US food giant General Mills, which has suffered amid increasing input costs and a stagnant domestic market, this week announced it was cutting 850 jobs to improve efficiency and allow it to re-invest in other parts of its business. Just two days later, it announced a deal to buy Brazilian food manufacturer Yoki. Michelle Russell reports.
General Mills’ decision earlier this week to cut 840 jobs from its global workforce may have been made in order to improve efficiency and allow it to reinvest in high-growth products, but for some industry watchers, the move was foretold.
The 850 job losses, the US food giant says, will be spread across General Mills’ global operations and the company will take a US$109m charge as part of the restructuring, including around $94m in the fourth quarter ending 27 May. The remaining costs will be recorded in fiscal 2013.
The cuts come as General Mills fights a problem that is endemic to the US food industry: Companies have been battling slow growth in the US along with increasing commodity costs. And as they try to pass along a portion of their rising costs to consumers, they are increasingly met with resistance as shoppers become more and more budget-conscious, leading to a slowdown in sales volumes.
In its past fiscal year alone, General Mills has seen input costs rise around 10% to 11%, the highest rate in several years.
Inevitably, those trends are reflected in the food maker’s most recent financial results.
In February, General Mills issued a profit warning and lowered its forecast for annual earnings on the back of weak volumes and flagging sales in the US.
The Cheerios cereal and Progresso soups maker cut its full-year adjusted diluted EPS guidance to $2.53 to $2.55 per share, below the $2.59 to $2.61 per share profit it had previously expected.
A month later during its third-quarter and the firm reported earnings that were largely flat due to higher raw material and other costs, and a 3% fall in sales volumes, also a result of higher prices.
Chief executive Ken Powell said in the firm’s third-quarter earnings statement: “Fiscal 2012 has represented a challenging operating environment, with the highest level of commodity inflation that we’ve seen in 30 years.”
Edward Jones Research analyst Jack Russo pointed to the “tough” consumer spending environment packaged food companies have had to operate in.
“Consumers in the US have been very frugal with what they’re spending and it’s not only affecting the food industry but we’re seeing this in every basic everyday household category. For a lot of consumer goods companies, if growing sales is this big a challenge then to grow profits they have to cut costs and watch their expense structures. Some of them have resorted to head count reductions like General Mills and Procter & Gamble,” he tells just-food.
“Growing any business right now in the food sector is challenging, so for these bigger companies like General Mills they realise they have to lower their cost structure and get that in line with what’s going on today. It’s about reducing inventories and lowering expenses across the line.”
Andrew Lazar of Barclays Capital was similarly unsurprised by the announcement in light of the “still challenging industry conditions facing the group”. She questioned whether other companies “may consider following suit lest they fall behind”.
Consumer Edge Research analyst Robert Dickerson also believed the cuts were inevitable.
“With US top-line demand still weak, pricing rolling off in fiscal year 2013, global expansion more costly and margin dilutive, and consensus still baking in a reduction in input costs falling to the bottom line, we’re not shocked that management has decided to cut overhead headed into fiscal year 2013.”
Some analysts had already predicted that General mills would have to cut jobs because the company was reluctant to slow down recruitment.
General Mills’ headcount grew 5.9% per year over the past three years, Credit Suisse analyst Rob Moskow told a number of publications in March, at a time when just about every major US food company was cutting back.
He noted at the time General Mills might be due for “a dose of austerity” at its headquarters given the food industry’s slowdown.
However, despite the cuts, the company is still looking to expand other parts of its business as exampled by the announcement of its purchase of Brazilian food manufacturer Yoki just a day later.
“That was big news,” Russo tells just-food. “It’s really doubled their presence in Latin America…so that seemed to be a pretty smart transaction for them and they need to grow their international business a little faster than what they’ve been doing.”
General Mills said savings from the restructuring actions will be reinvested to support the company’s future growth strategies, which no doubt includes the Yoki acquisition, and to “accelerate innovation” across its global business platforms.
Russo believes the savings will be reinvested in product innovation, marketing and advertising, and some potentially into lower price points.
“It’s tough to grow sales. They’ve got other cost savings programmes in place right now so as they get savings from those other three programmes they will probably go into these areas too.”
As a result of these programmes and a potential easing of commodity cost inflation, Russo says he is expecting “a better year” for General Mills in 2013.
“In the last year they saw input costs inflation of 10-11% – that was big. That should moderate … I would expect that to at least be cut in half, if not more. Just that alone will allow them to run their business a little easier so they won’t have to raise prices as much and their price points will be more attractive. I’m anticipating a better year for them next year.”
The company is expected to release further details of the efficiency savings when it releases its fourth-quarter and full-year results on 27 June.