Champion of Breakfast Foods
July 1 2001 by Dale Buss
Steve Sanger still gets choked up sometimes when he tells the tale of a nine-month-old baby who refused to eat and was being kept alive intravenously. One day the boy’s uncle placed a single Cheerio on the infant’s plate. When he checked a few minutes later, it was gone. He repeated the process until the child had downed an entire handful of the round oat cereal.
“Cheerios were the first solid food this kid had ever shown any interest in eating,” recalls Sanger, CEO of General Mills, the $6.7 billion processed-food giant that makes the 60-year-old cereal brand. “We got a letter from the parents six months later saying that he was eating, growing, and healthy-and that without Cheerios he would have died. I’m not sure how true that is, but the people who wrote the letter believe that absolutely.”
It’s a fitting anecdote about American culture today: the consumer brand as hero. And Sanger’s recounting of the story tells a lot about his rise to the top of Golden Valley, MN-based General Mills, which this year faces the challenge of finessing a $10.5 billion acquisition of Pillsbury. Sanger is a lifer genuinely emotionally attached to the company after climbing the ladder by succeeding at running its biggest units, Yoplait yogurt and Big G cereals. And he’s made a career out of understanding the gut appeal of the company’s brands, with strokes of product-innovation and marketing genius-such as boosting Lucky Charms sales 15 percent just by adding blue diamonds to its traditional marshmallow shapes and promoting the change in a media blitz.
While he’s got a satchel full of touching stories about General Mills brands, the 55-year-old fan of pop music and the Michigan Wolverines can be as steely as he is sentimental. Since assuming the CEO spot in 1995, Sanger has led General Mills in a relentless assault on leadership positions in its two biggest businesses, cereal and yogurt. The company recently grabbed the No. 1 market-share spot in U.S. ready-to-eat cereals from Kellogg, which had topped the category for decades. And Yoplait has blown right by Dannon brands to assume market-share dominance in yogurt for the first time.
“He’s always given me the impression of someone who’d come in every day trying to decide exactly who he’d take market share from that day,” says Leonard Teitelbaum, managing director of Merrill Lynch and a veteran food industry securities analyst. “And by the end of the day, he had taken market share from someone.”
Under Sanger’s leadership, General Mills has become somewhat of a growth company in an industry notorious for its sluggishness. The company posted an average of 6 percent annual sales increases over the past five years compared with peers’ average of 1 to 2 percent, according to U.S. Bancorp Piper Jaffray; revenues for fiscal 2000 ended in May were $6.7 billion, up 7 percent from a year earlier. Sanger also delivered double-digit earnings growth each year except in 1997, when his mettle in his second year as a CEO was tested after several major cereal makers, including Post and Kellogg, launched a price war. Rather than matching competitors’ 20 percent price cuts, Sanger trimmed prices but continued advertising aggressively. As a result, earnings were flat for fiscal 1997, but General Mills began to pick up market share, which set the stage for its subsequent successes.
Three years later finds the more seasoned CEO swinging for the fences with the proposed Pillsbury acquisition-which may be the biggest trial of Sanger’s leadership abilities yet. In acquiring Pillsbury from London-based drinks group Diageo Plc, he plans to create the world’s fifth-largest food company and a stronger entity than either firm could be separately. But profitably digesting General Mills’ traditional cross-town rival-both are based in Golden Valley, MN-will be rife with challenges, including proving the key logic behind the acquisition: that General Mills can revive tired old brands like Pillsbury dough and HÃ¤agen-Dazs ice cream.
If it works, the gambit will singlehandedly slash General Mills’ dependence on cereal from more than half its earnings to less than a third-and leave Sanger positioned to apply his brand-enhancing prowess to stagnant Pillsbury properties like HÃ¤agen-Dazs, Old El Paso taco kits, Progresso soups, and Jeno’s and Totino’s frozen pizzas and pizza rolls.
But the path to the altar hasn’t been smooth. As of early June, General Mills failed to close the deal because of the Federal Trade Commission (FTC)’s concern that the combination could threaten competition. A plan to sell some Pillsbury units, such as the flour and desserts businesses, to International Multifoods, has yet to satisfy regulators. Meanwhile, Diageo-which is shedding Pillsbury to focus more attention on its Burger King chain and its growing stable of liquor brands-is getting impatient.
“They’re blaming Sanger partly for the delay,” notes John McMillin, an analyst at Prudential Securities. And winning a nod of approval from the FTC is just the first in a series of acquisition-related hurdles. “His biggest challenge going forward will be managing this new shareholder of General Mills-Diageo-and making sure that what they do with their stock is in the interest of other General Mills shareholders,” adds McMillin.
Sanger will also have to overcome a legacy of underinvestment in Pillsbury by Diageo, as well as the difficulties of revitalizing the company’s mature brands. “The question,” asks Romitha Mally, food industry analyst for Goldman Sachs, “is what kind of growth can you really get out of those brands and out of things like refrigerated dough?”
But observers note that Sanger’s track record as a marketing maestro is well established. His string of wins since General Mills recruited him from a brand management post at Proctor & Gamble in 1974 includes a bet that Americans’ craving for convenience would favor pre-blending fruit in yogurt. That wager paid off for Yoplait, as did a move to add new flavors like apple-cinnamon and honey-nut to the company’s Cheerios brand offerings.
Since taking the CEO seat, he’s also honed his dealmaking skills by spearheading partnerships with NestlÃ© for development of the cereal business worldwide and with PepsiCo for exploring global possibilities for snack products. And Sanger’s theory that kids would be more likely to embrace a yogurt product if it were dispensed from something portable and cool-like a tube-resulted in the launch of the company’s popular Go-Gurt brand.
“It accounts for somewhere over $100 million a year now in retail sales, and it was only introduced in December, 1999,” says Ian Friendly, president of Yoplait. “It’s got a 6.5 percent share of the overall U.S. yogurt market all by itself.”
Sanger plans to ensure that the company continues striving for new developments across its brand portfolio. “Our strength is our ability to innovate,” he says, “and we think about innovation very broadly, across not just new-product development but also across our core brands. We’ve been able to do that because we focus very strongly on continuing to bring €˜news’ to these product lines. That’s important because they’re profitable, and when they grow that helps us to have the resources to invest in new products that tend to be less profitable at the outset but become the established products of the future.”
The company is applying that philosophy to Cheerios, for example, by using marketing and packaging to leverage the federal government’s recent endorsement of oat bran as a cholesterol fighter. It’s innovative marketing moves like these that analysts point to in suggesting that Sanger can breathe new life into Pillsbury’s product line. “If you take the General Mills advantage and put it on top of the categories that Pillsbury brings to the product mix,” says Teitelbaum, “then we could have for the first time in a long time a food company growing in the solid mid-single-digits in volume.”
Sanger is equally confident. Someday, he says, he’ll be reading e-mails about the Pillsbury Dough Boy and HÃ¤agen-Dazs ice-cream bars like the many he regularly receives and peruses about General Mills’ brands. “Brands are what have meaning for people,” he says.