General Mills chief Ken Powell is looking to the future with confidence after a “tough” 12 months in which the US food giant has battled the highest commodity inflation it has seen in 30 years.
Speaking to analysts after General Mills reported a fall in third-quarter profits due to the pressure from input costs, Powell said inflation would “moderate” and the company would then see its sales volumes, which have taken a hit in the US in recent months, “stabilise”.
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“This is the highest inflation that I’ve seen in my career at General Mills and our strong belief going forward is that it will moderate,” Powell said. And as we see inflation come down, there’s much less pricing come through. We have more or less stability in consumer prices, stability in the promotional environment. And we strongly believe, then, that unit volume will stabilize and those will all be good things.”
General Mills’ third-quarter results, issued on Wednesday, included a fall in underlying sales volumes. Last month, the company issued a profit warning on the back of weak volumes in the US in December and January. Reporting its results, General Mills confirmed that its US retail sales volumes fell in the whole of the third quarter, although Powell said the company had seen “a little bit of improvement” in February.
Nevertheless, Powell faced questions from analysts about the performance of General Mills’ Yoplait and Big G cereal businesses in the US.
Yoplait sales fell 3% in the quarter and there was concern among some analysts about General Mills’ performance in yoghurt, particularly in the buoyant Greek segment.
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By GlobalDataPowell said sales of Yoplait’s Greek yoghurt were up 50% in the US during the quarter. He said General Mills was increasing production capacity, investing in marketing and launching more products. “There are many more ways to innovate in the Greek yogurt segment. There’s quite a bit more innovation that will be coming from us on that front,” he said.
However, Sanford Bernstein analyst Alexia Howard said General Mills was likely to continue to find the US yoghurt category “challenging”.
“The yoghurt segment in the US appears likely to remain challenging for General Mills in the near term, with net sales declining by 3% this quarter as the Greek yogurt phenomenon continues to take its toll,” she wrote in a note to clients yesterday. “Although the category improved sequentially [for General Mills] from the second quarter, where it was down 6%, likely from the addition of capacity and start of a new marketing campaign in August, and the company is expecting to make several new products announcements in June, we expect that it will take some time to return the category to its old growth trajectory.”
Powell was also asked about the outlook for the US ready-to-eat cereal sector, which has seen sales under pressure in recent months and which, industry watchers claim, is seeing competition from other channels, including quick service restaurants.
General Mills saw sales for its US cereals business increase 6% in the third quarter, with volumes also on the up.
Powell said volumes across the sector had been hit by manufacturers looking to increase prices but he argued consumers would adjust. “The volume weakness that we’ve seen or decline that we’ve seen was expected. And as we’ve seen, in most other categories, it’s clearly related to the pricing and the increase in merch price points that we had to take this year. So we think that, that’s a one-off situation,” he said.
Powell also insisted General Mills was not losing sales to the QSR channel. “While there is some growth in quick-serve restaurants, trust me, we calculate those numbers and we study those interactions and that’s not where our volume is going,” he said. “We’re just suffering a little bit from the pricing that we saw this year and we’re optimistic that as we see that stabilise and knowing the kind of innovation that we’re going to bring going forward that we expect that category to continue to show good growth for us.”
However, Howard said she remained “concerned” with General Mills’ “soft volumes” in the US cereal category.
“Although easier comparables in the US cereals category are ahead, it remains to be seen whether new product launches and brand support can reinvigorate growth in the category given pressure from Greek yogurt, breakfast food items at quick service restaurants and frozen protein breakfast products,” Howard said. “We also wonder whether a further step-up in innovation is possible going forward, given the already strong showing in cereal innovation in 2011 from both General Mills and Kellogg.”
She added: “We expect the top line to be further pressured by less pricing coming through and higher promotional spending to stabilise volumes.”
