General Mills has painted a bleak picture for the potential pass-through effect to the consumer from rising input costs, with the US inflation rate already standing at an almost four-decade high.
The US food major expects input-cost inflation to reach 8-9% this fiscal year, higher than the 7-8% predicted in September, when the outlook was raised from 7%. Reporting first-half results today (21 December), chairman and CEO Jeff Harmening said further pricing will be initiated in the third quarter to add to increases already put in place earlier in the year.
Harmening provided some insight into the operating environment currently affecting the whole US food industry and other sectors, factors that are also being witnessed in some overseas markets.
“The current operating environment is as dynamic and challenging as I’ve seen in my 27-plus years in the industry. At-home-food demand remained elevated, input-cost inflation is at a 10-year high, and labour shortages and other issues are causing disruptions across our supply chain, from our suppliers to manufacturing to distribution. These disruptions are driving down service levels and driving up costs above and beyond inflation throughout the industry.”
US inflation accelerated to an annual rate of 6.8% in November, the highest level since June 1982. Food, which carries a 14% weighting in the inflation basket, quickened to 6.1%, the highest since 2008.
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By GlobalDataGeneral Mills said today that raw ingredients and packaging materials account for 55% of the current extra input costs, with 30% in manufacturing and the remainder in logistics. The Nature Valley snack bar owner has seen double-digit increases in raw materials, packaging and logistics, and single-digit increases in manufacturing.
The Annie’s pizza to Old El Paso Mexican foods producer estimates the impact from input-cost inflation and supply chain disruptions will be around half a billion dollars more than it initially anticipated.
CFO Kofi Bruce said: “On the cost side, we expect double-digit input-cost inflation in the back half. On a full-year basis, we are now estimating cost of goods sold headwinds to be approximately US$500 million higher than what was assumed in our initial fiscal 2022 outlook. This includes full-year input-cost inflation we now estimate to be 8% to 9%, as well as elevated costs related to supply chain disruptions.
“While it’s difficult to forecast, we expect the operating environment will continue to be challenged by labour shortages and other disruptions in the back half, and we expect our second-half customer service levers will be generally in line with the first half.”
On a brighter note, General Mills raised its financial guidance today after reporting a 5% increase in first-half sales to $9.6bn. On an organic basis, sales were up 4% in the six months ended on 28 November and were 6% higher over a two-year horizon before the pandemic set in.
For the full-year, organic growth is expected at 4-5%, compared to a previous outlook for declines of around 1-3%.
Adjusted operating profit, in constant current terms, is envisaged to be down 1-4%, versus an earlier forecast at the “higher end” of a 2-4% drop.
EPS on an adjusted, diluted, constant-currency basis is predicted to be down 2% to up 1%, compared to flat to down 2% previously.
Jonathon Nudi, General Mills’ president for North America retail, gave a sense of the operating landscape with the emergence of the Omicron variant adding to the difficulties faced.
“The consumer landscape continues to evolve as we face new variants and see ongoing fluctuations in Covid case rates. While the magnitude varies by market and by month, what has remained constant is that at-home-food demand remains elevated relative to pre-pandemic levels.
“To add to the challenge, industry-wide shortages in the labour market are impacting every part of the supply chain, adding significant costs that are above and beyond inflation. We’re seeing record levels of disruptions across our raw-material suppliers, internal and external production facilities, our own distribution centres, our customers’ warehouses, and the logistics networks required to connect each of these elements of the supply chain.”
In terms of input-cost inflation, Nudi added “our North American market basket has reached its highest point in recent history”.
Bruce explained about half of the $500m in extra costs “is sitting in inflation” and the other half is “disruption in the supply chain”.
Elsewhere in the first-half results, constant-currency adjusted operating profit declined 4% to $1.6bn. Net earnings attributable to General Mills were down 8% at $1.2bn and diluted EPS fell 7% to $1.99.
