This CPG Stock Goes All in on Pizza

General Mills (GIS), in partnership with several Ohio government agencies, announced on Aug. 29 that it would invest $100 million into expanding its Wellston, Ohio, Totino’s pizza facility. 

The plant is one of General Mills’ largest facilities. Once the expansion is complete, the plant will employ more than 1,000 Ohioans.   

“As one of the most recognized food brands around the world, General Mills continues to grow and thrive in Ohio,” said J.P. Nauseef, president and CEO JobsOhio. “The expansion of the Totino’s facility in Wellston and the addition of 30 new jobs for hardworking Ohioans demonstrates the ongoing success that global companies can establish in Ohio.”

What started as a family pizza parlor [Totino’s] in Minneapolis has become the foundation of General Mills’ big push into pizza. 

The question is whether it will be enough to keep GIS moving higher. Up 33% over the past year and 14% year-to-date, investors need more good news than the Wellston expansion to convince them it’s still a buy. 

Here’s my take and the pros and cons of its pizza expansion. 

A Part of General Mills Since 1975

Totino’s entered the General Mills sphere in 1975 when Pillsbury acquired the business for $22 million. General Mills acquired Pillsbury from Diageo (DEO) in November 2001 for $10.4 billion, including the assumption of $4.5 billion in debt. Diageo got 134 million shares of GIS stock for the equity portion of the deal. 

From Nov. 1, 2001, through Sep. 1, 2022, GIS stock gained 227%. If you include dividends, the consumer packaged goods business delivered a compound annual growth rate of 9.1%. However, if Diageo sold the shares it got from General Mills and reinvested the funds in its stock, the total return would be 140 basis points higher over the same period. 

But I digress. 

The pizza brand has been in the corporate family for 47 years. And now it’s going on the offensive, investing $100 million on the Wellston plant. 

When Pillsbury acquired Totino’s in 1975, it had annual sales of $40 million, with 375 employees. In fiscal 2022, according to General Mills’ website, Totino’s sales were $960 million, a 24-fold increase over 48 years. That works out to 6.9% compounded annually. 

That might not seem like a lot, but when you consider that today’s sales are rising by nearly 20% per annum, it’s not all that bad. General Mills, via Pillsbury, likely paid for its $22 million acquisition long before it made its big multi-billion-dollar splash in 2001. 

The Frozen Pizza Category Is Crowded

Totino’s frozen pizza and pizza snacks are part of General Mills’ North America Retail segment. In 2021, the segment’s revenue was $11.57 billion, so the pizza category accounted for approximately 8.3% of the unit’s overall sales. Totino’s sales were almost identical to its Canadian business. 

The glass-is-half-full view of its pizza business is that it’s ready to go over $1 billion in annual revenue. The $100 million investment will help it reach $2 billion more quickly. 

According to consumer packaged goods research firm IRI, the glass-is-half-empty view would be that the frozen pizza category in the U.S. is about $6.2 billion annually. That means General Mills has a 15% market share. Nestle (NSRGY) is number one with $1.4 billion in sales, good for 23% market share.  

In the trailing 12 months ended May 31, General Mills had free cash flow of $2.75 billion. Nestle’s free cash flow over its latest 12 months is $7.33 billion, almost 3x higher. If it wants DiGiorno to take market share from General Mills, it has a cash flow advantage to make it happen.

There’s also the argument that it should invest as much as possible in its Snacks and Pet businesses rather than pizza. 

To a certain extent, it is. In fiscal 2022, the Pet category saw sales increase by 30% to $2.26 billion, with 18 percentage points of the growth from higher volume and prices combined with a 12 percentage-point contribution from its 2022 acquisition of Tyson’s (TSN) pet treats business for $1.2 billion.  

General Mills’ pet business is already 2.4x larger than Totino’s by revenue. The gap will only widen as it makes additional acquisitions. 

The Verdict on Its Expansion

The company’s $100 million investment for its pizza expansion represents less than 4% of its free cash flow. It’s not a massive check that it can’t handle. So, I wouldn’t worry about the investment if you own GIS stock. It’s to ensure the pizza freezers at your local grocery store remain well stocked.

Assuming pizza generates about 8.3% of North America Retail’s annual operating profit of $3.66 billion -- a similar percentage to its sales -- that works out to $304 million, or 32% of its sales. That’s better than the Pet category’s segment operating profit margin of 21%.

However, we don’t know for sure that this is the case.

In the end, while the $100 million investment is a big deal for Ohio jobs, it’s not a move-the-needle monetary bet by the company. It’s just ensuring that it doesn’t lose ground in the pizza business. 

With a reasonable 2.8% yield, owning GIS right now isn’t a bad way to stay invested in a volatile market. In the long run, however, you won’t get rich from it, regardless of how much it spends on pizza. 

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