General Mills is winning new customers during the pandemic and is confident it will retain them beyond the Covid-19 crisis but the Nature Valley snacks owner remains cautious about providing financial guidance given the uncertainty over the duration pandemic.
Repeat rates were higher than pre-pandemic levels in nine of its top ten categories in the first quarter to 30 August, Jeff Harmening, chairman and chief executive of the US food group, said yesterday (23 September) in prepared remarks issued before the publication of the results, described as an “exceptional performance”.
“When you look at our US retail business, where we have the most robust data, not only are we attracting new consumers, early signs indicate they’ve been satisfied with what they have tried, and we are retaining them,” Harmening said. “And that’s true whether you’re talking about all buyers or buyers who are new to our brands.”
Despite the pandemic, General Mills, like other packaged food manufacturers, has recognised the need to continue to invest in innovation to keep consumers engaged, both new and old, with a recognition the company is now attracting a younger generation to its brands.
“Beyond renovation, innovation remains critical to our business, so we’re continuing to bring high-quality new products and formats to market this year, even if the quantity may be a bit lower than in years past,” Harmening said. “We believe it’s important to maintain our innovation pressure throughout the pandemic and recession, so you’ll continue to see us launch new items over the course of fiscal 2021.”
In anticipation of continued at-home demand spurred by Covid-19 restrictions on eating out, General Mills reiterated it has farmed out more production to external partners to give the Yoplait yogurt owner more “agility” to respond to the elevated purchasing behaviour at the retail level.
At the same time, the company has invested in internal capacity in areas such as cereal and fruit snacks as Covid-19 exacerbated capacity restraints already experienced before the onset of the virus, the CEO explained.
“I would say we are going external, not due to lack of competence, but primarily because it provides greater agility,” Harmening said.
However, engaging external partners comes at a cost. “We continue to pivot to capture the incremental at-home demand we are seeing. We’re also increasing our external manufacturing capacity, allowing us to react quickly to the increase in demand and avoid excess capital in the short term,” the General Mills chief explained.
“While this comes at a higher cost than our internal capacity, we still like the profitability of these sales, even if they are at a lower percentage margin. And importantly, leveraging external capacity allows us to shed costs if we see demand moderate.”
In North America, the maker of the Old El Paso brand has added around 30 new external manufacturers since the start of the pandemic, providing approximately a 25% increase in external capacity, he said.
First-quarter sales grew 9% – by 10% in organic terms – to US$4.4bn, while adjusted operating profit increased 22% to $832m. Volumes were up eight percentage points and price/mix by two percentage points.
In terms of organic sales growth by region, North America posted a 14% increase, the combined Europe and Australia division 7%, and the Asia and Latin America unit 17%.
Net earnings attributable to General Mills climbed 23% to $638.9m.
The company said at-home demand across developed markets “remained high”. In China, demand “continued to moderate” as the foodservice channel gradually started to reopen, while Brazil witnessed a “significant increase”.
Harmening quantified the ratio of General Mills’ business catering for at-home demand versus away-from-home at a 85%-to-15% split before the pandemic but did not provide figures to represent the current scenario playing out.
Looking ahead, CFO Kofi Bruce said the company would still not be providing financial guidance due to the uncertainty about whether the current demand patterns will be sustained beyond this calendar year, which rests on the trajectory of the pandemic and whether a vaccine can be found.
Nevertheless, he provided an inkling of what the company expects. North American retail sales are predicted to grow in the high-single digit range in General Mills’ second quarter but, further out, are likely to slow in the final quarter given the “difficult comparison” in the corresponding period, when sales surged in the panic-buying stage of the virus.
Adjusted operating profit margins are also expected to fall in the second quarter, from 19.1% in the first three months, “driven by higher costs to service demand, including increased utilisation of external manufacturing capacity”. For the full year, those margins will be “roughly in line with fiscal 2020 levels” (17.3%), Bruce said.
Bruce expanded on the reasoning behind not issuing guidance.
“I think it’s important for us to stay grounded in what we actually know right now, which for us I think we need to prepare for scenarios in which sustained levels of at-home consumption remain for a period of time.
“I think it is hard to make a call on duration at this point, with all due respect to any of our competitors who are doing so, especially that far out. So, there is a reason why we haven’t given guidance. It is not for lack of confidence in our ability to compete, but more a reflection of the uncertainty of the environment and the duration, and the expected duration of at-home demand.”