Commentary

Hit By Rising Costs, General Mills Will Try To Increase Some Prices

The Apple Cinnamon Toast Crunch cart was upended at General Mills yesterday as external problems such as a nationwide shortage of truck drivers and the rising price of ingredients like nuts got in the way of its “Innovation Intersection” initiatives. Its stock dropped about 9% in trading after it released its fiscal 2018 third-quarter earning report that warns of “cost pressures” that will force it to raise prices on some of its products.

“The maker of Cheerios cereal and Yoplait yogurt said freight costs in North America were near 20-year highs in February and food prices were also higher than expected, prompting the conglomerate to lower its earnings expectations for the year,” Annie Gasparro reports for the Wall Street Journal.

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It now expects fiscal 2018 adjusted earnings per share to grow up to 1%, compared with a prior forecast for a 3% to 4% increase, Reuters reports.

“We are seeing an unprecedented rise in logistics costs,” CEO Jeff Harmening tells the WSJ’s Gasparro. “For food costs, he said, ‘the inflation is not unprecedented, but we are a quarter late in reacting.’”

“The company’s response includes changing its modes of transportation and increasing the number of freight carriers it works with, but the measures are not expected to meaningfully improve profits until the 2019 fiscal year,” writes Anna Nicolaou for Financial Times.

“In the U.S., rates to hire long-distance trucks have soared as truck utilization has reached 100% and an improving job market has made it hard to find drivers. The producer price index for truck transportation is up 5.3% year on year, and some carriers are offering $50,000 bonuses for new drivers,” Nicolaou continues.

“Harmening conceded that even though General Mills is ‘moving urgently’ to tackle higher costs, the moves will only partially offset the profit pressure this year,” writes Paul R. La Monica for CNN Money. “…None of this would be a major problem for General MIlls if its sales were soaring. But they are not: Sales rose just 2% in the most recent quarter,” La Monica observes.

And another one of its solutions — jacking up the price of some of its products — may not help in that regard. 

“Consumers might just start saying ‘no' to Honey Nut Cheerios,” writes Fortune’s Lucinda Shen in her lede. 

“‘In terms of pricing, we are going to use a number of levers in some markets and some businesses; it’s going to be list price increase,' said Donald Mulligan, the firm’s chief financial officer, also pointing to greater inflation in the U.S. economy,” she reports.

"But analysts on the [earnings] call voiced skepticism that General Mills has room to pass higher costs on to consumers in the current tough environment. Among other factors, discount grocery chains are taking market share and pressuring suppliers to keep prices low. Shoppers also are increasingly willing and able to compare prices online,” points out Aaron Back in the Wall Street Journal.

transcript of that call is available on Seeking Alpha.

How much of what they're able to pass through will depend on individual retailers, the characteristics of the various product categories and what competitors do,” Edward Jones analyst Brittany Weissman tells Evan Ramstad of the Minneapolis Star Tribune. General Mills is based in Golden Valley, Minn.

“Our primary goal this year has been to strengthen our topline performance while maintaining our efficiency,” CEO Harmening says in a statement.  “While I'm pleased that we're delivering on the first part of that goal, with strong consumer marketing, innovation, and in-store execution leading to a second consecutive quarter of organic net sales growth, I'm disappointed in our results on the bottom line.”

“Wells Fargo's John Baumgartner isn't giving up on the shares,” reports Barrons’ Teresa Rivas. “He reiterated an Outperform rating on General Mills today, while acknowledging the forecast disappointed, writing that a sales recovery remains on track, with shipments in cereal and yogurt showing the potential for growth ahead. In addition, while cost pressures are weighing on General Mills, he writes that it's an industry-wide problem, and that the company is still ‘better positioned for revenue/operating leverage recovery.’” 


It will be interesting to see how other packaged goods companies are reacting to the same pressures as their results are announced.

1 comment about "Hit By Rising Costs, General Mills Will Try To Increase Some Prices".
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  1. Paula Lynn from Who Else Unlimited, March 22, 2018 at 9:12 a.m.

    Now add in pressure from groceries of all stripes to lower costs since they have to charge less and tariffs for China and more that the farmers either absorb or don't sell, this is going to be a "bad" scene, man. (Will talk about tariffs and about what the consequences which will blind side whoop the economy, later.)

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