General Mills predicts input-cost inflation will ease by around a third through its 2024 fiscal year but will remain high in historical terms.
CEO Jeff Harmening guided to a rate of around 14-15% for the 2023 financial year, which concludes at the end of May, as he presented third-quarter results yesterday (23 March). Cost pressures are likely to be sticky through the back half at a double-digit pace, he suggested.
Input-cost inflation is then envisaged to cool to mid-single digits in its 2024 fiscal year – June through May. Last week, the US Bureau of Labor Statistics reported an annualised headline rate for February of 6%, easing for an eighth consecutive month. The last time inflation dipped below that level was the 5.4% in September 2021 and it has not been at or below 5% since May of that year, official data show.
“Looking beyond this fiscal year, we expect inflation to decelerate but remain above historical averages. Based on our current projections, we’re forecasting mid-single digit total input-cost inflation in fiscal 2024, with labour and conversion costs at our suppliers being key sources of ongoing cost pressure,” Harmening explained in his prepared presentation remarks.
Despite price increases to recover costs, “the consumer seems to be reasonably robust”, he said during the Q&A session as analysts continued to press for insight on the impact and future expectations, as they have done throughout the inflationary cycle.
Harmening added: “I would say for the rest of our fiscal year, we’re seeing little change in elasticities. And we have seen consumption of food-at-home remain stable over this past year, despite all the volatility and puts and takes and theories. At the same time, they’re eating at home more than they were during pre-pandemic, and so, we see a continuation of that.”
The maker of Nature Valley snack bars and Blue Buffalo pet foods posted a 7% increase in year-to-date reported sales to US$15bn, with price/mix of 16% and volumes down 8%. Organic growth was 12%, “driven by positive organic net price realisation and mix, partially offset by lower organic pound volume”.
“Volume elasticities remained below historical levels through the first three quarters of fiscal 2023, particularly in North America Retail, and we do not expect a material change in elasticities for the remainder of fiscal 2023,” Harmening said.
As analysts tried to get a handle on future pricing, CFO Kofi Bruce said General Mills will use the tools of holistic margin management (HMM) and strategic revenue management (SRM) to control input-cost pressures. However, he was coy about giving anything away on actual pricing plans.
“We don’t want to get too far ahead here of our expectations,” Bruce told analysts. “We’ll approach the fiscal year with an eye towards leveraging first, the productivity we get through our HMM cost-savings programmes. And to the extent that there is additional margin that we need to protect, we’ll use the other levers we have, up to and including SRM. But I think we’re not going to say much more at this point about fiscal ’24.”
Pressed on the elasticity impact, Bruce said General Mills will take a “smart” approach on pricing, “not only at list price but also from a promotional standpoint as well”, as he hinted at the now common tactic of shrinkflation.
“We look at price architecture and mix as well. So we are much more sophisticated today than we were even a few years ago. And I think that’s helping us to make the right moves in market, which is helping with the elasticities as well. So it’s something we’ll stay focused on.”
Elsewhere in the nine-month numbers, operating profit rose 6% to $2.6bn with the associated margin flat at 17.4%.
Net earnings for General Mills increased 5% to $2bn, while diluted earnings per share were up 7% at $3.28.
“The supply-chain environment continues to improve,” Harmening said in his prepared remarks”, as service levels in US retail improved to 90%. However, he added: “Despite these improvements, supply disruptions remain well above historic averages and customer service is still notably below our normal range of 98 to 99%.”