General Mills reaped rewards from Covid-19 shopping behaviours in its fiscal first half as organic growth notched up a print of 8% compared to last year’s flat performance. And the benefits look set to continue judging by the emergence of a new strain of the virus in the UK and Italy, while the US still grapples to contain the disease. Simon Harvey looks at the key talking points behind the results.
With Christmas almost upon us, and Covid-19 affecting how we celebrate with friends and family, there is one sure fire bet in the packaged food industry – consumers will be cooking and snacking at home over the festive period.
And that is going to have a benefit on sales for food manufacturers like Old El Paso Mexican brand owner General Mills, not only because of the traditional splurge on in-home consumption but also because people won’t be eating out due to government-imposed restrictions, and, in some cases, won’t be taking a seasonal vacation either. That’s all good news for food producers and retailers alike.
However, top of minds in the investment community will be how long this elevated demand, driven through retail, and increasingly now through e-commerce channels too, can last beyond the crisis.
Jeff Harmening, the chairman and CEO of General Mills, expects to see a similar demand pattern in its fiscal third quarter that runs to the end of February as it experienced in the first half of the year, but further out he is loath to make any longer-term predictions for obvious reasons given the ongoing uncertainty, and given the vagaries of Covid’s impact on individual markets.
Despite the loss of out-of-home sales due to hospitality closures, General Mills performed better in the six months to 29 November than it did in the same period last year when the virus was an unknown phenomenon. The company announced last week that group sales rose 8% on an organic and reported basis to US$9.08bn, in stark contrast to the 1% first-half decline a year earlier.
It was a similar picture across geographical markets, with North America bouncing back to post 12% organic sales growth to $5.6bn having witnessed a flat performance a year earlier. For the Europe and Australia division, sales rose 5% (to $958.4m) after declining 1% in the corresponding six months, while Asia and Latin America climbed 13% ($812.7m) following a 1% increase.
Pet food sales growth slowed to 13% ($851.7m) from 16%, and the convenience and foodservice sector fell 13% after a flat print a year earlier.
But much will depend on the North American market and how the virus and controls develop there given the region accounted for 61% of General Mills’ sales last year. Three other divisions – convenience and foodservice, Europe and Australia, and pet foods – each accounted for a 10% proportion of sales, and Asian and Latin America 9%.
Looking ahead, Harmening said: “We are very much in the middle of the pandemic in most of our markets, and expect to be for some time to come.
“Because of the current state of the virus in the US and across our major markets, we expect consumer demand for food-at-home will remain elevated, relative to pre-pandemic levels, through the remainder of our fiscal 2021. With elevated demand and continued best-in-class execution, we’re forecasting continued strong top- and bottom-line growth in the third quarter, and while uncertainty with the virus makes it difficult to forecast full-year demand, we now expect our full-year fiscal 2021 adjusted operating profit margin to be in line or better than last year, based on our first-half results that were somewhat ahead of our expectations.”
General Mills’ adjusted operating profit margin was 18.7% in the recent first half, up 90 basis points, and was 17.3% in the previous financial year to 31 May 2020. For the metric as a whole, operating profit climbed 13% in the six months to $1.7bn in constant-currency terms.
Net profits saw robust growth too of 21% ($1.32bn), although slowing from the 50% pace last year.
Harmening said the Covid-19 crisis has ushered in a new era of shopping patterns, some of which look set to stay once the virus is beaten.
“As we take a step back from the day-to-day dynamic, we see consumer behaviours evolving in ways that we think will stick beyond the pandemic. First, we think consumers will be eating more at home in the ‘new normal’. Many consumers have told us that they’re enjoying the benefits of home-centricity in their lives, including flexible work environments, more family time, and more balance, driving a better quality of life. We expect more time at home, including more work from home, to be an ongoing part of consumer routines, meaning more opportunities for at-home eating occasions,” he said.
Looking at individual markets, General Mills noted demand for its food-at-home categories has shown “consistent high-single-digit” growth rates in “recent months”, while foodservice has been down in the “low-double-digits”.
Finance chief Kofi Bruce outlined how he expects the next few months to pan out. “We expect third-quarter demand trends to be generally consistent with recent months due to the ongoing virus concerns in many markets around the world, and we expect to continue to invest in our brands and capabilities to generate profitable growth over the long term and throughout the pandemic,” he said.
“Based on these assumptions, we expect to generate continued strong top- and bottom-line growth in the third quarter, with organic net sales growth roughly similar to the second quarter’s growth rate and an adjusted operating profit margin in line with the prior year.
