Gis Memo

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Memo
To:William Nubern, Chief Executive Officer for the Garden Equity Group From:Jacob Sumble
Date: [ 4/28/2013 ]
Re:General Mills Evaluation

Message
GIS faces a large amount of exposure from changes within the corn and oil commodities market. GIS uses a large amount of corn to process and create their products, but the market for corn is evolving. Corn is now used to: feed livestock, produce ethanol, feed the world’s growing population, and create corn based synthetics. As the world’s population continues to grow the need for corn will increase but the largest contributing factor is the demand for ethanol. As the demand for clean energy increases, ethanol production will increase and become the world’s largest use of corn. The United States still has the highest demand for oil; ethanol will be a green substitute that will require a large amount of the world’s corn supply.

A long term increase in the price of corn could cause General Mill’s business plan to lose sustainability. Short term increases in the price of corn can be hedged through trading options on the futures market. Corn byproducts are the first ingredient in many GIS products. Increasing corn prices would cause the prices of GIS products to raise, forcing consumers to choose substitute products.

Oil prices can influence economic growth but high oil prices could jeopardize the sustainability of GIS. High oil prices would increase the cost of transportation which would raise the prices of all GIS products. Oil carries an element of unpredictability due to the Middle East and constant political pressure. In the long run, GIS will rely less on oil as hybrids and electric trucks begin to take market share from diesel based transportation. But if there is a sudden spike in the price of oil, it would raise the prices of all food products dropping the demand for GIS products.

Prior to the recent recession, GIS was working to improve the efficiency of their SG & A. In 2002 the SG & A was 24% of sales. This decreased to 19.2% in 2008 but has increased close to 22% by 2010. The trend has been displayed in Exhibit 1. For General Mills’s business model to remain sustainable they need to react to economic forces and adjust SG & A as necessary. We would prefer to see General Mills to be more proactive in controlling their SG & A during harsh economic times to improve net profitability margins.

From fiscal years 2000 to 2006, General Mills had gradually increased its treasury stock balance. There are various reasons for this increase. One reason is primarily based on the dynamics of the actual return (R) and required return (k) relationship. An increase in treasury stock indicates that by investing in General Mills stock, the actual return earned does not warrant investment capital. In other words, the actual return is either equal or less than the required return that investors’ demand from their investment in General Mills. When executive management of General Mills acknowledge this sentiment among investors, they would conduct a stock repurchase (or buyback), in which the company buys back shares from its investors, usually above market price, as a cash distribution. When R is less than k, the company has little use for the equity capital, which is also an indication that the food industry is that of low to moderate growth potential. Moreover, The cash received in exchange for their shares allows investors to allocate their capital more productively.

Two, the food industry is highly competitive. Some of General Mills’ competitors are large food companies like Kraft, Post, Kellogg, and Dannon, which all have a sizable portion of market share in the food industry. Another purpose for the General Mills’ treasury stock increase is to use for compensation purposes. In order to preserve its cash for other functions, General Mills compensate its employees, especially the senior level employees, with common...
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