General Mills plans some increases as costs for shipping and
ingredients mount
By Annie Gasparro
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (March 22, 2018).
General Mills Inc. will raise prices on some meals and snacks to
reflect higher ingredient and shipping costs, as food companies
battle inflationary pressures that are eating into profits.
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.
"We are seeing an unprecedented rise in logistics costs," Chief
Executive Jeff Harmening said in an interview. For food costs, he
said, "the inflation is not unprecedented, but we are a quarter
late in reacting."
General Mills shares fell 9% on Wednesday to $45.06, their
lowest price in five years. The stock is down nearly 25% over the
past year while the S&P 500 is up 16%. Shares in other food
makers including Campbell Soup Co., Kellogg Co. and Conagra Brands
Inc. fell about 3% as well.
Campbell, Hershey Co., Mondelez International Inc. and J.M.
Smucker Co. in recent months have said they are struggling to
protect profits while freight and food costs rise. Fourteen of the
last 15 packaged food makers to reporter earnings posted
lower-than-expected gross margins, said J.P. Morgan analyst Ken
Goldman.
Conagra is due to report first-quarter results on Thursday.
Analysts project its gross margin will fall to 30.4% from 31.3% the
prior year. In December, Conagra warned inflation and other
pressures would weigh on operating margins.
Food distributors and grocers have also reported rising freight
and commodity costs, and some including Sysco Corp. are passing
some of the increase to customers. Food makers Tyson Foods Inc.,
Hormel Foods Corp. and B&G Foods Inc. have all said they would
raise prices to offset higher freight costs.
The Labor Department said prices businesses charge for goods and
services rose 0.2% in February from a month earlier, more than
economists expected. The increase followed broad producer-price
increases in January as well, suggesting consumers may soon see
higher prices, too, as businesses pass on more of their own rising
costs.
A shortage of trucks has pushed up shipping rates since federal
regulation changed late last year to more closely monitor the time
truckers spend on the road. Some companies have paid a premium to
get their products to retailers on time. Others have had shipments
delayed as freight volumes climbed.
Minneapolis-based General Mills usually uses more expensive
on-demand shipping for just 5% of shipments. Lately, supply
constraints have forced it to ship a fifth of its products at
higher on-demand rates, pushing transport cost up as much as 60%
for those goods.
To compensate, Mr. Harmening said General Mills will raise
prices on some products and sell some products in smaller packages.
He said the company would also tweak the discounts it offers.
Analysts questioned whether General Mills and its peers can
raise prices without losing shoppers as competition in grocery
stores intensifies. "Investors just worry so much that the retail
environment is so difficult," said Citibank analyst David
Driscoll.
Indeed, some grocery stores are cutting prices even as costs
rise to compete with discount retailers. The cost of a basket of
items at a selection of Kroger Co. stores fell this month compared
with February, according to a Telsey Advisory Group survey.
"It is more difficult than ever" to raise prices, said Mr.
Goldman, the J.P. Morgan analyst.
He said General Mills faced additional pressure because of its
own missteps as costs rose, while other food makers seem to have
planned better for the shipping shortage and inflation.
Part of the problem General Mills faced was that sales improved
while shipping costs were soaring. Brands like Cheerios and
Progresso soup sold faster lately than rival brands -- progress for
a company that hasn't seen that kind of success in years.
General Mills has had to pay outside manufacturers to help it
meet demand for some of those products and elevated shipping rates
to get them into stores. "We expected our new products to be
better, but didn't expect them to be this much better," Mr.
Harmening said.
General Mills' comparable sales rose 1% in the latest quarter,
including a bump in the U.S. as more people bought Nature Valley
granola bars and new flavors of Cheerios. But the higher costs
dragged adjusted operating margin down 1.2 percentage points to
15.7%.
For its fiscal year ending in May, General Mills projects
adjusted earnings per share will rise by up to 1%, compared with
previous guidance for an increase of up to 4%.
"We have been very effective in getting closer to the consumer,"
said Chief Financial Officer Don Mulligan. "We have to be just as
close to our cost structure."
Mr. Harmening, who took over as CEO less than a year ago said he
would continue selling off weaker businesses while acquiring brands
with more growth potential.
General Mills in February agreed to buy pet-food maker Blue
Buffalo for $8 billion, giving it a foothold in a fast-growing
business. He intends to sell Blue Buffalo through more retailers
and expand the brand with new products like treats.
Those acquisitions come alongside divestitures of older brands
like the Green Giant frozen and canned vegetable business that
General Mills sold to B&G Foods Inc. in 2015. Analysts have
speculated that Hamburger Helper or Bisquick could be the next to
go.
General Mills wouldn't say which brands it might sell.
--Heather Haddon contributed to this article.
Write to Annie Gasparro at annie.gasparro@wsj.com
(END) Dow Jones Newswires
March 22, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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