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3G’s Next Target: General Mills or Mondelez?

Jonathan Malankar, HBS '16

Jonathan Malankar, HBS ’16

Hardly a year has passed since the Kraft-Heinz mega-merger and there’s already word on the street that 3G could be on the lookout for its next yummy CPG target.  What’s on the menu?  The smart money has narrowed the field down to two options: General Mills and Mondelez. Food industry experts say it will take another year for the Kraft-Heinz integration to be complete.  That means we likely won’t be seeing any major transactions before then, but there’s no better time for speculation.  

When it comes to M&A, there are many lenses to use in evaluating a potential deal.  Conducting a financial analysis is always a valid way to begin but I’ll spare you a flailing attempt to look at P/E multiples. I’m no investment banker but I am a strategist.  

Using a strategy perspective, this decision would come down to which business has a better future.  3G’s formula is to cut costs, pay off debt and move on.  They would likely be able to do that at either company.  Without proprietary information, it would be mere speculation to say which company offers better cost-cutting opportunities.  Looking at the top-line though, shows Mondelez to be a much more enticing target while General Mills finds itself in inherently tougher categories.Bettina April (2)

General Mills plays in crumbling or contested categories

Acquiring General Mills would mean jumping head first into ultra competitive categories with largely outdated brands.  Let’s start with their largest category: ready-to-eat cereal.  At approximately 20% of total revenue, you’d hope that this category is a fortress but it’s under attack from all sides.  

Consumers have shifted away from cereals and towards other breakfast options.  According to Nielsen, in the U.S. (where General Mills gets 65% of its revenue), ready-to-eat cold cereal has been declining by 1.5% per year for the past five years while hot cereals, packaged hot meals and deli breakfasts have grown by 3.5%, 6.4% and 7.9% respectively.   

Even within the cereal category, growing consumer concern about processed foods and sugar have chipped away at core sales.  Can you imagine brands like Lucky Charms, Trix and Cocoa Puffs surviving much longer?  Last year, General Mills announced a major restructuring initiative that will include closing down excess cereal capacity and laying off 430 workers.  Not even a seemingly timeless brand like Cheerios is safe.  It seems like the only headlines about Cheerios these days have to do with GMO labeling.  

Beating up on cereal might be opportunistic, so consider General Mills’ one major hope: yogurt.  Buying Yoplait in 2011 offered an opportunity to get in on the growth about to be driven by Chobani and the Greek yogurt movement.  Unfortunately, Yoplait was too entrenched in the old guard of yogurt and has not done much to slow Chobani’s rise.

If cereal and yogurt can’t carry them to prominence, General Mills would be hard pressed to bet the house on the rest of its brands. Brands like Betty Crocker, (formerly Hamburger) Helper, Pillsbury, Fruit by the Foot, Bugles and others have suffered from the same consumer trends hurting cereal.  These brands tend to represent old school, highly processed foods that consumers simply do not want anymore.  The most likely future for these brands will be the auction block in the same way Green Giant was sold in September 2015.

Mondelez market leadership bolsters success

In contrast, Mondelez offers greater opportunity with more resilient brands.  In acquiring Mondelez, 3G would get iconic brands like Oreo, Cadbury, Milka, Trident and Ritz.   Mondelez is the market leader in share for biscuits, chocolate and candy with a second place position in gum.  Competing from the front has its benefits in consumer goods as Mondelez’s brands will better weather economic storms and always have the option to take price.  

In a changing world, innovation is always important.  Mondelez’s successful launch and management of the belVita breakfast biscuit provides a shining example.  belVita began with a consumer insight around changing preferences for morning fuel.  The brand grew to $600 million in sales by 2014, just two years after its launch.  In an industry where 85% of innovations fail within two years, this has to be hailed as a great success.

Considering Mondelez as an addition to Kraft-Heinz (instead of a standalone purchase) makes the deal look that much sweeter.  Kraft-Heinz’s current portfolio lends itself to the entrée portion of a meal while Mondelez offers the snacks and dessert for the beginning and end.  Combining the product portfolios could unlock powerful bundling opportunities for go-to-market and in-store displays.  General Mills would offer breakfast, albeit in a struggling category, but would also be redundant with its frozen meals products.

No auction is conducted alone either.  Industry experts have noted that anyone pursuing General Mills should expect competition from Nestle, who are looking to expand their nutrition portfolio.  Pursuing Mondelez means saying hello to Bill Ackman with Pershing Square and Nelson Peltz with Trian Partners, two activist investors that have already been very engaged on Mondelez’s board.  At the right price, it might be reasonable to assume that those players would be happy to cash out.          

The jury will be out until we see 3G actually make its next move.  What we know for sure is that there will be a move.  As I mentioned in an earlier article, the SABMiller – ABInBev deal marked the end of 3G’s big moves in the beverage space.  Kraft-Heinz began the snacks and meals push.  Buffett himself said he expects to “partner with 3G in more activities” so the question is just when.  When it comes to making a call between General Mills and Mondelez, you can never have enough cookies.

 

Jon Malankar (HBS ’16) is an Industry Insights contributor.  He previously worked at PepsiCo in Corporate Strategy and specializes in consumer packaged goods and retail commentary.

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Established in 1937, The Harbus News Corporation is the independent student news publisher of Harvard Business School.

April 6, 2016

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JonMalankar


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