximum consumer penetration in the US and international yogurt market. In FY2011 the company improved the health profile of 25% of their US Retail sales volume.

INCREASE COST OF SALES (Cost of Goods Sold)
In fiscal year the 2011 the cost of sales increased by $91.3 million. Reasons for this were higher net input costs and product mix; and an increase in higher volume, which was offset by the market-to-market valuation of commodity grain inventories.

The main reason for the FY11 cost of sales increase was the rising global, wheat, corn and sugar markets. (See Table 1 below) Wheat is one of the primary direct materials used by GSI in the majority of their products. Severe droughts in Russia, and severe weather in Kazakhstan, parts of Europe and Pakistan resulted in wheat prices rising in this fiscal year. Prior to this, global wheat prices increased because of floods in Canada. All of these incidents resulted in US wheat prices increasing greatly to $7 per bushel in 2010.

Facing pressure from its competitors and retail customers such as Walmart GSI passed on some of the increase in input costs on to customers. Compared to the five-year increase in cost of by 25%, the 8% cost that were passed on was minimal.

To further minimize the rising cost of commodities in FY12 GSI is utilizing long-term contracts and purchase orders to stabilize pricing. They have entered into these agreements to mange the price risk of increased costs of energy, grains, non-fat dry milk, natural gas and diesel fuel. These contracts will be utilized within the FY12 fiscal year.

INCREASE IN SELLING, GENERAL & ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) increased by $29 million dollars in fiscal year 2011. The primary reason for the increase was an increase of $69 million dollars in corporate pension expenses. Other decreased expenses offset that cost such as a $64 million dollar reduction in advertising costs. The company also decided to discontinue an underperforming product line, which resulted in a restructuring that resulted in no loss of jobs. The restructuring associated with the restructuring costs the company 5.9 million dollars. This restructuring will cause the company to become more efficient and increase profitability and reduce overall SG&A in the coming year.

The Patient Protection and Affordable Care Act, which was signed in to law in March 2010, has staggered coverage changes over an eight-year period. Changes to the benefit plans were made to the postretirement benefit that increased costs 24 million dollars in 2010. There were no effective dates for the act in 2011; however, as these effective dates occur they will result in increased health liability costs in future years.

Ratios and Analysis
Gross Margin
The gross margin as a percent of net sales for FY2011 was 40.0 similar to that of 2010 (39.6). The company implemented some price increases to offset some of the increased input costs. GSI instituted a business model that they call the Holistic Margin Management (HMM). This method helps them manage inflation using productivity, mix and price realization to offset inflation and protect their gross margin. The strong gross margin allows the company to invest in product improvements, product development and improved marketing.

When comparing GSI’s gross margin with those of its competitors Kellogg’s gross margin decreased 2.6% to 40.8% last fiscal year and Kraft’s slight decreased from 36.38%. to 34.97%. Clearly GSI is within a safe range when compared with its competitors. This should make the company appealing to those consider buying shares of stock of similar companies.

Selling, General, and Administrative Expenses to Sales Ratio

GSI’s selling, general, and administrative expenses (SG&A) increased from $3,162 million dollars in FY2010 to $3,192 million in FY2011. Though there was a monetary increase SG&A to sales ratio stayed the same 21.5% in FY2011 and 21.6% in FY2010.

GSI’s ability to stabilize the SG&A to sales ratio in tough economic times shows management’s ability to adapt to a tough economic market. Management predicted the increase SG&A and in response to that they moderately increased the price of some products and reduced advertising expense. The end result was that even though expenses increased the net sales increased at a proportionate rate resulting in no significant change in the SG&A to sales ratio. If management had not made these changes the result would have been a significant increase in the SG&A ratio which would have may cause increased concern on the part of investors. When comparing GSI’s SG&A to sales ratio with those of their competitors GSI’s has consistently maintained lower ratios than Kellogg at 26.3% and Kraft at 22.33%.

RECOMMENDATIONS

It has been forecasted that the price of commodities (wheat, corn and sugar) will decrease in the coming year, however crude oil is forecasted to increase significantly. This increase in crude oil as well as benefit changes as a result of the Patient Protection and Affordable Care Act will increase Cost of Sales and SG&A expenses. They should continue to use their Holistic Margin Management Initiative to offset these expenses.

One recommendation is that they could look at alternatives to rising the pricing of their products such as decreasing package content for example a large box of Cheerios containing 20 ounces of cereal instead of the current 21.6 oz. They may also want to consider further reducing advertising. Hopefully their Holistic Margin Management Initiative will remain successful.

With the US consumer behavior trending towards healthier eating, GSI may also want to consider increasing advertising on their healthier products such as Yoplait Greek Yogurt and Fiber One. Of course, they would need to offset that increase in the advertising of those products with a decrease in advertising of less healthy brands.

BIBLIOGRAPAHY
Datamonitor (2011), General Mills, Inc. Company Profile, 6-10 http://datamonitor.com Development Prospectus Group, World Bank, (2012), Commodity Price Forecast Update Released: January, 17, 2012 http://www.worldbank.org/prospects/commodities

Business wire (October 2011) (English), General Mills Marks Strong Year of Health Improvements

Kaplan, D.A. (May 2011) Fortune Magazine, General Mill’s Global Sweet Pot, 163 7 p194

General Mills, (2011), A Portfolio for Global Growth, Annual Report 2011, 1-76 http://phx.corporate-ir.net/phoenix.zhtml?c=74271&p=quarterlyearnings Kellogg Company (2011), Kellogg Company 2010 Annual Report, 3-14 http://investor.kelloggs.com/annuals.cfm Kraft Foods, Inc.