GENERAL MILLS-PILLSBURY MERGER

DAVID MERREFIELD

MINNEAPOLIS -- It's generally not good news when two companies announce a major merger strategy, after which month after month is devoured by a protracted regulatory-review process.

Indeed, some deals have foundered upon such shoals. But that's not the story when it comes to the long-delayed acquisition of Pillsbury by General Mills. The acquiring company used much of the time to ready a retailer-communication strategy that's rolling out at the present moment. Starting last week and continuing for a couple more, General Mills has plans to contact every substantially sized retailer customer to tell the story of the merger, and what it means to each of them.

And what is that story?

"I think that for the U.S. grocery trade, the most significant message is that in virtually all our product categories General Mills brings innovation and therefore growth to the categories," said Steve Sanger, General Mills' chairman and chief executive officer. "In almost every instance, our sales through retailers lead category growth. We plan to continue to contribute to category growth at retail, which is essentially what retailers rely on us to do -- to bring innovation and merchandising excitement to the categories." Sanger, together with Jeff Rotsch, General Mills' senior vice president, sales and channel development, were interviewed last week by SN.

It was in July 2000 that General Mills entered into an agreement with Diageo to acquire Pillsbury's worldwide operations. The deal attracted heavy-duty attention from the Federal Trade Commission, which worried about the new competitive landscape that would be painted in the wake of the deal.

To help assuage regulatory concerns, General Mills agreed to spin off some General Mills and Pillsbury brands to International Multifoods Corp., as well as to license the use of the well-known Doughboy trademark for shared use with IMC to market relevant brands.

So, late last month, the deal won approval when the commission voted two in favor of and two against the proposed merger. Tie votes mean approval, so the massive $10.5 billion merger moved forward.

The resulting new General Mills was catapulted into the uppermost tier of consumer packaged goods manufacturers, with its top line nicely plumped to $13.5 billion, from $7.9 billion. It also emerged with an expanded portfolio of brands and merchandising techniques to show retailers.

Asked why supermarket and other retailers should be interested in the General Mills transaction, Sanger said that "the Pillsbury acquisition gives us a whole new series of categories in which to operate. They're good categories and they have good brands in them."

Moreover, Rotsch said, a greater brand variety can equal greater distribution-chain efficiency.

Asked to cite an example, Rotsch said that "in most instances, at the present time we send half truckloads of yogurt to retail customers. But when we have the ability to combine yogurt shipments with the new refrigerated products Pillsbury brings, we'll be sending full truckloads. All of a sudden things become much more efficient for our customers."

Sanger added that new opportunities for brand growth -- whether existing brands or acquired brands -- come to hand when brand counts grow.

"Some Pillsbury categories are actually growing faster than [General Mills'], so there are some very strong brands in that portfolio. If we can do to those categories what we do to our own, which is to accelerate the growth of the brands by innovating and bringing higher quality to retail consumers and more merchandising excitement, that should represent accelerated growth for our retail customers as well. And, obviously, that will mean good things for consumers as well."

Asked to specify what innovation and merchandising changes General Mills would bring to its newly acquired brand portfolio, Sanger said ample examples already exist of such innovation.

"Retailers look to us to make sure that our established products are growing," he said. "For us that's brands like Cheerios, Hamburger Helper, Betty Crocker dessert mixes and so on. The new categories we'll add are refrigerated dough, Progresso Soup, Green Giant vegetables and others.

"We make brands like these grow by bringing new-product news to those categories. We tell people things they didn't know about them. For example, we've told consumers that eating Cheerios can lower cholesterol. That's something consumers didn't know. As a result of that news, which we communicated to them, Cheerios has grown faster than the overall cereal category for each of the last four years.

"Innovation also means bringing product improvement to a category. We do that all the time, by improving taste characteristics of a product to make it superior to competitors'. And, new features can be brought to a product category, such as by the addition of calcium to children's cereals. That's an innovation that spurred growth of that category.

"Then, of course, there's bringing new products to a category, such as our Go-Gurt yogurt [a yogurt-in-a-tube product] to the yogurt category. And we've brought out a new soy milk product to form a whole new category.

"These changes have the common element that they accelerate the growth of sales because they bring consumers either news or product attributes that they want, but that they didn't have before."

Queried about what growth opportunities might be brought to the sometimes-neglected Center Store part of the supermarket, Rotsch told SN that expanded merchandising and promotional techniques that can now be brought to a wider brand range should mean additional store traffic and larger average tickets. "Center Store is still a big anchor for most supermarket retailers' bottom-line profit," Rotsch pointed out. "Retailers all talk perimeter, but Center Store pays for perimeter. Retailers have probably underplayed Center Store for a long period of time, and have played up the perimeter to compete against fast-food and quick-service restaurants.

"So my sense is that we will bring more productivity to Center Store, and that will help. But in all honesty, what Center Store needs is more growth. We will bring growth to Center Store by combining [merchandising] with perimeter brands so we can increase traffic through the entire store. Growth will also come through our process of innovation.

"This is an important consideration for retailers because the average supermarket ring is about $25. If a cereal brand or refrigerated baked-goods brand or soup brand is added into that basket, the ring typically doubles because that means there's a family with children doing the shopping.

"And this will be increasingly important for retailers because Center Store is a tremendously profitable area and one that is potentially a powerful tool that traditional retailers can use against a number of nontraditional retailers that have come out of literally nowhere, such as the discount operators."

Sanger pointed out that the new General Mills will remain heavily invested in Center Store items, which will provide a powerful and ongoing incentive to continue to collaborate with retailers to build their business.

"The largest part of our business is still going to be the ambient-temperature products found in the meals aisles, the cereal aisles and the baking aisles. We will be present in every part of the center of the store.

"That gives us a particular commitment to the growth of retailers."