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Overcoming High Prices: General Mills Plans to Use Advertising to Boost Sagging Sales Volumes
After losing volumes for 8 straight quarters, General Mills is looking to boost marketing.
General Mills, the maker of Chex, Pillsbury, and Blue Buffalo dog food, announced that higher prices boosted revenue by 13% for the third quarter of fiscal 2023—despite stagnant sales volume. The Minnesota-based food giant joins a growing chorus of packaged foods makers who generate solid sales and profits but have seen significant volume declines after two years of price increases.
The key culprit is inflation, which increased the price of everything from eggs to transportation. Large companies like General Mills have used market power to pass those costs onto consumers. According to management, inflation at General Mills is driven by labor pressure, energy, and manufacturing costs associated with turning raw commodities into finished food products. "That's what's driving the inflation," CFO Kofi Bruce told investors. Bruce did not rule out more price increases in the future.
Since last year, the Federal Reserve has radically increased interest rates—resulting in significant job losses—without significantly impacting rising prices. The indexes for meat, poultry, and fish have declined, but those savings have not yet been passed on to packaged food consumers.
General Mills has lost sales volume for eight straight quarters. There's a growing concern among investors that the volume declines could drag the industry down. Unspoken is that these price levels will just become the new normal—buoyed by immense market power. General Mills executives seem to agree—although they didn't outright say so.
"We want to get back to growing not only dollars but growing pound volume as well." Jonathon Nudi, the Group President of NA Retail said. "And it's going to be really all about the fundamentals." These fundamentals are of course, marketing, particularly digital marketing. Digital marketing accounts for over half of the company's yearly marketing budget—which increased by about four percent last year. The company also started merchandising some long-forgotten categories. "So it will be back to the fundamentals," Nudi concluded, "and we feel really good about our ability to compete in that role as we move forward."
General Mills had a strong 3Q of 2023.
Net sales increased 13% to $5.1 billion.
Gross margin expanded 1.6% to 32.5% while operating profit dropped 10% due to higher selling costs.
North American Retail, General Mills' largest segment, increased 15 percent to $32 billion.
Management further increased sales guidance--following an increase in the second quarter.
Pet surprisingly underperformed
Pet sales, led by Blue Buffalo, increased 14% for the quarter; profit decreased by about the same amount.
The decline in profit in the third quarter was due to significant inflation and costs related to capacity expansion and external sourcing.
General Mills Management expects profit to increase as new price increases enter the market.
Foodservice is driving huge growth.
General Mills has seen strong momentum in their food service business despite the impact of the pandemic on restaurant dining. Net sales increased 25% compared to last year, growing both sales and volume.
The company has a strong K-12 school business. It continues to gain share in many categories across food service, believing that this business will continue to drive top-line growth and margin expansion.
They said it:
CEO Jeff Harmening on private label competition and marketing:
And we have seen consumption of food at home remains stable over this past year. Despite all the volatility and puts and takes and theories. I mean the consumer seems to be reasonably robust. And at the same time, they're eating at home more than they were during pre-pandemic. And so we see a continuation of that.
I will say there are a couple of things. One private label exposure in our categories around the world is lower than what you see on the average. And I think that's a benefit to us. The other thing is that we've been investing, we've been investing in marketing. And so you see, over the last 4 years, our compound annual rate of growth and marketing spending is up, I think, about 4% or 5%.** And if you look at this year, our marketing spending is double digits. And so it's not an accident that our brands -- we had strong brands to begin with, but we also know that brands are kind of organic in nature, if you will, and that you need to keep them growing. And so we've invested in marketing spending as well as capabilities. And we continue to do that through the third quarter of this year.
And so is not really an accident that private label is lower in our categories, and I think it pretends well for our future because even during the last recession, what we found is that even though private label gained a little share back in 2008 to 2010, we were able to hold -- we were able to hold market share due to our brands, thanks and our investments in consumer spending.