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Cereal cost cutters

How breakfast food maker General Mills milks its products for margins.

By Mina Kimes, reporter
November 3, 2008: 11:20 AM ET

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New! Improved! Profit margins! New! Improved! Profit margins! New! Improved! Profit margins!
At General Mills, the maker of Cheerios, cost-cutting is a way of life: Company execs meet weekly to discuss ways to streamline products. The company's Holistic Margin Management system has helped them sustain higher margins than their peers.

(Fortune magazine) -- If you and your friends have ever gotten into a heated debate over which tidbits should come in a bag of Chex Mix, then you have something in common with the top brass at General Mills, maker of the salty snack. "Was it cute that the pretzels in our Hot 'n Spicy Chex Mix spelled H-O-T?" asks Ian Friendly, head of U.S. retail for the food company. "Sure, it was cute, but we had 14 different pretzel shapes. By getting rid of some of them, we save $1 million a year."

A million bucks may not seem like much for the $13.7-billion-a-year company, but General Mills (GIS, Fortune 500), which ranks No. 2 (behind Nestl) among consumer food producers on the World's Most Admired Companies list, makes hundreds of such cost-cutting decisions each year. And those cuts add up: Last year General Mills, based in Golden Valley, Minn., posted a 13% gain in profits on a 10% increase in sales, and analysts say that it has fatter margins than Kraft (KFT, Fortune 500) and ConAgra (CAG, Fortune 500).

The company's financial soundness - plus investors' fondness for food stocks in recessions - has made it a star on Wall Street: General Mills shares are up 14% this year, while most of the Fortune 500 are trading in negative territory.

How does General Mills maximize margins, especially when higher commodity prices have hit food manufacturers hard? CEO Ken Powell attributes the gains to a General Mills-designed fat-trimming system called holistic margin management that's starting to pay off in a big way. General Mills had worked on improving efficiency for decades, but the rise in inflation a few years ago spurred it to seek a more effective companywide productivity solution. At an offsite retreat in 2005, a team of executives rode a pontoon out to the middle of one of the Park Rapids lakes in Minnesota and discussed the problem. "It wasn't the first time that we said we should look at costs, but it was the first time we figured out a way to get everyone to do it at once," says Chris O'Leary, then head of the meals division. O'Leary, who now runs the international division, brought the idea to Powell, then head of U.S. retail.

Powell's team first applied the system to struggling Hamburger Helper. At the time the company sold 50 versions of the product, with 25 pastas ranging from wagon wheels to spirals. Executives researched the costs of producing the different options as well as how much consumers liked them, then eliminated half of them. They excised unimportant spice and cheese pouches. They shrank the size of the box while keeping the serving size the same. The upshot: Hamburger Helper now costs 10% less to make.

Margin management soon grew into a structured process at General Mills. Each division has a three-year savings goal, and virtually everyone meets once a week to focus on cuts. Ditching multicolored Yoplait lids, for example, saved $2 million a year. Factory-floor workers will point out when box sizes are inefficient for putting in trucks. And consumer researchers identify flavors that aren't selling.

Now General Mills is going beyond the low-hanging fruit snacks. One group recently looked at the oils, flour, and sugar that its baking division uses. The team found a way to consolidate purchases of such items, giving General Mills more buying power. The changes resulted in $12 million in annual savings.

Of course, frugality is just one of many ingredients needed to be successful in consumer foods. Innovation and marketing drive sales, and General Mills' revenues rose 14% last quarter after it heavily promoted new products such as Fiber One yogurt. But the money for such aggressive initiatives, says Powell, comes from margin management. "First you have to protect your margins," he says.

It figures that the company that makes Wheaties would understand that sometimes the best offense is a strong defense.  To top of page

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