“As we look further out, we expect fourth-quarter net sales to be above pre-pandemic levels, though below Q4 of fiscal 2020 due to the difficult comparison in the year-ago period, when net sales grew 21% behind the initial pandemic-driven surge in at-home demand, the 53rd week, and the extra month of results in our pet segment.”
And General Mills envisages a recession will last beyond the pandemic and will only heighten the demand for food to be eaten at home as consumers cut back on visiting restaurants, as the company experienced during what Harmening described as the Great Recession of 2008 to 2010.
“In the Great Recession of 2008 to 2010, we saw growth for our at-home categories accelerate by about two points,” the CEO explained. “Importantly, we were able to drive similar acceleration for our business, allowing us to hold market share through that period. With our improved capabilities and strategic revenue management and personalised marketing, we’re in an even better position to adapt our offerings and connect with consumers in meaningful ways during difficult economic times.”
M&A appears to be on the cards too, despite all the uncertainty generated by Covid-19. General Mills’ balance sheet provides “flexibility” to pursue bolt-on acquisitions or share buybacks, Harmening said, given the net debt/EBITDA ratio is now in the region of 2.9 times, adding that dividend payments have increased 4% this year.
But he may also look to disposals too.
Harmening explained his view on M&A: “If we see some, we’ll continue to reshape our portfolio, and that’s both on the acquisition front and the divestiture front. And so to the extent we see bolt-on acquisitions that we think will be accretive to our growth and good for shareholders, we now have the flexibility to do that.
“If on the other hand, there’s nothing that we see on the horizon on the M&A front, we now have the flexibility to buy back shares if we need to do that. We don’t need to necessarily wait for the end of the pandemic before we do either M&A or share buybacks. But now we have the flexibility on our balance sheet to resume those kind of activities and to create value for shareholders in a variety of ways, which we feel great about.”
General Mills, like many of its food peers, has also seen a surge in e-commerce with shoppers still wary of paying too frequent visits to supermarkets, while others have become accustomed to doing their grocery shop online. And it’s another aspect of consumer behaviour the company expects to stick, at least to some degree beyond the pandemic.
So even if foodservice remains in partial or full shutdown mode, General Mills expects to benefit from the elevated at-home-demand through the retail channel, amplified by the recession, and with e-commerce filling in the gaps, especially the click-and-collect services offered by supermarkets.
Sales through electronic means now account for 10% of General Mills’ group sales, from about 5% around 18 months earlier. And the business is seeing an increase in e-commerce right across the globe from the US to Europe and Asia.
“I don’t think over the coming couple of years our model is going to change very much because the click-and-collect model…is so much more profitable for our retail partners,” Harmening said. “That model, I think, is going to still be a predominant one in the near future.”
He continued: “How it looks five years from now? I mean, we’ll see. I do think that e-commerce will continue to grow. I think it will continue to evolve. But I would tell you, at least in the near term, I think we’re very well positioned.”
Private label a threat?
Private label could be an area where General Mills would be expected to lose out in a recession as people naturally look to stretch their budgets. But Harmening is not fazed given the Betty Crocker meals owner performed well during the Great Recession he alludes to.
He admits private-label sales will probably rise during an economic downturn but so too will demand for General Mills’ brands judging how the company held market share in the last depression.
“What we’ve seen now is that in the categories in which we compete, not only here in the US, but in Europe and Brazil as well, is that we continue to gain market share because we’ve got good brand strength as well as good supply chains,” the CEO said. “Our retail customers see that we’re driving growth in the majority of our categories and they want to see that growth continue.
“And at least so far, we’ve seen private-label shares decline, whether it’s in pet food or human food. We don’t see any reason why consumers won’t continue to buy big brands.
“Consumers may decide to shift more to private label, but if what happened during the last Great Recession happens again in our categories, we’ll at least hold share during that period of time.”
For the time being, with the US still seeing a huge number of Covid-19 infections and deaths, and the UK now thrown into further disarray with the emergence of a new strain of the virus and tough new restrictions, consumer shopping behaviours could at least be expected to remain in their current form into the early months of next year.
There’s a risk too that the mutation spreading the UK could emerge in other countries, as it now has in Italy, signalling a new era in tackling the virus. And the wide scale availability of a vaccine will be the ultimate determinant behind the continuation of current demand patterns.
So for now, or at least over the next few months, General Mills could be expected to continue to reap the rewards on its top and bottom line.