By Annie Gasparro 

General Mills Inc. will raise prices on some cereals 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 21, 2018 15:06 ET (19:06 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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