General Mills raises guidance after overcoming supply chain constraints

Improvements in the supply chain have increased shelf availability and created positive fluctuations compared to previous management guidance. General Mills shares rose 2.5% in the down market on Wednesday. The company’s full-year earnings forecast hike (previously expected to increase by 1% from a 2% year-on-year increase, but this time it is flat at a 2% year-on-year increase) has surprised the market. A month after the New York Consumer Analyst Group Meeting. There, management discussed the limitations associated with availability of dough, pizza, and hot snack shelves. The result is a more conservative outlook than was explained on Wednesday.

Last month, shelf availability of these product categories improved from a low of 75% early in the company’s third quarter (December-February) and then recovered to 85%. However, the company does not expect service levels in these categories to return completely to past levels in the short term. For comparison, the availability of other products on the shelves of the company remains in the 95% range. What changed last month was a greater impetus for General Mills to find the materials needed to keep the manufacturing facility up and running. In addition, General Mills has adjusted cargo lanes to deliver products to retailers on time.

I think some other points from the General Mills results are related to other CPGs as well.

Not surprisingly, General Mills’ cost inflation and pricing will continue to rise in the coming quarters. The company’s input cost inflation has been in the range of 8% to 9% in 2022. Meanwhile, the company’s prices have risen by an average of 7% in the third quarter and are expected to rise even more significantly in the fourth quarter. General Mills’ most recent quarterly adjusted margin shrank by 160 basis points as input costs rose faster than prices. Most CPGs have experienced margin pressure over the past year, with packaged meat companies being a notable exception.

General Mills has hedged approximately 50% of its costs in 2023 (May 2022 to April 2023) and is taking other steps to maintain profitability under intense cost pressure. General Mills is working to secure alternative sources and increase inventory levels for certain raw materials in order to control costs. In addition to raising the list price, General Mills is changing the package size to raise the price per ounce. General Mills has reduced SG & A expenses. Management explains that it is driven primarily by lowering administrative costs, with only a slight reduction in marketing budget. Many other CPGs have significantly reduced their marketing budgets for low-inventory products, especially as a way to mitigate out-of-stock during a pandemic.

Rising fares are one of many pressures on the cost of goods sold by CPG companies.
Average fares for dry vans without fuel have risen steadily since mid-2020.
Chart: SONAR

So far, elasticity is in line with historical levels. General Mills management describes elasticity as “benign,” and despite maintaining inflation at its highest level in 40 years, it hasn’t fallen below historical levels. However, the company believes that consumer demand is at least to some extent elastic, saying pet food is less elastic than most categories. General Mills calls “humanization of pet food” the predominant trend in pet food, which makes consumers less sensitive to rising prices. Notably, organic prices / mixes increased 13% in the pet food category, easily outpacing company-wide 7% price / mix growth. Other CPGs have called coffee (Nestlé not sold in Russia) to have sub-average elasticity. In particular, it is a brand that provides services to the mass market, such as the Folgers brand of JMS mucker.

General Mills will spend capital next year to expand its manufacturing capacity. One of the major CPG trends during a pandemic is the growing use of outsourced contract manufacturing, which has the advantage of creating volume flexibility when demand is uncertain. The disadvantages of contract manufacturing are the increased supply chain complexity and working capital requirements due to the high costs, the difficulty of CPGs managing production costs, and the need for more inventories in more locations. .. Now, with the surge in contract manufacturing rates and rising expectations that CPG demand will remain at pre-pandemic levels, we expect CPG to bring more production internally.

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